As an update, I had written a couple of weeks ago that the stock market will be entering an area of consolidation. So far, it held up to my predictions and have held the support level of 181.31 for the SPY. As I mentioned previously in another post, it is currently resembling the consolidation pattern from Sept 2011. I extrapolate that in the next couple of months, around mid-November, that this would signal the end of the consolidation period, and I will then be on vigilant watch for the lookout of uptrend signals.
If we examine a couple of the most profitable sectors in the stock market in the last 5 years, the sectors that immediately come to mind are the retail sector and the pharmaceutical sectors.
The retail food sector is often touted as a recession proof sector because people need to eat, whether or not we are in a recession. Another sector that has done extremely well in in the last half decade is the pharmaceutical sector.
Valeant Pharmaceuticals has made a 500+% gain in the last 5 years and I was curious about why.
Valeant Pharmaceuticals primarily focuses on dermatology products that do not require a prescription. The majority of their products are acne-based washes and creams; their lesser products include a few neurological products (eg, anti-depressants and benzos, Ativan, Wellbutrin).
So why do acne meds make money? For one thing, because the people who use them become lifelong customers. In comparison, cancer meds have not caught up in profit margins as acne meds because of the simple fact that cancer patients often die within 6-8 years of treatment, whereas an acne med patient will often be a patient for life.
If anyone who has had experience with pharmaceuticals might have noticed that cures are not profitable. Treatment, and ongoing treatment are, on the other hand, quite profitable, but cures themselves are never profitable. Even if we hypothetically made an assumption that a combination of borax (a natural salt) + 3% hydrogen peroxide solution will cure acne forever, this inevitably will not create lifetime customer value (LCV) because its sale is a one-off. Once a patient is cured of the condition, there is no motivation to continue to purchase the product. Whereas, in the pharmaceutical model, if one never cures the condition, but only treats it superficially, then what you have is a staggering profit margin, and customers for life.
Cancer meds and cancer treatments, although they are a trillion dollar industry and are dependent on new diagnoses, and because the majority of cancer patients die within 8 years, it means that profits eventually do not generate lifetime customers as the meds for acne and other dermatological conditions
However, if we take an example of a company that specialises in autoimmune diseases, these people become customers for life, therefore elevating the bottom line.
I was nineteen years old when one of my best friends died from cancer. He was my best friend in high school; we were in mock trial together, and he became the valedictorian of our year, and won a full scholarship to UC Berkeley. He was one of the most brilliant people I have ever met and I remember so much of our time studying together or pushing each other to become better at what we were capable of. So it was unfortunate that he had developed skin cancer at the age of 19, and after treatment with an experimental cancer drug, he was dead within 8 months.
For a long time, I was really angry that this had happened to him. He and I had the same family doctor, and our doctor was far from evil. He was someone I had known since I was 10, who had treated my entire family. But when my best friend died, I made a life changing realisation: I realised that doctors weren't gods. This was a very important realisation for me, because before, I believed everything doctors always told me, and believed blindly that whatever they recommended automatically made things better.
So it was a shock then, for my 19 year old self to realise that my best friend had died because he had what had been the beginnings of skin cancer on his back, and after given an FDA approved cancer treatment drug, he was dead within 8 months. Before this event, I never questioned the medical and pharmaceutical industries. I never questioned my doctor, and what he would tell me I only considered was the holy truth. And when my friend died, I became angry. I started to question, and what I found out wasn't pretty.
Truth be told, doctors are people, flawed people with an often outdated education. My doctor who was also my friend's doctor, and whom I know never had any bad intentions, was the one who prescribed the experimental-cancer drug that eventually killed my best friend. He didn't know any better. This is what he had been taught in medical school: to treat symptoms and prescribe new drugs. He wanted to help my friend, but he was limited by what he could do, and he was told, this experimental drug could help my friend, FDA approved. (As a note, it only takes 2 studies to become FDA approved. You could have a million trials but if 2 are successful, your new drug is approved.) My doctor is not a bad guy, but the systen he worked under limited his choices in treatment for his patients.
Most doctors (and like my cousin in New York) are good people. In medical practice in the United States, it becomes increasingly harder to also remain ethical doctors because medicine and the practice of medicine is not determined by the doctors themselves, but by corporations that are interested in making a profit. There exists this incestual relationship between the public and private sector, and this insidious relationship destroys everything England had stood for in 1948, when NHS was first created.
In comparison, what has been the history of healthcare in the United States? It has been a series of abject failures- of citizens declaring mass bankruptcy at the face of overwhelming health costs, deterioriating health for all, and abject ignorance of disease conditions. In the United States, Obamacare has become nothing but a fallacy to the concept of universal health care, and acts as a method to increase profit margins over a short period of time. Healthy people must pay an extraordinary amount to have simple benefits of health care, and sick and poor people are forced to declare bankruptcy to get the health care that they need. Is this the model that the UK would like to follow when funds for the NHS expires in 2020?
Historically, the UK has always been the pioneer in progessive thought. For many centuries, economic wealth had been dependent on the slave trade for many nations. The slave trade itself had accounted for more than 30% of the UK's GDP in the late 1600s. For me, studying history often has a high level of humility when discovering the truths about the world. I find it incredible that so much wealth of our ancestors had been dependent on something we consider so unethical in contemporary times.
However, in 1706, the UK set an unusual precdent: in In the case of Smith v. Browne & Cooper, Sir John Holt, Lord Chief Justice of England, ruled that "as soon as a Negro comes into England, he becomes free. One may be a villein in England, but not a slave." This was an extraordinary event that would begin a domino effect in many other European and Asian nations. Soon, Russia, China, France, Spain and Portugal followed, abolishing slavery as a trade.
The United States, would begin their anti-slave crusade nearly 70 years later from 1775 when the first abolition society would appear in Pennsylvania to the banning of slave trade trips in the Slave Trade Act of 1794.
Whilst British women wrote numerous essays and articles about the ethics of the slave trade and a need for abolition in the 1800s, women such as Julia Gardiner Tyler, the 2nd wife of President Tyler (and the historical source for the character of Scarlett O'Hara in Gone With the Wind) wrote very eloquent essays defending slavery. The daughter of a plantation owner, whose wealth and livelihood depended on slave labour, Julia Gardiner Tyler naturally defended her entire family's heritage. What she says is interesting though; she said that slaves were better treated as slaves than if they were left alone to live their own lives.
That legacy wasn't so far off, because even after the US' abolition of slavery in 1863 by President Abraham Lincoln (157 years later after the British courts declared slaves as "free men" in England), slaves were left to fend for themselves in poverty and segregation and it wasn't until the 1960s when Martin Luther King Jr. changed the world with his view of racial equality in "I have a dream".
Meanwhile, the UK had done something completely different. After the World Wars, they integrated a system known as the National Health Service, or NHS. Rich or poor, race or gender aside, people had a right to health care. I wonder what would happen if the UK decided to follow the US in their approach in health care post-2020? In history, the UK typically sets the precedent, however in the post-modern era, many Labour Party leaders have instead, embraced the tactics of the American strategy for short-term profit margins at the expense of the population at large (eg, Tony Blair)
We have to remember that at one time, slavery was a large percentage of England's GDP until the courts dictated in 1706, that all men were free once they landed in England. How brave must that decision have been to go against conventional morals and prejudices? And how brave was it to set a precedent for the US to follow 157 years later?
CB Insights, often makes fun of people for being "wantrapreneurs": people who are primarily interested in becoming billionaires than entrepreneurs per se, and often have "get-rich quick" schemes or perhaps even have ambitions of creating wealth out of the suffering and exploitation of others, often at an extravagant burn rate. I even think that perhaps this wantrapreneur model has been elevated in the media by Hollywood, a sector I am quite familiar with that celebrates exploitation.
My hope is that all entrepreneurs, such Sir John Holt and Abraham Lincoln, have the courage to do the right thing, even if it only begins with an idea and goes against the status quo.
And I wonder, which are the UK and US startups that will disrupt the global medical and pharmaceutical models of profit in our current era?
DISCLAIMER: This post was not intended for any stock advice and for educational purposes only
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