In the late 1990s, I ran into an old Army buddy who revealed he had become an investing wizard. His secret? “Just buy any company with a ‘dot com’ in its name.”
Well, we remember how that turned out. It’s easy to be a business genius when customers love you and the dollars are pouring in. But when markets change and your revenue begins to sag, that’s when you discover how skilled you are.
I was reminded of this story by an article in The Wall Street Journal. The author wondered why many big pharma stocks are languishing despite the continued growth of U.S. healthcare drug spending.
According to him, the NYSE Arca Pharmaceutical Index has underperformed the Standard & Poor’s 500 by 30% in the past two years. The last time I checked, it was pretty much the same. So what gives?
One answer may be a follow-the-leader mentality. If one company hits a home run with biologics, let’s go there. Someone else has a hit with immunotherapy? Sounds good. It’s like watching anglers crowding toward the spot where the last fish was caught.
Another problem may be that R&D investments have surpassed the probable payouts. If millions are needed to develop a me-too drug, then hundreds of millions might be necessary to find a blockbuster. And blockbusters aren’t what they used to be. With the constant bleating about drug prices, it gets tougher every day just to get your money back.
Here’s a third explanation: sunk cost bias. This refers to any reluctance to abandon a practice because you’ve already invested so much time and effort. You can see it with investors clinging to plummeting stocks. You can see it with the companies that were big until they suddenly weren’t: Blockbuster, Polaroid, and Borders.
And I’m not being critical. There’s nothing easy about overhauling a business model that’s worked well in the past.
So here’s a modest idea for CEOs of big pharma companies with stagnant revenues and a lackluster analyst rating. Take a close look at orphan diseases. You already know the tax and patent life benefits for orphan drugs. In fact, that’s all our critics talk about.
But that’s not their real potential. When you develop medications for diseases for which there are no approved treatments, let alone cures, you’re getting back to the roots of what made our industry so great. You might not see the immediate huge returns we once saw with drugs such as Lipitor and Plavix, but you’ll definitely spike your revenue curve, not to mention create a buzz about your company and its mission.
And here’s an even bigger benefit. I wouldn’t be surprised if we soon learned that many of the “big” diseases — depression, diabetes, and so on — are collections of a myriad of rare diseases. How else can we explain the wide variability in response and tolerability to drugs in broad therapeutic categories?
Today’s orphan may be tomorrow’s powerhouse. Consider oncology, where a generic category such as non-Hodgkin’s lymphoma is now known to be an array of diseases, each with preferred regimen.
You don’t have to abandon your model. Just expand it. Seek out smaller biotechs that are searching for treatments for rare diseases. With the right drug, you’ll not only jump your revenue, you’ll rev up your image.
In the words of industry trade group PhRMA, “Go Boldly.” Extend your vision beyond the blockbusters and make room for some orphans.
Sander Flaum is a principal at Flaum Navigators.