Gregg wrote a nice comment: "This NYT editorial story is not good for drug stocks which depend on revenues from cholesterol lowering drugs. That is good and bad. Good from a moral-philosophic point of view, bad for my portfolio."

Drug stocks will become much more volatile in the next 5 years. Many billion dollar patents are expiring and the pipelines are not there to replace them. Big pharma will downsize more and more in US/EU, and throw money at all biologicals as well as small molecules designed for cancer to fill pipelines, and shift research projects (and esp. regulatory testing) for small molecules to cheaper chemists in China/India. Why?

Labor costs. Wu Xi in China (WX on NYSE) a great example of the last. WX is also getting into cheaper regulatory/development testing. Many big pharmas opening R&D centers in China, too (Shanghai). Biologics are harder to make but easier to develop (usually less toxic). Small molecules for cancer are more likely to get approved. Big pharma has made billions on small molecule drugs for chronic conditions. Double whammy here - a) many good drugs coming off patent for those conditions, so unless the new drug is much superior, it has no chance cost-wise, b) FDA is now much tougher on the safety of drugs for chronic conditions, especially if the condition is not life-threatening. Cancer is still hard to treat and life-threatening.

VCs seem to be putting less money into traditional US small molecule startups. If I were a VC, I would move money to China/India, but also look for plays for pipeline fillers. Big pharma execs have to be seen "doing something" or lose their jobs.

Their real problem is the length of the R&D cycle. Research averages 5 years, clinical testing in humans averages 7 years, and FDA approval time is ~14 months. So 13 year cycle.

Fail rates are huge. Take 10 research projects. Each makes 2,000 molecules on average to produce a clinical candidate (drug to test in man). One of those ten projects will produce a drug. So about 1 in 20,000 molecules becomes a drug after 13 years. Why the fail rate is so huge is another essay.

Consequences are that big pharma execs reorganize alot and buy pipeline fillers while cutting costs and praying the pipeline gets better randomly (and they fire the research head, too). Changes made back in research may or may not affects the success rates. Doesn't matter much, either, from the CEO viewpoint. Even if a research process change/new technology tripled the success rate, you couldn't tell easily. 3x better means 1 in 6,667 molecules succeeding after 13 years… So big pharma execs "do something now" even if it has little chance of fundamentally changing the odds in order to save their own necks. Likely more shenanigans like hiding of bad data on Vioxx and new Vytorin ethics scandal.

This means lots of volatility. The problem is the high fail rates mean it is tough to tell which small companies are any good. Interesting times ahead.


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