A Perfect Storm for Biotech in 2012?
These Stocks Are Up 40% for the Year
Once in a long while, the perfect set of conditions all come together at the same point in time and space...
And bring us bull markets that forever change the landscape of the sectors they affect.
About 15 years ago, that perfect set of conditions merged to create the dot-com bubble, which carried an entire industry — and the handful of investors lucky enough to sell before the burst — into the forefront of big business and onto the pages of history.
Not long thereafter, another bubble — this one driven by the American real estate rush — started to expand, doing much the same for housing... for better and for worse.
Today another bubble is beginning to expand.
But it's still so early in the process that anyone getting into this market today will be sure to ride the ensuing wave.
I'm talking about biotech and pharmaceuticals.
And if there ever was a perfect storm that made itself plainly evident a long time beforehand, this is it.
First off, let's look at the market.
Never mind that medical science is busy working on cures and vaccines for every major ailment affecting every major age-group. That's just natural progress.
What's happening right now, once it sets in the next couple years, is unprecedented...
You see, the biggest market for pharmaceuticals is, by far, the elderly.
Because the baby boomers are currently lining up for retirement at a rate of over 10,000 per day, there is a corresponding spike in the rate of age-related medical cases diagnosed annually — as well as the cost per case as aging takes its toll.
Illnesses like cancer, Alzheimer's, diabetes, heart disease, and a host of other afflictions will represent an ever-growing cost of living... and until a magical cure-all drug is invented, there's nothing that can really be done about that.
Take dementia care, for example. As of this year, elderly dementia patient care sucks up more than $200 billion in unofficial costs — 'unofficial' meaning care that's not being provided by a professional caretaker, doctor, or facility.
In 40 years, as our average life expectancy and the average age of the American citizen rises, that number will reach $1.1 trillion.
Longer lives also mean longer survival times for patients with terminal diseases.
And this means the same effect will be seen for all other treatable but currently incurable diseases...
More patients living longer with their sicknesses taking more medications at increasing doses as their conditions progress.
In perfect storm terms, this is the band of dark clouds forming on the horizon.
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But it gets even bigger, because the United States isn't the only variable in this equation...
As emerging markets start to catch up with the Western European and American consumers, this trend promises to outlast the catalyst provided by the aging baby boomers.
So while its consumer base gets wider and longer in the United States, this trend is appearing for the very first time in a number of places where there have historically been more people than resources:
Globally, we're not looking at a 40-year time horizon like we are with the established, predictable Western market...
We're looking at a much shorter one.
In a recent article, Forbes stated the global market for pharmaceuticals will swell from the current $950 billion per year to $1.2 trillion by the year 2016.
That's an increase of more than a quarter — in just 3.5 years — for a trillion dollar market.
Shifts like that don't happen often — and when they do, it's almost never this easy to anticipate.
Of course, if it's so obvious to you and me, it'll probably also be obvious to the major Wall Street money managers, too. And it has been.
In the first quarter of this year alone, Fidelity Investments, Goldman Sachs, BlackRock, Vanguard Group, and 22 other major funds with more than 40% of the assets of the entire U.S. equity market under their management boosted their holdings in biotech and big pharma by $4 billion (about 4%).
So, when are we going to start seeing the gains?
Well, we already have...
For 2012, the SPDR S&P Biotech ETF (XBI) and the First Trust NYSE Arca Biotech Index ETF (FBT) are up 37% and 35%, respectively — outperforming the broader market by a wide margin and setting decade records for growth:
This is still just the first few signs of what we'll be seeing in the years to come.
For this trend to lose steam or do what bubbles are famous for — to burst — not only would $117 billion in smart money already invested by the major funds need to be wrong...
But something as basic as the U.S. Census would need to be fundamentally misinformed.
Keep your eye on this one.
To your wealth,
Brian is a founding member and President of Angel Publishing and investment director for the income and dividend newsletter The Wealth Advisory. He writes about general investment strategies for Wealth Daily and Energy & Capital. Known as the "original bull on America," Brian is also the author of the 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. In addition to writing about the economy, investments and politics, Brian is also a frequent guest on CNBC, Bloomberg, Fox and countless radio shows. For more on Brian, take a look at his editor's page.