The pharmaceutical industry has witnessed major changes in 2009. Performance has been affected by factors like sluggish prescription trends, intensifying generic competition and limited phase III catalysts. The next five years are expected to reflect a significant imbalance between new product introductions and patent losses.

According to IMS Health (RX), this is the main reason why global pharmaceutical market growth will be restricted to the mid-single digits through 2013. Over the next five years, products that currently generate about $137 billion in sales are expected to face generic competition, including Lipitor, Plavix and Seretide. At the same time, new products are not expected to generate the same level of sales as the products losing patent protection have.

With most of the big pharma companies already facing patent challenges for their blockbuster products or likely to face them going forward, the companies have been looking toward mergers and acquisitions (M&A) and in-licensing deals to make up for the loss of revenues.

We saw huge M&A activity in the first half of 2009. Major deals include Abbott Laboratories' (ABT) acquisition of Advanced Medical Optics, Johnson & Johnson's (JNJ) acquisition of Mentor Corp., Pfizer's (PFE) acquisition of Wyeth and the merger between Merck (MRK) and Schering-Plough (SGP).

While these deals took place between large-cap pharma companies, others have been looking toward biotech companies to build their product portfolios. Prime examples include Johnson & Johnson's acquisition of Cougar Biotechnology, Roche's acquisition of Genentech, Bristol-Myer Squibbs' (BMY) acquisition of Medarex, and Sanofi-Aventis' (SNY) acquisition of Fovea Pharmaceuticals, SA.

We expect this trend to continue. Small biotech companies are also game for such deals. Given the current economic situation, most small biotech companies are finding it difficult to raise cash, thereby making it difficult for them to survive and continue with the development of promising pipeline candidates. As such, it makes sense for these companies to seek deals with pharma companies that are sitting on huge piles of cash. We would recommend investors to put their money in biotech stocks that have attractive pipeline candidates or technology that can be used for the development of novel therapeutics.

Another recent trend seen in the pharmaceutical sector is a focus on emerging markets.