The glory days of the big players in the pharma industry are winding down. In the 90s the industry pretty much had a lock on profits. Major drug companies developed drugs for such problems as cholesterol, high blood pressure and diabetes and had them under patent. Those patents generated hundreds of billions of dollars in revenue for these companies. But now profits are falling and the future is unknown. What is happening? Quite simply patents for these 'killer' drugs are expiring. In the next two years the major companies will lose at least 10 key patents. Generics are moving in rapidly to fill the vacuum. Since generic producers did not spend the billions developing the drugs, their costs are much lower. In 2010 the average prescription fell to $72 versus $198 for a similar name brand.
Huge profits are evaporating for the pharma industry. To put this in perspective, prescriptions of generic drugs rose from 57% to 87% in the six years from 2004 to 2010, It is estimated generics saved the entire health care system $844 billion.
The result has been less spending on research and fewer jobs. There are about 10% fewer jobs now than four years ago.
The shifting trends of the big pharma industry have led to a corresponding drop in stock prices for this sector. Prices are down 25% compared to a gain of 15% in the S & P. Major brokerage houses have lost favor with the group and are not recommending them. The new health care reform program will give the government more pricing power and put additional pressure on company profits.
While these changes were occurring, a new and powerful trend was underway. It is the growing challenge of startup drug companies. It is a serious threat in that the startups are not trying to make the big scores of years past. The industry is shifting toward more specialized drugs. For example, in cancer research one company is producing a drug that selectively inhibits cancer cells. An unusual start-up is doing research with varicose veins. They are closing defective veins and diverting the blood to other veins. Research in oncology has one company developing molecular diagnostics for inflammatory problems. One company is working on ways to preserve sight. And the list is growing.
This does not mean that big pharma is on its last leg, far from it. They are sitting on billions in cash and they too are moving into these more selective areas of research. For the investor who is looking for a beaten down sector, it may be time to look at the drug industry.
Huge profits are evaporating for the pharma industry. To put this in perspective, prescriptions of generic drugs rose from 57% to 87% in the six years from 2004 to 2010, It is estimated generics saved the entire health care system $844 billion.
The result has been less spending on research and fewer jobs. There are about 10% fewer jobs now than four years ago.
The shifting trends of the big pharma industry have led to a corresponding drop in stock prices for this sector. Prices are down 25% compared to a gain of 15% in the S & P. Major brokerage houses have lost favor with the group and are not recommending them. The new health care reform program will give the government more pricing power and put additional pressure on company profits.
While these changes were occurring, a new and powerful trend was underway. It is the growing challenge of startup drug companies. It is a serious threat in that the startups are not trying to make the big scores of years past. The industry is shifting toward more specialized drugs. For example, in cancer research one company is producing a drug that selectively inhibits cancer cells. An unusual start-up is doing research with varicose veins. They are closing defective veins and diverting the blood to other veins. Research in oncology has one company developing molecular diagnostics for inflammatory problems. One company is working on ways to preserve sight. And the list is growing.
This does not mean that big pharma is on its last leg, far from it. They are sitting on billions in cash and they too are moving into these more selective areas of research. For the investor who is looking for a beaten down sector, it may be time to look at the drug industry.
