Dear Reader,

We’re all familiar with the saying “Give a man a fish and feed him for a day. Teach a man to fish and feed him for life.” But in my opinion, this statement is misleading. It implies that only the skill of fishing separates a man from a life of sustenance. In real life, the story is much different.

Hence, I would like to add an extra sentence to the old saying. Here’s how it should really go: “Give a man a fish and feed him for a day. Teach a man to fish and feed him for life. But teach a man to fish in a country without lakes or oceans, and you’ve wasted everyone’s time.”

This is important to remember, especially in regard to education. From an early age, we’ve been taught that education is the key to all doors. Unfortunately, reality tells us a much different story. For example, think of the stereotypical Russian physicist driving a taxi for a living. It’s a stereotype, but there’s some truth behind it. An education is only as good as its environment. And fishing is only useful at a lake with fish.

Think about some of these questions… Where is a doctorate degree more useful – in Sierra Leone or the United States? The answer is pretty clear. Could education save Uganda? If everyone in Uganda received a Ph.D., would the country improve? Probably not. It would have the same messed-up government limiting people’s opportunities. If anything, Uganda would see a massive exodus rather than economic revitalization.

Education by itself cannot make a country prosperous. It only pays off in societies where opportunity and entrepreneurship are allowed to flourish.

Fishing can help us better understand this as well. What’s better: being an extremely talented fisherman in a lake with almost no fish, or being an average fisherman in a place where the fish are practically jumping out of the water? Sure, the U.S. doesn’t do well on the international exams. However, that’s not what made it great. Maybe we don’t have the best education in the world, but in the past, we had a society of free markets and great opportunities. We had more fish in our lake than anyone else.

Other places such as Russia and Eastern Europe had some really smart people – great fisherman – but that doesn’t matter when the government is polluting the stream and killing the catch.

Yes, education is important, but it can’t drag us out of a recession. We can’t study ourselves into prosperity. Instead, America needs to foster opportunity; it needs to increase the number of fish in the lake again. If companies can start with ease and businesses can operate without the heavy hand of government upon them, it won’t take a nation of geniuses to reach prosperity. Our kids can all study physics, chemistry, computer science, engineering, etc., but someone must employ those degree-holders. Without a free society to create jobs and innovations, those degrees are no more valuable than the paper that they are printed on.

With those thoughts in mind, let’s move on to an article by Alex Daley about the growing biotech industry. Alex lays out the case that biotech is far from a bubble. The ‘90s are different from the last decade. We’re seeing real growth in the sector, and there’s still opportunity ahead. I’m always skeptical of any claim that “this time it’s different,” but Alex makes a convincing case.

The Makings of a Biotech Bubble?

By Alex Daley

There is no question that biotechnology is a hot sector right now. The anecdotal evidence is everywhere, from attendance at industry conferences to coverage in the mainstream financial press. But recent data from the biotechnology analysts at the respected trade journal Signals say it just might be the hottest the sector has ever been.

In 2010, biotechnology companies both public and private raised $32.7 billion, an all-time record for funding.

The previous high-water mark came (not surprisingly) at the technology blow-off top in 2000, when $31.4 billion was raised – more than the preceding six years combined. That was a bubble.

While today’s funding may sound like it’s reached bubbly proportions, since we’re back at 2000 levels, the comparison isn’t really apt. Interest in the sector today has yet – for several reasons – to hit the kind of fever pitch associated with a true speculative mania.

One key difference between the earlier spike and today’s total is that 2000 marked a real change in the landscape. While funding did fall off precipitously following the 2000/2001 tech crash – the next year funds raised dropped by more than 53% – it never again returned to the single-digit range (in billions) that was par for the course prior to the tech boom.

The yearly average from 1990-1999 was just $4.3 billion. Though 2000 was a manic aberration – a 633% increase over that average – every year since has seen over $10 billion raised; in five of the ten years, the total was more than $20 billion; and even at the dead bottom in 2008, the sector still pulled in an impressive $10.8 billion, 27% higher than even the best year of the ‘90s.

To put it mildly, the first decade of this century established a new normal for biotech funding that can’t be compared to what went before. In the nine years between 2001 and 2009, average funds raised rose to about $18.6 billion annually, with a high of $26.5 billion achieved in both 2006 and ‘07. That puts 2010’s new record high in perspective. Yes, it’s a huge jump over the $4.3B average and $8.5B high for the ‘90s. But it’s just a 74% increase from the average since the 2000 bubble – an average that includes the precipitous drop of funding across all industries that 2008 saw – and is just 23% above the ‘06-‘07 highs.

The sector is hot right now, but those kinds of swings are relatively common in this highly volatile sector. The swings from 2002 to 2003 (+60%) and from 2008 to 2009 (+106%) were comparably dramatic. It’s just the nature of the industry. The jump in funding between 2009 and 2010 (+47%) would have to have been much closer to that between 1999 and 2000 (+369%) before we could safely say we’re in bubble territory.

Another key difference between the prior run-up in funding and today’s new high is the overall size of the biotech industry. Annual prescription drug sales – including both traditional and biologics – have risen in the US from $40 billion in 1990 to over $290 billion today. Similar growth trends are in place in the EU, Japan, and other industrialized nations as well, as most of the world faces an aging population. And in the developing nations of the world, the numbers of people with access to modern health care are rapidly increasing, bringing entirely new patient populations into the market.

Third, the cost of bringing a new therapy to market has increased dramatically, necessitating far more fundraising than ever before. According to the Tufts Center for the Study of Drug Development, the average price for developing a new drug and getting it to patients was up from about $500 million in 1996 to over $1.2 billion for a biologic compound in 2006. (This figure excludes marketing and advertising expenses associated with a launch, which often add hundreds of millions to the bill.) That’s a reflection not only of higher laboratory costs, but also a regulatory gauntlet which is more difficult and more expensive to navigate these days. Companies need more money to get through that 12- to 20-year slog from the discovery of a new compound to the day it can be marketed for use in humans. Thus, an increase in overall funding levels is to be expected.

However, these differences don’t mean there is no risk for investors with all this new money sloshing around. With more funding comes far more new ventures. And with all new ventures there is inherent risk – and opportunity. More players means both more successes and more failures.

America’s Food and Drug Administration (FDA) continues to be a major bottleneck to the industry as well, approving about the same number of therapies as in previous years. According to monthly drug-approval reports on the FDA's website, 21 new drugs were approved in 2010, down from 25 in 2009 and 24 in 2008, but higher than the recent low of 18 in 2007. With thousands of drugs under development and consideration by regulators, this does not bode well for the average company.

And as noted, biotechnology is a volatile sector. One only has to take a look at the share performance of the ten largest biotechnology Initial Public Offerings (IPOs) of 2010 to see that:

(Click on image to enlarge)

Clearly, the right investments in this sector can pay off big-time for investors. This is the primary reason money has been increasingly flowing into this sector for the past 20 years: It’s one of the few places where a multibillion-dollar business can be grown from scratch out of one discovery in a public or private lab around the nation.

Sure, funding levels are increasing. And much ado is being made about the new high. We may even have the early stages of a biotechnology bubble of sorts on our hands. It is a growing sector where knowledge, work, and R&D funding can produce value far greater than the cost of the investment, creating great wealth in the process. Increasingly, investors are taking note, driving speculative valuations through the roof in some cases.

These are exactly the conditions that we as speculative investors want: both liquidity and excitement in a market where strong understanding of the right companies and right technologies can give us an edge in picking winners.

[As Alex wisely observes, biotech may be in the very early stages of a bubble; if it is, there’s plenty of opportunity to profit from it. He and his tech team sift through and sort all the players to bring Casey Extraordinary Technology subscribers the very best picks. A trial subscription will put their expertise in your hands – and it’s risk-free. Learn more here.]

Additional Links and Reads

China Raises Rates to Counter Fastest Inflation Since 2008 (Bloomberg)

China again raises rates by 25 basis points, to 6.56%. The Chinese economy is getting shakier, but considering the rapid succession of rate hikes, it’s doing a pretty good job of standing its ground. The article notes that the central bank may slow down rate increases, but I’m not so sure.

If there’s any slowdown in rates, it will likely be a temporary pause to evaluate monetary policy thus far. If inflation accelerates, the central bank may come back with even more aggressive rates.

Why is Lindsay Lohan tweeting About the Federal Reserve's Monetary Policy? (Slate)

Thanks to some of our subscribers, I’ve learned more about LiLo’s recent comments on the Fed mentioned in a recent edition of the Daily Dispatch. No, she has not seen the light: She was paid by the National Inflation Association for her comments. Slate does an exposé of this “educational group” and shows some history of “pump and dump” from its members. I haven’t done my own research on this topic, so you’ll have to take Slate’s word on it.

I’ve seen the National Inflation Association’s videos and websites before, and personally I’ve been skeptical. For one thing, I’ve never met or heard of these guys prior to a few years ago. The circle of free-market writers, economists, and think tanks is rather small. Everyone knows everyone else – or at the very least, they’ve run into them at various conferences. But the NIA was always a complete outsider. I’ve asked friends and colleagues about these guys in the past, and no one had a clue about them – to me that’s suspicious. If you’re interested in starting a monetary policy think tank, shouldn’t you know other people interested in the very same ideas?

The Jobless Summer: Why Only One in Four Teens Is Employed (Wall Street Journal)

With a badly-timed minimum wage increase in 2007 and the crash in 2008, teens are struggling to find jobs. According to the Department of Labor, the teen unemployment rate is the worst since records began in 1948. Only 24% of teens have a job compared to 42% in 2001.

We’re getting closer and closer to the European model of the perpetually unemployed and homebound children. This certainly isn’t a good sign for the future.

That’s it for today. Thank you for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor