The Medical Oilpatch

One of the first business stories I covered was the Houston oilpatch, in the late 1970s.

The oilpatch, or the oil exploration industry, has always lived in a boom-and-bust cycle. When I was in my early 20s it boomed, and so did Houston. We were Dubai before Dubai was cool. Then prices busted in 1981 and the city followed.

The oilpatch had another boom early in this decade, with the rise of fracking. The idea is credited to George Mitchell, a man I interviewed while at the Houston Business Journal, and involves shooting water, sand and chemicals down a wellhead to break apart the rock, allowing oil and gas to seep out of the new cracks.

Fracking has made the northeast energy self-sufficient and made the U.S. an oil exporter again. But the boom busted in 2014, because there was a gas glut followed by an oil glut. Even with oil at $75/barrel the gas glut remains, with producers flaring off what they can’t send to market, and the U.S. exporting it in giant refrigerated tankers or, through pipelines, to Mexico.

This boom-and-bust cycle happens in other industries. It happens all the time. One result is an incredible, awesome supply of cheap and useful stuff after the boom is over. It’s happening right now in memory chips, which will mean faster clouds, PCs without any moving parts, and intelligence added to everything in your house, your neighborhood, and your world over the next decade.

Speculators are always looking for the next boom, so that when the common herd of investors gets there it’s busted, and they go broke. That’s what social media was about – boom, bust, and see what’s beyond. That’s what Bitcoin was about. That’s what the current entertainment boom is all about. Even the clouds will, in time, burst.

The next boom is already out there. What’s interesting to me is it looks an awful lot like that 1970s oil boom.

It’s in drugs and medical devices.

Ordinary people are getting seriously rich on this stuff. If you bought into a company called Sarepta Therapeutics (SRPT) in 2015 and held onto it, you’ve made 10 times your money. Sarepta has pushed through a treatment for Duchenne’s MS, a terrible “orphan” disease that usually strikes boys at age 3, leaving them unable to create muscle tissue. Here’s another. Cytosorbents (CTSO). They have more than tripled in price over the last year thanks to a mixture of synthetic polymer beads that filter out impurities from blood.

Today’s stock market is filled with such stories. It’s also filled with dry holes, companies that thought they had something but didn’t. Theranos is one example. Here’s another. Dendreon. They had a treatment approved for late-stage prostate cancer. But it was expensive and extended life for just a matter of months, on average.

While most public attention is filled with the industry’s crooks, scam artists who pushed expensive drugs through the payment channel, then sent the profits overseas, or raised prices by 1,000% or more even while their costs remained constant, there is real excitement in real solutions to terrible problems.

My editors at Investorplace recently asked me to do a “gallery” of medical device stocks, and within an hour I’d found two. Abiomed (ABIO) makes a tiny heart pump that you put inside someone’s heart in the hospital, and gradually wean them off it. Novocure (NVCR) makes this strange cap called an Optune that you put on the head of someone with brain cancer, which then fights the tumor with electrical impulses.

I don’t know what’s going to happen with either of these companies. I’m more inclined toward ABIO than NVCR, but what do I know? I told a friend to dump Sarepta a month ago and it promptly rose $20 per share. (It’s down from there.)

There are two reasons this will end up like the fracking boom.

First, we can’t afford this stuff. Take Sarepta’s Duchenne treatment, called Exondys 51. It only treats 13% of the genetic mutations causing the disease, but it costs $300,000 per year. Sarepta got this into the payment pipeline despite a study with just 12 patients, because the families of victims demanded it.

But you wind up paying. You pay directly, through tax dollars, or in your insurance premium. The biggest cost driver in the U.S. healthcare system is that, once something is approved by the FDA, the system must pay. That’s not true in Europe, or in Asia, where governments step in to decide what their systems can and can’t afford. There is no such thing as an unlimited draw from a limited pool of funds, and we just haven’t figured that out yet.

Then there’s discovery itself.

We’re creating new treatments at an accelerating rate. Thanks to breakthroughs in DNA research, thanks to Moore’s Law, and thanks to new fields of research like immunotherapy, billions of dollars are being tossed into university research centers, so there are soon going to be multiple cures for many conditions.

This is how we circle back to my oilpatch analogy.

In a competitive market, as you’ll find in Europe and Asia, choices mean government can force competition. Government can choose to pay for this treatment instead of that one, based on cost, and companies that don’t get through can pound sand. Or they can cut their prices.

The weight of this thumb on the treatment scale is going to increase with time, and it’s going to come to the American system as well, either through the existing insurance system or through government letting Medicare bargain as the VA does.

More important is this. When there are multiple options for a cure everything becomes a commodity. Competition forces prices down, which is why natural gas still costs less than $3 per mcf. I see this in my own life. The statins and ARBs I need to live are dirt cheap, as the patents have expired and there are several suppliers. But the value of patents will go down when there are multiple solutions to the same problem.

The biotech boom has a sell-by date. Doesn’t mean it’s not going to be fun while it lasts. If you’re near retirement and don’t have enough in your bank to do better than cat food, this at least gives you better odds than the riverboat casino.

Just know when to get out.