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Biotech Bonanza of 2012

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"Favorable regulatory change is on the horizon in the biopharmaceutical industry, which should help improve conditions for innovators in the future. This is great for our portfolio going forward, as well as for the lives of patients."

So far, 2012 has been a terrific year for our biotechnology portfolio. It's been great for biotech investors in general, despite the weak global economy.

The NASDAQ Biotechnology Index (NBI), for example, is up 35%. The biotech picks in my investment letter, Technology Profits Confidential, have outperformed even these stellar returns.

Of the stocks we picked before January of this year, the average year-to-date return has been 58%. If we include our new picks, the figure comes out to 44.8% year to date.

Our thesis for this newsletter has long been buying the best technologies and holding for outsized returns. This, of course, includes the biotechnology innovators that make up a large part of our portfolio. Investing in late-stage, yet still pre-commercial biotech companies is a proven way to earn big returns. Patrick Cox and I always make it a top priority to carefully evaluate a prospect's technology, leadership and addressable markets. We've picked companies with big platforms that have the potential to produce new therapies for years to come.

There is always a strong element of risk, of course. There is always the possibility that the FDA will rule unfavorably on the approval of a new therapy. However, investing in a variety of emerging biotechnology leaders helps to mitigate that risk. Many of these companies, often largely undiscovered by the market, can produce such outsized returns as to completely overcome the losses produced by the losers.

Favorable regulatory change is on the horizon in the biopharmaceutical industry, which should help improve conditions for innovators in the future. This is great for our portfolio going forward, as well as for the lives of patients.

Earlier this year, a bill was introduced in the House called the FAST Act. It is designed to expedite "approval of drugs for serious or life-threatening diseases or conditions." In the Senate, another piece of legislation, called the TREAT Act, has been introduced with a similar goal:

According to Biotechonomy's Juan Enriquez, who presented on the cost of pharmaceutical regulation at this year's Agora Financial Investment Symposium in Vancouver:

"We are constantly reminded of the costs of acting. They play out in courtrooms everywhere. But we do not explicitly measure the costs of not acting, of not bringing products to market or of not acting quickly enough and taking an extra decade to bring something to a pharmacy. Increasingly, medicines and medical devices are approved in Europe before the U.S. Following European approvals, the U.S. demands additional trials, despite hundreds or thousands of patients already treated. How many Europeans are saved while U.S. patients wait for regulators?"

We seldom, if ever, see the costs of too much regulation in the pharmaceutical industry quantified, but the added time and expense for drug development end up costing billions of dollars and many thousands of lives. These bills, if they pass, will hopefully help make a dent in the problem, which would open the door to even greater profitability for the biotech companies that succeed in discovering groundbreaking drugs.

Ray Blanco
The Daily Reckoning


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