Bayer & Monsanto Just the Tip of the Iceberg!
If any of you missed the big financial headlines this week - its that Bayer - one of the largest health companies in the world acquired Monsanto forming a powerhouse. As the cardinal rule states " the day you see the headlines in the financial post, you know you're too late to buy". Maybe that's what Drake meant when he said "If you're reading this, it's too late". The reality is in the pharmaceutical industry they are so many companies and so many products with acquisitions happening weekly - it can be difficult what investments to pinpoint and go with.
This week, I will share with you my pharmaceutical investing strategy - so you someday can find the Bayer to your Monsanto. That acquisition by the way, represents a 45% premium to Monsanto's stock price!!!
With Pharmaceuticals, I find there is 2 paths you can choose, Either investing in well-known reputable companies (your behemoths if you wish) or entering it at the basement level finding research based companies looking for that next "something".
What’s the difference between a pharmaceutical and a biotech?
Biotechnology companies are generally very small enterprises that engage mostly in research and development. Companies will use biotechnology to recreate cell functions in the hopes that their experiments will yield the desired function. Due to this, biotechnology companies can be in the research phase for many years, running huge deficits just to do research.
Pharma’s already have sustainable drugs that are ready for production and marketing. They engage in some research and development but usually the pipeline of drugs they already own is more than sufficient to offset research costs. Their major threats are rival firms who hope to capitalize by launching ‘generic drugs’ – which are just drugs whose patents have expired so any company can sell their own identical drug.
Which strategy is riskier?
Since biotech companies are very small and only research based they run steep losses. The only thing keeping the stock price alive is the the clinical trial results come out. The clinical trials drive the stock if they’re good the stock soars – if they are bad the stock tanks. investing in biotech’s is very volatile. Many of times, it can take years before any advances are made if any.
Pharmaceuticals stocks are stable – as their products have a history of success and they have the numbers to back it up. Take a company like Pfizer with such a huge market share and so many products (many of which can be their own company!). Pharmaceuticals are safer because of their existing pipeline and also because they are more predictable in the sense that analysts can gauge demand using past history.
They may not provide the exorbitant growth that biotech’s do but they will provide the safety and sustainability that biotech’s do not.
That being said, one strategy is not better then the other – it depends on personal preferences.
Which strategy has performed better for you in your own portfolio? What do you look for when investing?
I have numerous positions in both pharmaceuticals and biotech companies and both strategies have proven to be successful for me. It is about finding the right personal balance that suits your needs. When selecting companies to invest, I am always looking at the future prospects of the company. Regardless of the type, I always ask myself, If the product will still be as popular and in demand 10 years from now? In regard to biotech’s, I always look at how the product will revolutionize the industry, the cost of actually using such a product and the number of uses the product will have. The reason, I am fond of biotech’s is because of their upside potential. When a biotech finally has a marketable drug, a larger company usually will acquire them for a huge premium netting the shareholder a huge gain --- the day however when that happens may never arrive though.
How do you find takeover targets?
Unfortunately, there is no secret way in finding these companies but they are some signs. Look for companies that are on the verge of finishing their clinical trials and have a semi-marketable drug. Many of times these biotech companies are looking for another company to pair up with as they do not possess the financial resources to promote their own drug. Finally, look for smaller companies that have a niche product that big companies will pay big bucks for. Larger companies usually avoid their own R&D as it is risky, costly and time consuming with no guarantees. They much rather prefer buying out a smaller company for a premium and adding their product to their pipeline.
Disclaimer: All of the above information is my own personal opinion. Please be aware investing in biotechnology companies is very risky and possibility of losses is probably – please do your research. I do not hold any positions in the companies listed above.