I have not been the first nor will not be the last to point out the troubles of Big Pharma; however, how can you as an investor take advantage of the weak sub-sector and transfer your investments to another attractive area of Healthcare that will be reaping the benefits? In this article, I will point an attractive industry that will be benefiting from what I like to call, the Big Pharma Effect.
What’s happening in Big Pharma?
The patent expirations are building up and margins are getting squeezed. We’ll take a closer look at exactly what is coming off of patent. The following chart details the top twenty branded U.S. Drugs from May 2008.
Graph from IMS, FDA Orange Book, and Company Filings and Jefferies & Company, Inc.
Looking at the graph, you will notice that many common household branded drugs will expire and the generics are rushing in to gain exclusivity. (PFE: 19.75, +0.38 (+1.96%)) has been brought up recently in the courts as they attempt to block other companies releasing the generic version of Lipitor, the world’s most-prescribed cholesterol-lowering medicine. Pfizer reached a settlement with Ranbaxy Laboratories in June over some patent disputes, and has allowed the Indian based company to launch a generic version of Lipitor on November 30, 2011. Ranbaxy was the first generic company to challenge Lipitor’s patent; therefore, Ranbaxy holds the rights to 180 days of marketing exclusivity in the United States.
The next graph I would like to point out shows the volume of top 20 patent expirations through 2015.
Graph from IMS, FDA Orange Book, and Company Filings and Jefferies & Company, Inc.
As you can see 2008 encompasses 22.75% of the top 20 patent expirations through 2015 according to 2007 sales, and slightly over 75% through 2012. With revenues depleting signicantly, how can Big Pharma maximize their R&D and SG&A expenses without having it cut into the bottom line too much? Are these mega-cap companies prepared to take a hit in earnings and are they fullfilling their due diligence to their investors? I would not hesitate much to answer with “NO“.
