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Another Perfect Health Care Investment

By Rob Fannon, editor Phase 1 Investor
Friday, July 11, 2008

Today, I want to tell you about a group of stocks ready to explode as the world's largest drugmakers slim down...
 
As I've explained before in Growth Stock Wire, Big Pharma is in trouble. The industry is facing slowing sales, patent expirations, generic competition, and withering pipelines. Now drugmakers are on a massive diet. The biggest losers – Pfizer, Merck, and Sanofi-Aventis – are dumping employees and slashing costs.
 
One of the winners in this situation is contract research organizations, or "CROs." Rather than perform the work in-house, drugmakers are outsourcing research and clinical trial work. As I've written before, I love CROs. They get paid whether or not new drugs make it to market. So they're a uniquely safe health care investment.
 
I recently told Phase 1 subscribers about another industry set to reap big rewards from drugmakers' downsizing. Let me explain...
 
By far, the biggest victims of Big Pharma's cutbacks are drug reps: attractive, well-paid twenty-somethings visit doctors bearing free samples and branded mugs. The largest drugmakers in the world are firing their rank-and-file sales force in record numbers. For the first time in more than a decade, the total number of drug reps actually fell last year.
 
Leading the bloodbath is Pfizer, the world's largest drug company. Last October, it kicked off a cost-savings plan that included a 10% reduction in its global workforce: 10,000 jobs. That includes 2,200 sales positions, nearly 20% of its U.S. fleet. Shortly after, Pfizer's peers announced similar cutbacks...
 
Britain-based AstraZeneca will trim 7,600 jobs, 11% of its roster, including most of its European sales force. Johnson & Johnson will cut 5,000 folks, including 400 drug reps right away. Sanofi-Aventis is firing one-third of its domestic sales force. And 3% of Novartis' employees, including 500 U.S. sales reps, got canned.
 
Of course, these companies still need to sell drugs. But at $165,000-$170,000 a year, traditional drug reps are too darn costly. The industry must sell more efficiently. That's where contract sales organizations, or CSOs, come into play.
 
Today, Big Pharma players can "borrow" sales reps on a temporary basis from a few CSO players. For example, Novartis may need a short-term team to push its flu vaccine in the fall. Or Merck might want to boost a drug launch and build brand awareness quickly. Using CSOs, drugmakers can supplement their internal sales force with top reps without taking on permanent, costly employees.
 
Right now, CSO reps make only 5% of total drug sales. This figure is set to triple in the next three years. That would make the substitute sales-rep industry worth about $2 billion. But CSOs do much more than farm out salespeople. They also recruit, train, and place new reps at drug companies. And they do market research, brand management, and other types of consulting.
 
The industry's biggest player is inVentiv Health (VTIV). The company loans out sales reps, crafts sales and marketing strategies, and provides staffing services. It brings in about $1 billion per year
 
Like CROs, the CSO industry is a perfect example of a low-risk, high-reward way to profit on Big Pharma's crash diet.
 
Good investing,
 
Rob Fannon




Market Notes
Government-backed mortgage giants Fannie Mae and Freddie Mac hit 17-year lows.
 
Home-improvement retailers still falling... Home Depot and Lowe's scrape out new lows.
 
California real estate gets cheaper... landholder Tejon Ranch at a 52-week low.
 
Earnings today... General Electric.
Market Watch
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52-Wk
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Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
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S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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