The Secret to Investing in Big Pharma

There’s a jibe David Letterman used to love to repeat on his late-night TV show: “Oprah has all the money,” he’d joke, with some level of jealousy. It always got a laugh. Of course, he was wrong: Drug companies have all the money.Drug companies hold great wealth for investors, but there’s a hidden secret to tapping that wealth that most investors never pick up on.

Let me explain…

Big Pharma Soars Thanks to Americans

It may be crazy that we are the only modern nation in the world to pay far more for the same drugs than people in other countries, but it doesn’t look likely to change soon.  President Barack Obama gave us sorely needed insurance reform, but no one has seriously addressed health care reform. And until that happens, drug companies are going to do very well indeed.

How well?

As Marcia Angell says in her book The Truth About the Drug Companies,

“The combined profits for the 10 drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses put together ($33.7 billion) [in 2002].”

Based on those numbers, only an idiot would ignore the profit potential of Big Pharma.

Take the last year or so of sales.

According to research firm IMS, the top selling drug from October 2013 to the end of September this year was Crestor, a cholesterol-lowering drug, with 22.3 million prescriptions written.

Thirty Crestor 10 mg tablets retail for about $200 in the United States.

The price for the same Crestor in Australia is about $30.

Americans paid nearly seven times the price Australians paid for the same drug.

And that’s not going to change anytime soon.

AstraZeneca sold $5.8 billion worth of Crestor in the last year. That’s $18 for every man, woman and child in the United States — for one drug.

Acid reflux drug Nexium came in third, at nearly 18 million prescriptions.

Nexium raked in about $5.4 billion.

But the biggest buck came in the depression market, with Abilify. It sold for the most total dollars in the last 12 months.

Abilify is the antipsychotic add-on drug people take when they are using antidepressants and still feel depressed.

Yes, that means if you take an antidepressant and it doesn’t help, you take a second antidepressant to help the first one. Thirty tablets sell for about $800.

Now that’s depressing!

Abilify sold $7.5 billion worth of prescriptions in the 12-month period.

The top five drugs that took in the most cash are Abilify; Humira, for arthritis; Sovaldi, for hepatitis C; Nexium; and Crestor. Sovaldi famously sells for $1,000 per tablet and took in $6.7 billion for Gilead, and it wasn’t even for sale for the entire 12 months.

All of these companies can make you money. They’re big names with big products.

But here’s where most investors get it wrong.

You could take the top 10 drug companies in the world, create your own mutual fund and invest equally in each of them and you’d do just fine — if you’ve got 20 years to wait for the returns.

But the exciting gains come from doing something entirely different.

Follow the Little Guys

What if you don’t have 20 years to wait? What if you need to make money now?

You can get wealthy far faster by following one trick:

I call it following the little guys.

The secret is to invest in promising young companies you’ve never heard of that get gobbled up by those big pharmaceutical companies for billions.

Yes, the drug companies may have all the money, but only the small, innovative biotechs can deliver great wealth in a short period of time.

Sincerely,

Stephen Petranek
for The Daily Reckoning