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What differentiates healthcare investing from investing in other sectors?

Kyle DennisKyle Dennis ·

Investing or trading in healthcare is different from other sector investing. Healthcare investing is mostly very rule-bound and regulated. That makes healthcare investing catalyst-driven. You buy early, analyzing earlier trial results, and then you wait for the big ones, the end stage catalysts – the phase 3 trial results, the PDUFA, and then maybe, if all goes well, the first prescription data. Or, you could short, along the same principles, driven by the same catalysts, only with a different interpretation of trial results. Either way, there are specific events that occur in the life of a clinical stage pharmaceutical company that have specific timelines, which is unlike anything that happens in technology, or banking, or mining. This is the one key difference between healthcare investing and everything else.

Regulated – The SEC is the broad regulator of all sectors of the market; however, healthcare has another regulator, the FDA. It is the FDA’s job to keep a tab on the quality of drugs produced by a pharmaceutical, or devices manufactured by a medical devices company. The FDA involves itself with a healthcare company through the entire range of its life, starting from the discovery stage, when the first official contact is made between the FDA and the company through the filing of the IND, or Investigational New Drug Application. Then, the FDA is again involved in awarding various designations to a drug – a Fast Track, an orphan designation, a QIDP or Qualified Infectious Disease Product, and an SPA or Special Protocol Assessment for the trial are some of the major designations in the process. Then there’s the filing of an NDA, or New Drug Application, which seeks to market a drug based on phase 3 trial results; after that, we have a PDUFA, where the FDA gives its final ruling on the drug. Even after the drug comes to the market, the FDA is involved in tracking safety data for the drug, and sometimes even recalling an approved drug.

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In most other countries, too, there’s a government agency just like the FDA which performs more or less the same function. In Europe, it is called the EMA, or European Medical Agency; in China, Japan and other countries, they simply call it the FDA.

The FDA’s involvement makes the sector unique, because, at every stage, we know what is going to happen next. Not the exact outcome, of course, but we know when a decision is going to be made. We invest in the healthcare sector based on this publicly available information.

Event-driven – Following from the FDA’s involvement, we have a very event-driven, catalyst-driven kind of investment here in the healthcare sector. Each interaction between a pharma company and the FDA is an event, a catalyst that can move the stock up or down. Besides these, there are trial result readouts, often at major healthcare conferences, that can also push a stock up or down. A recent example: a small clinical stage company, Achaogen (AKAO), just declared much-anticipated phase 3 trial results. The results were positive, and the stock went up 160% in 2 days. That they would declare results more or less around this time was known to serious investors. In that sense, the investment in AKAO was event-driven.

Strong movement in IBB – The IBB, or the index that tracks the biotechnology sector, is usually very robust compared to, say, the S&P500. When it goes up, it moves further up than the S&P500. When it falls, it falls further. Trained investors know such strong movements are good for making a load of money in a short time. There’s more risk involved, but the rewards are also greater. You can go long a stock or the sector as it is moving up, and then short the index itself as it falls. Properly done, expert investors could potentially make a lot of money very quickly. This isn’t always true of the other, less interesting sectors.

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Just see the chart above. BLUE is IBB, GREEN is S&P500. The IBB is very volatile; compared to that, the S&P500 is almost docile.

Cash Rich sector – By many accounts, the healthcare sector has the highest amount of cash at any given time. This reflects in M&A activity; companies in the sector are always actively buying each other, collaborating, merging, splitting off, spinning off smaller companies. As is well-known, such merger activity is always indicative of the health of a sector; and the confidence of management in products and assets.

Transparent sector – Any amount of information is always available to experts in the healthcare sector. First, there are company filings, which is common to other sectors. But then things change, because the healthcare sector comes out with hundreds of publications in major scientific journals. Reading these, experts can form an opinion about a drug candidate, and ultimately make investment decisions. Not only journals, but a number of major conferences are held all over the world, throughout the year, where companies publish data from trials. Experts can read these abstracts and figure out a lot about the product candidate. So there’s a lot of transparency, a lot of research and data that’s always available to the smart investor. This is unlike any other sector, where data is often hard to come by, and what is available isn’t reviewed by third party, independent experts.

Global headwinds proof – If the Chinese government puts out some regulation on steel imports, mining companies around the world feel the heat. If a mid-level bank in Greece collapses, shudders may run through large, trillion-dollar Wall Street banks. But in healthcare, what happens in another country does not usually dent the demand for a product in the US. Political upheavals in China or Germany are not going to reduce demand for a HCV drug, or flu drugs during the flu season.


So these are some of the things that make healthcare investing unique. To sum it all up, this is a sector of high risk-high rewards investment where ample data is available for investors to make wise investment decisions based on their reading of specific upcoming catalysts. This is the nearest to an exact science that investing can get.

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