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Tickers in this Article: PFE, BMY, LLY, MRK, TEVA, BRL
The landscape for large pharmaceutical companies has changed radically in the last year.

Their model used to be that they would spend huge sums on R&D and then push blockbuster drugs into the market.

These drugs would often be worth billions of dollars in revenue each year, and were protected from competition by patents.

But, a number of those patents are expiring, and generic manufacturers are moving into the drug market with cheaper versions of the products.

The success of this trend is fueled by government desires to keep down health care costs.

Early this year, Pfizer (NYSE: PFE) cut 10,000 jobs. The company said that rising competition from generics would pressure its operating profits for the next several years.

Wall Street analysts pegged the drop in Pfizer's annual revenue due to generic competition at as much as $14 billion a year. The biggest drug in Pfizer's stable about to go "off patent" is its hugely successful cholesterol drug Lipitor.

URCH Publishing recently put out a report that forecast $100 billion in sales of big pharma drugs will be at risk between 2007 and 2011. Bristol-Myers Squibb (NYSE: BMY), Takeda, AstraZeneca and Eli Lilly (NYSE: LLY) have 40% of their revenue competing with new generics and for Merck (NYSE: MRK) and Pfizer the figure is closer to 50%.

It will be a windfall for generic companies, which may be able to add $20 billion in revenue over the next five years.

Investors have known for some time that this day would come. The patent expiration dates for key drugs are readily available. And, the growing concern shows in the stock prices. Over the last five year, shares in Pfizer are down 40%. Shares in Bristol-Myers are down 46% and shares in Merck are off 28%.

Perhaps the best example of how investors have been able to benefit from the trend toward generics is the public company Teva Pharmaceutical (Nasdaq: TEVA).

Shares in the Israeli company are up over 150% during the last five years. One of its rivals, Barr Pharmaceuticals (NYSE: BRL), has seen its stock up 50% over that same period.

The pressure on drug prices is mounting as both the state and federal governments try to hold down medical costs. Eleven governors recently banded together in an attempt to drive down the cost of insulin.

Consumers, the government, and private insurers spend $3.3 billion on the diabetes drug each year. Analysts say that a generic version could push those costs down by 25%.


The remaining question for big pharma shareholders is whether the large R&D operations at these companies can create patented drugs to replace those that are now the target of the generics companies.

With falling revenue opportunities the money for R&D may not be so plentiful, and that is a very big problem.

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