New York – An article in the Wall Street Journal this morning bemoans the future of big pharma as a result of pending patent expirations and a lack of new drugs to take the place of those expiring. Examples are the expirations of Pfizer’s Lipitor patent in 2010, Bristol Myers Plavix in 2011 and Merck’s Singular in 2012.
Pharma is a complex business, and not just because of the physical science skills that are required to produce effective drugs. First, there is a massive up front investment required to fund the R&D. Second, is the somewhat unknown timeline for FDA approval. Third, competitors may produce a more effective drug with the similar launch date. Fourth, once developed, drugs are copied relatively easily forcing drug companies to live by the patent. Fifth, patent expiration timelines force the constant re-investment into R&D so that new drugs are ready to be launched when the old ones patents run out.
While the article sites evidence that big pharma is in transition, indicating lower profitability and a potential for M&A as the industry consolidates. Fortunately, there are some excellent research companies that can help in this analysis that provide excellent information on the drug industry, over and above the traditional fundamental analysts. They include, but are not limited to industry experts and expert networks, and to a lesser extent, news and commentary services.
Industry experts are defined as firms which consult to the industries they cover. Examples are Decision Resources and MedPannel. The process of analysis is very detailed, including an assessment of the demand for drugs via disease studies that include the prevalence of the disease in the population, the percentage of those with the disease that seek treatment and other factors. Next the company looks to the drugs that promise to treat these diseases (supply). Clinical trials are tracked to see which of the drugs have the best treatment qualities, including measures of how pharmacies are perscribing drugs in the marketplace. Together this data is combined and analyzed to handicap drug treatment regimes and pick the most efficacious and popular drugs. While neither Decision Resources nor Med Pannel make stock recommendations, it is a simple matter for an equity analyst to translate this information into buy, sell and hold recommendations.
Expert Networks, such as Clinical Advisors and MEDACorp, are in the business of connecting investors with resident experts so that the investors can make informed decisions. In the drug industry, if the investor is connected to the right expert she can make a well informed investment decision about particular drug stocks. Experts that have a great deal of knowledge about the industry are available for consultation. One concern with this model is that the expert might know too much about the particular drug in question, for example having knowledge of or being a participant in a drug trial. This would mean that this expert would have to excuse himself from that particular engagement or be in violation of insider information rules. There have been cases in the expert network space where the expert was participating in drug trials while providing advise. Most of this impropriety has been wrung out of the system by the introduction of much more encompassing and detailed rules administered by the expert networks to guard against this practice.
Examples of these services are StreetAccount and Informa Healthcare. StreetAccount, for example, racks up all relevant data in the public domain and maintains a relational database on all of the information. The database allows clients to filter the information according to their particular holdings, stocks they may be considering and particular drugs or treatments etc.