One of the most compelling aspects of the healthcare sector is its sheer amount of innovation. Each and every year, new drugs are approved, revolutionary technologies are developed, and new methods of treating a wide variety of diseases are introduced, as doctors and scientists work to improve the health and longevity of the human population.
Much of this innovation occurs as a result of extensive cooperation between government, academia and the private sector. For instance, while private industry investment accounts for about 58 percent of biomedical research spending, the US federal government pays for much of the rest through National Institutes of Health grants and other funding. On top of that, there’s a host of academic researchers working at universities across the country whose work is underwritten by funding that isn’t picked up in most broad surveys. In fact, these networks are replicated in countries throughout the world.
While the economic slowdown has caused spending on global biomedical research and development (R&D) to decline over the past few years, over the long term, investment in R&D has been robust. In fact, over the past decade global biomedical R&D spending has averaged about $180 billion per year.
And now biomedical industry insiders believe R&D budgets are finally set to resume growing. In a recent survey conducted by Battelle and R&D Magazine, nearly a third of respondents reported that their R&D budget outlooks had improved over the past six months. More than half said that they plan to increase their R&D budgets this year, and fully 85 percent believe that the recent innovations in life science technologies were positive and opened new avenues of research.
They were particularly excited that recent US legislation has spurred widespread adoption of electronic healthcare records, which creates the opportunity to mine a huge database of information with which to drive future research and track outcomes.
So while the quest to extend life and improve its quality might have hit a speed bump because of the global financial crisis, its pace should reaccelerate over the next several years and create more opportunities for healthcare investors.
The Innovators
One of my favorite healthcare innovators is Life Technologies Corp (NSDQ: LIFE), a company that I’ve already mentioned in a previous issue.
Personalized medicine has been a popular theme in healthcare investment for more than a decade, but it’s proved to be a minefield as innovation hasn’t kept pace with expectations.
The field of personalized medicine is largely predicated on using genetic testing to find a patient’s predisposition for certain diseases; create profiles of cancer cells to tailor treatments to each patient; and to accurately diagnose an illness at first presentation rather than taking a more trial-and-error diagnostic approach.
The first human genome was sequenced in 2003 at a cost of nearly $3 billion. At the time, it was widely believed that technology would soon make this process more affordable for the masses, and within a few years personalized medicine would really take off.
Almost a decade later, however, gene sequencing is still a costly and time-consuming endeavor. As a result, only a tiny fraction of the human population has had their genome sequenced, which means only a limited data set is available for researchers working to identify specific disease-causing genes.
But last year, Life Technologies made a significant breakthrough in the gene-sequencing arena. The company says its new Ion Proton Sequencer should be able to unlock a patient’s entire genome in about a day at a cost of only about $1,000. That’s roughly the same cost as a magnetic resonance imaging scan (MRI), a commonly used diagnostic tool that’s typically covered by health insurance.
For now, these extraordinary sequencers, which cost about $150,000 each, are only available for research purposes. The company has made these machines available to academia, so researchers can test them and validate their results.
That’s a critical step to winning the Food and Drug Administration’s 510(k) clearance for the device to be marketed and sold for diagnostic and other medical treatment purposes. The expectation is that this should happen sometime in the next few months. Given that the company has already received this clearance for several of its other devices for a number of indications, once the testing is complete the time to market should be pretty speedy.
This promises not only to be a transformative development in the field of personalized medicine, but also extremely profitable for Life Technology.
PDL BioPharma (NSDQ: PDLI) is another significant innovator. The company owns a portfolio of patents covering the production of “humanized antibodies,” which are a mixture of mouse and human components.
Antibodies are the basic building blocks of the human immune system, with each antibody coded to fight a specific pathogenic invader by binding with certain proteins on cell walls. Using antibodies to fight specific diseases has become a cornerstone of personalized medicine and the basis of several next-generation drugs that are already on the market for the treatment of cancer, multiple sclerosis and other diseases.
However, the antibodies used in those drugs are derived from mice, so the human immune system sometimes sees them as foreign invaders and attempts to destroy them. That biological response can be overcome by using PDL’s process of humanization, which essentially reorganizes the antibodies’ proteins into a more human form, thereby tricking the immune system into believing the mice antibodies belong within the host.
Several drug companies, including major outfits such as Roche Holding (OTC: RHHBY) and Novartis (NYSE: NVS), have licensed PDL’s technology to produce blockbuster drugs, such as the cancer treatment Herceptin, the macular degenerative disease treatment Lucentis, and the asthma drug Xolair. The technology is also used to produce Perjeta, a breast cancer treatment that was approved in early June and is widely predicted to become a new blockbuster drug with annual sales in excess of $1 billion.
Under licensing agreements, PDL collects a sliding percentage of drug sales based on total revenues generated. PDL’s revenues have grown an average of 22.4 percent over the past five years. Annual revenue growth is expected to slow to about 13 percent, as the market for the current slate of drugs that incorporate PDL’s technology matures. However, PDL will likely strike new licensing deals, as a growing number of new drugs incorporate antibodies.
In 2000, the company generated only around $25 million in licensing revenue from two drugs that used its technology. Today, it brings in nearly $400 million in fees from more than 10 drugs, and that revenue should continue to grow as pharmaceutical companies develop new drugs that rely on our own immune responses to treat diseases.
This rapid growth in licensing revenue has enabled PDL to fund a generous dividend. While payouts can be a bit lumpy, the shares consistently yield better than 8 percent, which makes it an excellent growth and income play for aggressive investors.
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