A Prescription for an Ailing Portfolio
By Andrew Mickey, Q1 Publishing

Feb 22, 2009

In 1998 a 29-year old American received some of the worst news imaginable. He contracted the human immunodeficiency virus, HIV. It was a de facto death sentence.

Even the most optimistic person would have trouble looking on the bright side. Sure there were numerous advances in HIV treatment. People were living longer and longer with HIV. In 1998 it was common for people infected with HIV to live 10 years or more with the virus. And advances were being made consistently as billions of research dollars were going in to fighting HIV.

Had he contracted the virus a decade earlier in the 80’s, there would have been little or no hope.

A few years later he received even more bad news. He was diagnosed with leukemia.

Tough to imagine a worse fate, but it gets better from here. A lot better.

Flash forward to 2006. That man is now “cured.”

It was a miracle. Right? It had to be. I mean, HIV had never been wiped out in a patient before. But it was true. Two years after the fact, his doctor tells us, “Two years after his transplantation, he is still without any signs of HIV disease and without antiretroviral medication."

How’d they do it? Well, it’s part of the biggest growth area in healthcare which we’ve been looking at as one of the greatest wealth-creating developments in decades, stem cells.

“CCR5 delta32” to the Rescue

This is where it gets a bit complicated. But by understanding it, you’ll truly realize the potential of stem cells, how they’re changing the medical world, and what it means for the imminent changes heading to the healthcare sector.

You see, the man was cured of HIV as a result of a bone marrow transplant. Bone marrow produces blood cells. It makes stem cells and they turn into blood cells. Bone marrow is the earliest stem cell therapy.

In this case, the donor marrow was from a man with the gene mutation CCR5 delta32. About 1 in 1,000 people have it (or 1% to 3% of whites of European decent – depending on which estimates you use). The mutation makes them more or less immune to HIV.

After the transplant, the man’s body was now making blood cells with the CCR5 delta32 gene mutation. As a result, he was immune to HIV. This is a giant leap forward and will be studied for years to come.

There will be losers and there will be big, big winners.

Unintended Consequences

Now, I’m not about to write off the HIV/AIDS issues the world is facing. Bone marrow transplants are expensive, painful, and there is limited availability of donors and capacity to complete the procedures. Then add that most of the world’s HIV sufferers are in poor sub-Saharan African countries and it’s easy to see this is not the cure-all solution.

It’s a start though. And, more importantly, it’s the perfect example of how stem cell therapies will drastically change the medical industry. As always, with change comes danger and opportunity.

Take a look at Gilead Sciences (NASDAQ:GILD) for example. The Foster City, California based biopharmaceutical company has been one of the few bright spots in a rough market. It has been a steady grower and the economic downturn hasn’t been much of an issue.

In fact, last year was one of the best on record for Gilead. The AP reported, “[Gilead’s] profit soared more than 40 percent in the fourth quarter…Excluding one-time items, including stock-based compensation, Gilead said it would have earned $598.5 million, or $63 per share. Wall Street analysts polled by Thomson Reuters predicted earnings of 55 cents per share.”

Pretty good for a year the entire U.S. economy spent in recession. But here’s the problem. The main cause of Gilead’s great year was from sales of its HIV treatments. Sales of Atripla, Gilead’s leading HIV treatment, soared 79% in year-over-year terms and were a key part of Gilead’s strong performance.

Over the long run though, Gilead’s future might not be nearly as bright as the shares’ premium valuation suggest. If stem cells and/or gene therapy create a cost-effective treatment for HIV, Gilead’s bread and butter HIV drugs could become obsolete.

Curing an Ailing Portfolio

Obsolescence is just one of the risk factors when investing in pharma stocks and other industries which rely on being the leader. Now, I’m not saying Gilead shares are going to zero or the company’s downfall is imminent. Rather, stories like this just show how much opportunity there is out there right now. And how much opportunity there will be in the future.

This week the Dow fell 6%, gold climbed 6%, and bank shares collapsed even further. The Dow even fell below the liquidity crunch lows from November. It’s ugly and there aren’t too many catalysts for a turnaround either. But, now more than ever, you’ve got to look towards the future.

As we said before, there will be winners and losers. This happens in every recession. But normally a few of the losers can scrape by until the good times return. And this time, during a harsh recession, the division between the two will be massive.

The reason I say this is because of the biotech conference I went to a few weeks ago. While I was there, I caught a presentation from a Merck (NYSE:MRK) executive. He was adamantly looking for partnerships (Big Pharma needs new drugs - desperately).

After his speech, about 24 of the 80 or so biotech executives people in attendance lined up to get his business card in hopes of laying the foundation of a drug development deal.

Meanwhile, shortly after the Merck presentation I went to a session which talked about outsourcing medical research to India. It’s cheaper, the people are just as well trained, and it’s downright booming. However, the number of people willing to check out a very real opportunity here were in the single digits.

We’re in a period of great change. No one knows for sure what the world economy will look like in five to ten years. One thing’s for sure though, we can pretty much bank on it looking significantly different.

We’ll do our best to stay a few steps ahead of the changes because the bigger the change the bigger the opportunity.

After all, if the opportunities we’re going to uncover in the months and years ahead aren’t the perfect subscription to cure an ailing portfolio, I don’t know what is.

Good investing,

Andrew Mickey

Chief Investment Strategist, Q1 Publishing