Buying the 'Picks and Shovels' Of Biotech's Gold Rush

Back in the days of the gold rush, an investing adage was born. People back then quickly realized that it was better to invest in the manufacturers of picks and shovels than trying to pick the individual gold prospector who will strike it rich. That may have passed into the realm of cliché, but the principle behind it can be applied to any industry that involves a lot of risk but offers substantial reward to those that strike pay dirt. That guarantees that many will try, and those that do try will require certain products. That in turn ensures growing revenue for suppliers.

That description certainly fits the biotech business. The industry has come under scrutiny recently for issues with the pricing of some drugs, and the stock of the major companies in the business has been pummeled as a result. Part of the reason for the current focus on that is the emergence of a new generation of cholesterol drugs, PCSK9 inhibitors. These therapies have been shown to dramatically reduce LDL cholesterol, making them potentially beneficial to a huge patient population, adding the potential for yet another surge in the overall cost of healthcare.

Leaving aside the implications for society as a whole for now, this once again demonstrates that the potential rewards of developing new therapies using the principles of immunology, where the body’s own defenses are used to fight disease, are huge. Unless regulation is restrictive or heavy handed enough to kill the incentive to discover new drugs, therefore, many will continue to try. That means that identifying a supplier to invest in for the long term is a smart thing to do; which brings us to Repligen (RGEN).

Repligen is, to quote the company’s website, “…leading manufacturer of Protein A affinity ligands, a critical component of Protein A media that is used to separate and purify monoclonal antibody therapeutics” in addition to other consumable products for the industry. That leaves them ideally placed to benefit from the increase in research as the principles behind immunology are expanded to look for treatments for other conditions.

To be clear, this is not some hidden gem that is still ridiculously cheap. RGEN currently trades at around 100 times earnings, but the company has already demonstrated that it can make money and buying in has to be based on the belief that the business as a whole will continue to expand. If it does, then consolidation in the supply chain as well as exponential organic growth could well make that high P/E irrelevant.

I have as low an opinion of politicians in general as the next person, but it is hard to believe that even they would introduce price controls or regulations that would risk stifling innovation that has the potential to do so much good for mankind. I am quite prepared to bet that while the topic will be an issue in the upcoming election, any measures that are eventually passed will still allow for enough potential profit to ensure that research continues. If that is the case, then RGEN will look incredibly cheap at these levels a couple of years from now.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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