Matt McCall’s out with another high-priced promo letter that promises the potential for huge gains — this time, by finding the stocks that he thinks will benefit from China’s massive increase in health care spending in the years to come.
The ad is for his Early Stage Investor, and he claims to be making a “$3,000 bet” on this idea — but really all that means is that he’s offering you some add-on “special reports” and services that he thinks are worth $3,000… the actual offer he’s making now is that you get his newsletter and those special reports for $1,499, and that you better be sure you like it before you’ve seen it because there are no refunds (as with some other high-cost services, the guarantee is, “If you don’t like it after a year, I’ll give you another year for free” — which, of course, costs them nothing and doesn’t get you your $1,499 back).
So in the interest of helping you to make a more rational decision about whether you want to plunk down fifteen hundred bucks for a speculative newsletter subscription, I thought we’d put the Thinkolator to work for you and at least get a better idea of what he’s talking about — including the stocks he’s teasing as his secret best ideas. Ready?
OK, the pitch is pretty compelling… here’s a little taste:
“You see, there’s a secret “force” at play here that actually makes this one of the SAFEST and MOST LUCRATIVE opportunities I’ve ever uncovered.
“And that force is the full faith and backing of the government, which is about to inject billions of dollars into a new and tiny sector of the economy.
“In this case, over 800 billion!
“Only this is the single greatest cash infusion I’ve ever seen from any government — EVER”
Which basically just means, “China has promised to make a much larger investment in biotech” and wants it to be a much larger part of their economy in the future. That’s been true for China’s “five year plans” since at least the 10th plan (2001-2005), but it is true that the current 13th five-year plan does specifically say that the biotech sector will exceed four percent of GDP by 2020. That’s also not a new goal, it was publicly reiterated and boosted back in 2017 when China was pushing a “special plan for biotechnology innovation.”
Which makes sense, China is aging faster than any other major country and China would rather be a developer of treatments than an importer of drugs… and it also makes sense that healthcare spending for things like cancer, where risks are high in China partly for environmental and social reasons (smoking and pollution), would be a priority.
McCall tries to put a bit too much precision on the implications of this five-year plan goal, I think…
“… the government is desperate to get this industry off the ground…
“So much so that it officially announced it wants this new sector to go from virtually nonexistent to representing 4% of the GDP by the end of next year….
“That may not sound like much at first glance, but consider that 4% of the GDP represents a massive $627 billion dollars.
“This sector is currently valued at just around $5.4 billion.
“When you do the math, the numbers are mind-blowing…
“That’s a growth of 116,000% in just over a year.”
It looks like that $5.4 billion number comes from a Goldman Sachs estimate of the annual revenue for “medical biotech” in China in 2017, and while that’s growing fast that’s a lot narrower than the “4% of GDP” they’re targeting for the five-year plan. China has invested more than that, through various venture funds and state-run enterprises, just into buying into US biotech companies in a given year, and they’ve increased their spending on basic medical research to something in the $100 billion neighborhood to try to mimic the US’s historical government-funded dominance in foundational research.
This is the match McCall uses for that 116,000 percent gain, by the way:
“China’s biotech sector will grow from its current size of roughly $5.4 billion to its $627 billion target (4% of overall GDP) by the end of 2020.”
The increased spending on research and development in biotech is real and dramatic, and the focus on growing that part of the economy aggressively is real, but it’s not 116,000% real — it’s more like doubling or tripling the government’s investment in the sector in the next few years, spurring more private investment as well, which is big, and is probably enough to create windfalls in a lot of companies as the cash surges into the system, just don’t get too wrapped up in comparing recent sales for biotech companies in China ($5 billion-ish, says Goldman Sachs) to the strategic goal of having the sector be 4% of GDP ($627 billion). That’s apples and oranges.
China’s five-year plan and the similar “Made in China 2025” plan represent strategic initiatives to modernize China’s economy in some high-tech sectors, including biotech, and pushing to make the country more of an innovator and less of a contract manufacturer… a process that’s been ongoing for decades already. And they are spending heavily and dramatically to boost this, but that does not mean that the value of China’s biotech companies is going to increase by 116,000% in the next year. Or the next five years.
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More from the ad:
“When you can basically wave a magic wand at one sector inside a $14 trillion economy, the resulting stock price movements are almost unbelievable.
“The country I’m talking about, of course, is China. Today, the Chinese government has earmarked an unprecedented pile of cash for one small sector of the markets — and the tiny companies operating in the space are about to go supernova.
“I’m so convinced this is going to happen, I’m willing to bet $3,000 to prove it.”
That’s the $3,000 “bet” I noted at the top… and yes, it’s malarkey, he’s not betting anything. That’s like me saying that the rest of this article is worth $500, and since I’m giving you the rest of the article for free instead of charging you for it, that’s my $500 bet on this idea.
And yes, I just made up the $500 — much as McCall’s publisher made up the retail price for the research reports he’ll be sending you “for free” (after you send them $1,499).
The basic ongoing argument here is not necessarily a bad one, it’s just that there isn’t a linear connection between China pushing a sector forward and a specific percentage gain for those stocks. Certainly China’s focus on other industries in the past has helped some specific stocks perform awfully well, partly by design and partly by accident as they’ve built up national champions in technology, energy, telecom and natural resources, and the biotech sector has been slobbering over the China potential for several years now… probably with good reason, though that doesn’t mean every stock is going to succeed.
Here’s more from McCall…
“Every single minute, four people die of cancer in China and another seven are diagnosed.
“That’s over 10,000 Chinese people getting diagnosed with cancer every single day.
“Nearly 22% of the entire male population will get lung cancer and over 19% of women will get breast cancer.
“But it gets worse…
“The cancer survival rate in China is less than half that of the U.S.
“Getting cancer in China today is basically a death sentence.
“In short, these reasons are exactly why China has decided to go ALL IN on health care and biotech. They need access to basic medicine, prescription programs, and companies working on new drugs and they need them now.”
And then, of course, we get to the “one small company” that’s going to make you rich. If I hadn’t called this site Stock Gumshoe back when I started writing about and uncovering investment teaser pitches in 2007, I would have called it “One Small Company.”
OK, it’s not just one… but still. More from McCall…
“The lion’s share of this money is going to a select few small — publicly traded — startups….
“There are already more than 1,000 government-funded venture capital firms on pace to invest $800 billion on biotech firms…
“And I’ve found the ones at the center of it all.”
So… what are they? Let’s start to dig… clues, please!
“Biotech Firm #1
“If you know anything about the way the Chinese government operates, you know it’s not shy about who it’s getting behind.
“In fact, this small cancer drug maker might as well be holding up a huge neon sign.
“First, the Chinese government has decided to directly invest in this company to the tune of $150 million, but I’m sure the figures are higher than what’s publicly reported.”
OK, so China’s investing in this cancer drug company. What else? There’s more connection to the gummint, we’re told…
“This Beijing-based company’s executive team is filled with former high-level China government health officials and biotech veterans.
“The co-founder of this company was also the founding director of a strategic government initiative called the National Institute of Biological Sciences.
“Another executive member was the head of China Pharmaceutical Development and Manufacturing for several years.
“And the president of the company ran U.S biotech juggernaut Pfizer’s entire China operation for years.”
OK, good clues… what else?
“Massive billion-dollar U.S. biotech companies like Celgene have formed strategic partnerships with this company to the tune of $1.4 billion.
“Then there’s the massive pipeline this company has.
“They currently have 50 active trials for four drugs that are either in the late phase 2 or phase 3 stages.”
Wowsers! So who is it? Thinkolator says McCall is teasing BeiGene (BGNE), a Chinese biotech R&D company that’s been around for about a decade but went public in 2017… and it’s been a particularly interesting story this month, because the shares just shot up dramatically on November 1.
Why so, you ask? Another investment — the shares popped by about 40% when Amgen (AMGN) announced that they were making a big investment in the company (buying about 20% of the company at $175 a share, which was a 26% premium at the time). That’s also giving BeiGene the Chinese commercialization rights (the two will share profits and costs) for three Amgen cancer drugs, Kyprolis, Blincyto and Xgeva, the last of which is already approved in China, and BeiGene agreed to invest $1.25 billion toward developing 20 of Amgen’s experimental cancer drugs (Amgen will share the funding costs, and will pay royalties if they sell them outside of China). It will take a while for the financial part of that to shake out and find out if it’s a good deal in the end, but it is, at least, a pretty big vote of confidence from Amgen in both BeiGene’s abilities in R&D and commercialization and in the Chinese cancer market in general.
BeiGene does a pretty good job of telling its story on its website, with some background here and a good (pre-Amgen) investor presentation here. I can see how this is an interesting idea for getting access to the growing Chinese drug market, particularly as that population ages and the market opens up to more investment in pharmaceuticals and foreign branded and developed drugs. I have no idea what the economics of the pharmaceutical business might be in China, since spending on drugs is vastly different there than it is in the US, but these folks appear to be well-connected and there is a big late-stage pipeline of potential catalysts.
The financials are not particularly meaningful yet, but that’s true of any biotech whose effort is spent mostly on developing drugs that aren’t yet being sold. It’s a big company, with a market cap of about $12 billion even before the Amgen deal closes (that won’t be until next year, it appears), and with more than $1.5 billion in cash (again, pre-Amgen) they should not be in need of any additional funding anytime soon.
Their revenue has been jumpy over the past couple years, mostly because the lion’s share of it is “collaboration revenue” and not actual product sales, and the near-term hope for meaningful revenue, beyond their variety of joint venture programs and the Amgen deal, appears to be from their BTK Inhibitor Zanubrutinib and their PD-1 andibody Tislelizumab, both of which seem to be on the verge of final approvals and commercialization in China (Zanubrutinib also has breakthrough therapy status in FDA review in the US).
I can’t tell you how this will all work out, of course, and I’m far from being an expert on the drug development process or, more importantly, drug commercialization (especially in China), but the analysts who follow BGEN estimate that they’ll keep losing money for at least a couple more years… but that their incoming revenue, which doubled in 2019, will double again by 2021. So it’s likely not the financials that will spark interest in the next few quarters, it’s probably the clinical progress and the impact, once they get clearer about it, of the Amgen deal on their income statement that will drive the shares either higher or lower from here.
I do think that emerging markets healthcare is an interesting theme, though it’s challenged by the historical status of the developing world as a beneficiary and subsidized customer of “western” R&D and the traditional view that the US is the primary world profit center for advanced medicines (partly because of the lack of price controls, and the historical willingness to spend very heavily for improved outcomes).
But I also know that when I invest in biotech and health care companies, particularly those with a really unclear financial trajectory or a lack of approved and marketed products, that I’m likely to be buying those shares from someone who understands the company and the science better than I do… which is a deterrent.
The argument to be made here that does seem a bit compelling is that BeiGene is in the right place at the right time, focused on proven and advanced drugs that are often partnered with established biotech companies just when China is opening up its health care market and dealing with a growing population of cancer patients. Not so compelling that I’m rushing out to buy shares, particularly after Amgen’s investment a couple weeks ago brought that 40% pop in the share price, but compelling enough to keep paying attention and maybe chew on this one for a while.
And yes, McCall did offer up three other China biotech stock teases… which might help to make things more interesting, because investing in a basket of “China’s going to spend a lot on cancer drugs and biotech research” stocks is likely to be a lot less risky as a thematic investment than “I’ve got the best Chinese biotech stock”… but that will have to wait one more day, I’m out of time so I’ll have to get to those tomorrow for you. If you want an ETF, there aren’t many but you might look at Loncar China BioPharma ETF (CHNA), which has BeiGene as a 4% holding, or the broader Global X MSCI China Health Care ETF (CHIH) or KraneShares MSCI All China Health Care Index ETF (KURE) (neither of those two includes BGNE as a top holding).
And, of course, if you’ve got thoughts on BeiGene, or other favorite biotechs in the Chinese market, please let us know with a comment below… thanks for reading!