As 2011 looms ever closer, it’s seasonal to offer stock tips for the New Year.
Well, I want to offer you something more. An idea and an investment theme for the next five to ten years. When deciding asset allocation (the overall make-up of my investments) I like to think of large, long-term themes that will run and run. Commodities was a theme that’s served us very well. But I’m ready to start building exposure to a new super-cycle.
I’m looking at a sector that’s poised to make some monstrous cash over the coming decades…
And that sector is pharmaceuticals. Now hear me out, because I know that this may sound a bit boring. But nothing could be further from the truth. I reckon the markets are missing something and this could be the decade when large pharmaceuticals come back into vogue.
Right now the sector is out of fashion and that’s exactly when I like to go out shopping.
The convergence of key technologies
Stock market investors can get very excitable – and it usually costs them dear. Just read some prospectuses from IPOs on the Aim market and you’ll see what I mean. I love to pore over all the new technologies and businesses raising money at the cutting edge of industry.
But I never invest here… I just like to see what’s going on. I know that nearly all of these companies will fail, no matter how appealing they sound on paper. Investors fall for all the same old lines. They put their money down as if they’re gambling on the lottery – they don’t mind losing so long as they’ve got the ‘story’ and the dream that they could make vast fortunes. Then when they lose, they don’t seem to mind – it’s a tax write off!
Well, somebody’s got to pay for the research and development to drive our civilisation forwards, so why not let the dreamers foot the bill?
What’s this all got to do with the pharmaceutical industry I hear you muttering… Well there’s a lot of stuff going on right now. We’re talking about nano-technology, human genome mapping and biotechnology. Though most of the companies involved will run out of money and fail, some will make it.
But even if they do pull through, most of these small-fry will need to partner up with a big fish to bring their products to market. So who are the big fish? It’s the pharmaceuticals industry. They’ve got the money and they’ve got the expertise to commercialise the new innovations.
In fact, it’s how the industry has always worked. Large pharma, tends to acquire promising prospects and they’re the ones that profit from it. Remember, these things can take many years to bring to market and it costs a fortune.
In the same way that the odds are stacked against original investors, so the odds are stacked in favour of the large pharmaceuticals.
I’m not pretending to be a scientific guru here. I don’t know which technologies will win out in the end. The point is, I don’t need to know. The pharmaceutical industry has the fire-power to employ the best scientists on the globe… they’re learning on the job right now. I’ll leave it up to them to make the calls.
It’s an incredibly exciting time and yet nobody’s talking about it.
While small time investors get very excited about tiny companies making massive losses (and facing almost inevitable bankruptcy), nobody’s getting excited about the big boys that are bound to mop up as they snap up the winning technologies, often at a fraction of what it cost to produce.
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And just imagine the knock ons
As these exciting (and yes, scary too) technologies come together, there’ll be knock-on effects. Nano-tech, biotech and genome mapping have applications in wider industry too. We’re talking about anything from manufacturing to farming.
Most of the pharmaceutical big boys were spun out of industrial conglomerates built up during the post-war period. And now we could be looking at a situation where the industries of the future get spun out of the pharmaceutical industry. Sure we’re talking about a long time-frame here, but remember, as the story develops investors will start to get interested… nay excited.
Pharmaceuticals are out of fashion because investors lack the imagination to see what’s coming. When they cotton on, I’m expecting pharma to get re-rated. That’s how markets work… a collective boom and bust of imagination.
While I’m relatively pessimistic on our economy, one thing is for sure… our civilisation keeps on moving forward. It’s the one thing I’d never bet against. These guys are likely to be the winners from the amazing new technologies as they develop and they’re paying out handsome dividends as we wait for the future to arrive.
2011 is the year I start to really build exposure to large pharma… I’ll keep you updated on where I’m going.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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