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Saturday, April 2, 2011

Changing times in the drug business

Many years ago when I was learning about investments, I read a book that strongly recommended buying shares in pharmaceutical companies. Their returns on equity -- that's MBA-speak for relative profitability -- were consistently higher than any other large, stable, and growing sector of the economy. It had been that way for a long time, and it showed no signs of ending.

I saw evidence of this. In the 1980s and 1990s when I flew frequently within the U.S. and Canada on business trips -- before I started doing the overseas thing -- I would often get no-cost upgrades into first class. One of the things that put North Carolina's Research Triangle Park on the map, literally, was an influx of pharmaceutical companies. I noticed that their rank-and-file employees, not merely their executives, going in and out of RDU were traveling on paid first-class tickets. Coca-Cola and a few wealthy banks were the only other employers I knew of that were so generous in their travel policies.

Times have changed. Big pharma companies are falling off a "patent cliff" as the patents for some of their most profitable drugs are expiring. Pfizer has lost patent protection for Lipitor, which generates $10 billion a year in sales. Here's a partial list of other drugs that have lost or are about to lose patent protection. Some of them you've never heard of, but others are familiar names.

Actos, Advair, Aprovel, Aricept, Arimidex, Astelin, Avandia, Cipralex, Climara, Cozaar, Crestor, Diovan, Effexor, Flomax, Follistim, Hycamtin, Imitrex, Invirase, Keppra, Lamictal, Levaquin (I took this a year ago for a serious ear infection), Maxalt, Mepron, Migranal, Plavix, Prevacid, Protonix, Seroquel, Singulair, Symbicort, Synarel, Topamax, Valtrex, Viramune, Xalatan, Zometa, and Zyprexa.

Even the first patent (of several) for Viagra is about to expire.

Meanwhile, there are fewer drugs of potential blockbuster status in the development pipeline. That's a concern not only for investors but for the general public. For example, only two drug companies (GlaxoSmithKline and AstraZeneca) are spending much R&D money these days on antibacterials... a major concern, given the rapid spread of drug-resistant infective bacteria containing NDM-1.

Many drug companies have essentially outsourced their R&D to universities and start-up companies. If the drugs prove in, the big companies will swoop in to manufacture and market them -- a low-risk proposition for shareholders of the big companies, and a task that small companies are ill-equipped to perform. For the sake of all of us who want silver bullets on demand, I hope this new strategy works.