Cashing In On The War of Resistancera

Dear Reader,

Adam Smith noted in his seminal tome The Wealth of Nations how in serving themselves, market participants also serve the needs of others. Smith refers to the phenomenon as the “invisible hand.” The father of modern economics wrote:

It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.

But the ordinary human regard for self-interest supplies us with more than meat, beer and bread.

It produces lifesaving drugs, too.

Unfortunately, the “invisible hand” of the market to which Smith referred has been slow to produce some of the most important types of drugs in the world… and the problem has been building for many years.

There’s one particular drug I have in mind that’s suffered from this the most…

Part of the problem is related to how we regulate new drugs.

However, it is also true that this type of drug is unique. It is rightfully regarded as one of the greatest inventions of the previous century.

And unlike other drugs, it must be constantly reinvented.

A cancer drug invented 50 years ago works just as well today as it did back then…

… but the type of drugs I am referring to stop working over time.

I’m talking about antibiotics.

Eventually, bacteria develop resistance to antibiotics, and even the best lifesavers of the past lose their effectiveness.

When they do, formerly curable infections become unstoppable and deadly. New antibiotic development is part of a constant war against the bacterial world.

New antibiotic development faces different roadblocks than other types of drugs.

First, antibiotic development is expensive.

Second, these drugs are only given for a short period of time. This means the revenue opportunity is smaller than that for drugs treating other indications, like rare disease or cancer.

Pharma companies, even the large ones, have limited resources to throw at new drug development. Therefore, they put their efforts into developing drugs with the greatest likelihood of success and the best opportunities for revenue creation.

This means that we’ve had a drought in new antibiotics for many years. The death tolls from drug-resistant infections have been rising.

In some places, antibiotic resistance is frighteningly high… and in a world where you can board a plane in New Delhi and be in New York in a day, resistant strains can spread across the globe in weeks.

But the best is yet to come in the hunt for new and effective antibiotic development.

For example, Congress created incentives for pharmaceutical companies to develop new lifesaving drugs in the last few years. These incentives reformed the FDA in order to make new antibiotic development faster and cheaper. They also increased the amount of time new antibiotics are protected from generic competition, in order to improve their profitability.

These reforms were designed to change incentives and make antibiotics attractive to developers again.

I believe we’re going to see a boon in small antibiotic developers. And that means big profits ahead for investors.

Antibiotics are binary: Either they work or they don’t. Clinical trials are straightforward, patients are easy to find, the drugs can often be dosed orally and results can be had in months instead of years.

If not for the good of society and each of us and our families, antibiotics are uncomplicated, and success or failure is relatively transparent for stockholders.

Bottom line: Investors should love companies trying to make new antibiotics.

To a bright future,

Ray Blanco

The Daily Reckoning