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) -- Last week, I

graded my bio-pharma stock-picking efforts

during 2012. This week, it's time to look around and ahead. Over the past month, I've spent lots of time talking with professional healthcare investors and listening to company executives. Here are my observations from these interactions.

Investor sentiment feels less exuberant than might be expected given the impressive year-to-date performance by the major healthcare and biotech indices. Many investors described 2012 as a difficult year of missed opportunities, undersized victories, and unusually high pressure to achieve index-beating returns. Add to this unsettled dynamic a general sense of unease about the global macro environment and uncertainty over implementation of the Affordable Care Act (ACA), and the result is palpable wariness.

From my conversations with investors, I came away with optimism about the future of healthcare, mainly because medical innovation seems to be picking up again. I also heard concerns about hidden risks, largely due to an increasingly brutal commercial environment. And yes, fund managers have been talking a lot about SAC Capital Advisors, allegations of insider trading related to the leaking of clinical trial results, and the impact this may have on healthcare investors and investing.

There is a general consensus the U.S. Food and Drug Administration has loosened up a bit. A long list of companies scored drug approvals in 2012, including

Onyx Pharmaceuticals


(Kyprolis for multiple myeloma),



(Xtandi for prostate cancer),

Gilead Sciences

(GILD) - Get Gilead Sciences, Inc. (GILD) Report

(Stribild for HIV),


(PFE) - Get Pfizer Inc. Report

(Xeljanz for rheumatoid arthritis),



(Perjeta for breast cancer),

Vertex Pharmaceuticals

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(Kalydeco for cystic fibrosis), and of course


TheStreet Recommends

(VVUS) - Get VIVUS, Inc. Report

Qsymia and

Arena Pharmaceuticals'

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Belviq (both for weight loss). Looking ahead,

FDA drug approval calendar

will remain busy through the first quarter of 2013.

Even as FDA is giving the green light to more drugs, selling those drugs successfully remains a challenge. Investors aren't in a forgiving mood when companies make marketing mistakes. Witness the punishing drop in Vivus' stock price after the dismal Qsymia launch, or the cautious statements by Ariad Pharmaceuticals about yet-to-be approved ponatinib in chronic myelogenous leukemia (CML) that sent investors running for the exits.

Investors expect next year to be a "stock picker's market," a term that always initially strikes me as tautological but simply suggests the biotech sector may be directionless or overly volatile. I agree, but would add my view that the market will increasingly reward only true medical innovation going forward.

Sarepta Therapeutics'

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eteplirsen and


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drisapersen, two novel drug candidates to treat Duchene muscular dystrophy (DMD), are good examples of the kind of products that will justify sustainable premium pricing. In contrast, the global commercial environment will likely grow increasingly difficult for products with either a modest long-term clinical benefit (Arena and Vivus' weight loss drugs) or impending competition and unclear cost-adjusted value (

Edwards Lifesciences'm

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transcatheter heart valve technology).

Memorial Sloan-Kettering's refusal to use

Regeneron Pharmaceuticals'

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oncology drug Zaltrap because of its high cost strikes me as a dark cloud on the horizon. As a fundamentals-based healthcare investor, I consider pushback against flagrantly unjustified drug pricing to be a positive. Generalist investors, however, might quickly become extremely concerned if drug-pricing power seems unsustainable.

Cost pressures on the healthcare system will invariably increase over time. Eventually, I think these dynamics will force more widespread adoption of cost-effectiveness analysis such as the roughly $50,000 Quality Adjusted Life Year (QALY) threshold used by the U.K.'s National Institute for Health and Clinical Excellence (NICE).

Company executives always complain that increased use of cost-effectiveness analyses will quash innovation. I call shenanigans. No other segment of the economy benefits from annual "inflation driven" price hikes in perpetuity for a stagnant product, yet innovation abounds. It's becoming increasingly clear that the salad days of healthcare pricing are over and executives need to adjust accordingly.

Oaktree Capital Chairman Howard Marks frequently reminds investors of his favorite adage: Never forget the six-foot tall man who drowned crossing the river that was five feet deep on average. This cautious tone feels especially relevant in healthcare as we head into 2013.

Sadeghi has no positions in stocks mentioned in this column.

Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza's Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.