Beating Inflation With Biotech

Keep ahead of inflation and you can do very well, whether it is return on investments if you are an individual investor or what you charge if you are a business owner. Raise your prices faster than inflation and your bottom line can become fat and happy.

The trick is being able to outrun inflation. Investors in the past dozen years learned first hand how hard this is and many businesses have also found it tough. Many, but not all.

If inflation were Wile E. Coyote then its Road Runner might well be the pharmaceutical industry. An AARP study found that of drugs used most by older Americans, prices rose nearly 26% from 2005 to 2009, which was close to twice the inflation rate.

National Public Radio reported January that the "biggest (drug) companies raised list prices for brand-name drugs an average of 4.5% this month, when new prices typically kick in. Back in January 2008, the same companies raised prices an average of 2.8%." Inflation now runs at 3.4%, NPR said.

The New York Times reports that in 1992 Bristol-Myers Squibb (BMY) faced opposition to its pricing of Taxol, a breast-cancer treatment, at $4,000 a year. Now, the price of most new cancer treatments us in the stratosphere of $25,000 to $50,000 annually.

The Times article goes on to note that when a drug does not face any competition, "its maker can charge almost any price (and) once a company sets a price, government agencies, private insurers and patients have little choice but to pay it."

Nice. Wouldn't we all like such pricing leverage? We can by investing in pharmaceutical companies and riding their pricing power. Questcor (QCOR) is a biopharmaceutical. It has one drug on the market, Acthar, which is used for multiple sclerosis and nephritic syndrome, a rare kidney disease, as well as other indications.

Admittedly an investment in Questcor is a gamble, but risk-taking investors should pay it some attention. An analysis by my Martin Zweig-based strategy, which I modeled on Zweig's description of his approach to investing, likes Questcor because both its revenues and earnings are growing in tandem (the strategy does not want to see earnings growth far outpace revenue growth), earnings growth for the past several quarters is up and the company has no debt.

A company with two multiple sclerosis drugs is Biogen Idec (BIIB), which also has a cancer drug. A computerized strategy I created from Peter Lynch's writings likes this company, particularly because of its P/E/G (price-to-earnings relative to growth) ratio. A measure of how much the investor is paying for growth, the P/E/G ratio cannot be greater than 1.0. Biogen Idec's is 0.71. Also in the company's favor is its modest amount of debt.

Another company earning accolades from the Lynch strategy is Salix Pharmaceuticals (SLXP), which addresses the gastroenterology market. Salix's P/E/G is 0.81. But it does have more debt than either Questcor or Biogen Idec.

At the time of publication, the author and his clients were long QCOR and BIIB.