Marketing vs. Research: How to Profit From Big Pharma's Secret
By Rob Fannon, editor, The Medical Investor
August 31, 2007
Over the course of a year, research associate George Huang and I probably attend more than 15 different medical conferences...
You have the "Super Bowl" of cancer – the annual meeting of the American Society of Clinical Oncology (ASCO). You have the American College of Cardiology conference for the who's who in heart disease drugs... and ICAAC, the Interscience Conference on Antimicrobial Agents and Chemotherapy for new HIV and other anti-viral medicines.
It's a tough schedule, but it's simply the best way to learn about the newest developments in the medical field... and, of course, how to invest in them.
There's one thing about these road shows that I both love and hate: the pharmaceutical sales rep, one of the most persistent forces on earth.
On one hand, these good-looking, silver-tongued twenty-somethings are the epitome of what's wrong with health care today. I've watched in dismay as blond bombshells armed with free drug samples, pens, mouse pads, and dozens of other trinkets charm and manipulate middle-aged doctors. Sadly, the stats prove these tactics work. In many cases, good doctors prescribe inferior products because a pharmaceutical sales rep has wooed them.
So... given the obvious negatives, why are these snake-oil salespeople also one my favorite parts of a medical conference? Well, nearly all of the meetings I set up with doctors and scientists take place at parties and dinners sponsored by drug companies. The host or hostess of the evening is inevitably a sales rep with a limitless corporate card ready to be thrown on the bar or at the bill.
One of my favorite stories comes from last December's American Society of Hematology conference in Orlando. A friend of mine had attended a dinner the night before... The drug rep had lost her corporate card that day, and scrambling to prepare for a dinner of top-prescribing doctors that night, she managed to have $15,000 in cash forwarded to her by the drug company. The bill that night for 10 doctors: $10,000.
Oh yeah, and the drug reps that man the corporate booths at medical conferences are always willing to give away the finest espresso and latte drinks... which saves George and me a few bucks in the mornings.
No doubt, they're good at what they do... and very well funded. The drug industry regularly spends two to three times more on sales and marketing than it spends on research and development.
But I'm not here to pick on sales reps... only to demonstrate the enormous spending power Big Pharma has to market, and occasionally develop, new drugs. And even though marketing gets the lion's share, development can be an incredibly lucrative enterprise – last year the industry spent over $15 billion on research. I like to take advantage of this with smaller, almost "hidden" drug investments... ancillary plays that always get paid, without taking the risk of drug failures.
One of the best examples of a Big Pharma "feeder" is the contract research organizations, or CROs, which conduct clinical trial design, management, and analysis outsourced by the big drug companies. These firms get paid for their efforts no matter what the clinical outcomes. Medical Investor subscribers have six-month gains of 17% and 11%, respectively, on the two dominant names in the industry: Covance (CVD) and Pharmaceutical Product Design (PPDI).
Other companies such as Charles River Laboratories (CRL) make a living off of selling and conducting animal-based research used for early-stage drug testing.
Much of my portfolio consists of companies that feed off the health care system and its overflowing budget, starting with Big Pharma's associates. I think yours should be too.
Good investing,
Rob Fannon
