If you're familiar with the writings of former New York Times journalist Melody Petersen, you might know that she released a damning examination of the pharmaceutical industry in 2008 entitled "Our Daily Meds". I'm currently reading the book, and like many of the reviewers at Amazon.com I'm absolutely in agreement with her simple thesis that drug company marketing bears much of the responsibility for America's addiction to prescription drugs.
Two-thirds of Americans take some sort of prescribed pill, spending more each year than 13 countries combined, including Canada, Great Britain and Japan. Over a 24-year period from 1980 to 2003, annual spending for prescriptions went from $12 billion to $197 billion. It's no wonder pharmaceutical companies aren't inventing drugs as rapidly as they once did. Just like the movie industry, it's easier to release a second, third and fourth version of a proven formula than to introduce drugs without an existing fan base.
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Five Best Sellers
The top-five drugs in terms of global sales are Lipitor, Plavix, Nexium, Seretide and Enbrel. Combined, their revenues in 2008 were $43.5 billion, which would rank these drug makers as 77th in gross domestic product if they formed a country. Although I've included a table with the total sales of the companies that make these best sellers, I thought it would be more interesting to uncover five companies with best-selling drugs that generate more than 50% of their sales from just one product. With many major drugs' patent protection expiring in the next five years, those overly dependent on one drug are bound to take a hit. Frankly, I wouldn't feel too sorry for them. After all, what goes up must come down.
Top-Five prescription Drugs Globally 2008
|Company||Sales - Leading Drug||Total Revenues||Percentage of Total||Market Cap|
|Pfizer (NYSE:PFE)||$13.66B - Lipitor||$43.4B||31.5%||$111.07B|
|Bristol Myers Squibb (NYSE:BMY) & Sanofi-Aventis (NYSE:SNY)||$8.63B - Plavix||$20.6B/35.6B||
|Astra Zeneca (NYSE:AZN)||$7.85B - Nexium||$32.5B||24.2%||$67.74B|
|GlakoSmithKline (NYSE:GSK)||$7.70B - Seretide||$36.5B||21.1%||$97.49B|
|Amgen (Nasdaq:AMGN) & Wyeth (NYSE:WYE)||$5.70B - Enbrel||$15.8B/$15.7B||18.1%||$51.60B/$63.12B|
|Source: IMS Health. Figures are in U.S. dollars.|
Diversification Protects Investors
None of the above companies relies too heavily on its wonder drug. Their investors should be happy about this. Even Pfizer, with its industry-leading Lipitor, doesn't push the envelope. I'm sure Melody Petersen would have some explanation for this. I tend to think these companies are doing a better job diversifying than she might give them credit for. From a business perspective, I have to believe they're spending more time and money figuring out what will replace these home-run drugs than detractors realize. Sure, the past few years haven't been as lucrative as in previous decades, but these companies have still made gobs of money. That's all investors can ask for. (Learn how to use revenue and expenses, among other factors, to break down and analyze a company. See Understanding The Income Statement.)
When I run down IMS Health's (NYSE:IMS) list of the top 15 drugs worldwide, I'm interested in one or two companies that have leveraged their futures on a one-hit wonder. I'd avoid those right now. Genentech, maker of cancer drug Avastin, had $4 billion in sales in 2008, ranking it 15th. As an independent company, Avastin's revenues accounted for 40% of its product sales, but that's stretching it. Add in its royalty revenue and Avastin's contribution is more like 30%, similar to Pfizer's. In March 2009, Roche Holdings bought Genentech for $95 per share. As a Roche subsidiary, it contributes approximately 10% to the top line. Therefore, it's out.
After checking all 10 drugs outside the top five listed above, the only company that comes close is Wyeth, maker of Zyprexa, a drug used to help those who suffer from bipolar disorder. Its 2008, sales were $5 billion, 31.8% of its total revenue. Between Zyprexa and Enbrel, you might have a problem. At least that would be the case if Pfizer weren't buying Wyeth for $68 billion. It seems Pfizer needed a few more products to protect it from Lipitor's expiring patent protection. (Learn how to find a healthy pharmaceutical investment in a market full of weak drugs in Measuring The Medicine Makers.)
Consolidation continues in the pharmaceutical industry. If you're an investor in one of these behemoths, you've got to be happy - unless you're an advocate of science-driven healthcare companies like Melody Petersen.
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