When you’re paying for your drugs it’s hard to know what you’re actually paying for.
Are you buying the chemical compounds contained in the pill? Are you buying the research and development that was necessary to bring the pill to market? Or are you buying the brand name printed on the bottle?
The pharmaceutical industry is big business, but it’s no sure bet. It requires much time and huge investments to research, develop and market drugs. Since there’s more economic value in the proprietary research and formulation of a successful drug, than in the raw materials, drug companies often fight patent wars.
This pits the drug manufacturers who developed the drugs against generic manufacturers who lay in wait for patents to expire so they can produce the same drug, but undercut the competition with cheaper prices. After all, generic manufacturers spend far less on R&D so they can afford to sell their product at a cheaper price.
I found an interesting trend when comparing the stock price of Bristol-Myers Squibb (NYSE: BMY) – a major, brand-name manufacturer – against the stock price of Mylan (NYSE: MYL) – a generic drug maker.
This chart shows the relative performance of these two companies, by dividing Mylan’s stock price by Bristol-Myers Squibb’s.
As the chart moves higher, it indicates that Mylan is outperforming Bristol-Myers. And as you can see, that’s the general trend ever since the market bottomed in early 2009.
This may or may not be an industry-wide trend, but it will be interesting to see how the battle plays out between drug makers with significant R&D costs and the generic makers that can offer the same chemicals at cheaper prices once the patent has expired.
If you haven’t done so already read the Survive & Prosper issue on “Pharmaceutical Companies Are Happy – Old People Are Buying Drugs.”