When Drug Makers Aren't Selling Drugs...
By Rob Fannon, editor, Phase 1 Investor
February 25 , 2008
In 2008, $50 billion medical device maker Medtronic (MDT) will offer the first commercially available glucose monitoring and insulin delivery pump integrated system for diabetic patients.
The blood sugar monitoring system will wirelessly communicate with the insulin pump to help manage patients' blood-sugar levels continuously. It's the perfect marriage between a medical device (i.e. the monitoring and pump system) and a drug, in this case, insulin.
This example is one of a few medical products positioned in an emerging trend in medicine: Merging medical devices with new drugs. Of course, the perfect example of this is drug-eluting stents, which prop open clogged arteries and are coated with a blood-thinning drug. Big Pharma player Johnson & Johnson generates about 40% of its revenue from medical devices and diagnostics.
The smaller biotech and drug companies are getting in this game, too. Phase 1 Investor recommendation CombinatoRx (CRXX) has a lucrative collaboration in place with Canada-based Angiotech Pharmaceuticals to develop the next generation medical device-drug implants.
With an entire generation of active baby boomers, you better believe the medical device industry will prosper in sales of new hips and knees. But, there's a pile of money to be made beyond new shiny ball-n-socket joints with the next-generation drug-device products.
But, medical devices are just one example of how drug companies are diversifying away from their bread-and-butter products – drugs.
On Friday, I shared with you three specific ways to directly profit from the recent setbacks experienced by the world's largest drug makers, collectively referred to as Big Pharma.
Today, I'm going to dive deeper into what I find is the most fascinating tactic these industry giants are using to keep their heads above water – diversification.
Struggling drug companies are looking at ways to diversify their product lines outside of the traditional top-selling lifestyle drugs like cholesterol, blood pressure, and diabetes treatments.
For example, vaccines are back in vogue. Last year was a banner year for new vaccines. Merck and GlaxoSmithKline were granted approvals for vaccines against the human papillomavirus (HPV), the viral culprit behind cervical cancer. Sanofi-Aventis became first company to receive U.S. approval for an emergency-use avian flu vaccine. And, while it came up short, biotech company Dendreon's efforts to get its supposed cancer vaccine approved by the FDA caused quite a stir in the industry.
Speaking of stirs, Swiss drug company Roche's $3.4 billion hostile takeover of cancer diagnostic company Ventana, roused valuations throughout the dozens of publicly-traded diagnostic players.
Once regarded the red-headed step child of the medical industry, drug companies are pouring billions into marrying expensive drugs with a corresponding diagnostic test. For example, Pfizer's new HIV drug Maraviroc can only be prescribed after results are known from a viral diagnostic test made by tiny biotech Mongoram Biosciences.
One last source of diversification for the drug market – "cosmeceuticals." This is just a fancy word that describes new medical treatments that blur the line between cosmetics and traditional drugs. Examples include Allergan's anti-wrinkle Botox injections. Both Botox sales and Allergan's stock price have been a tear the last few years.
Drug companies are drooling over this new class of "drugs" because patients pay for these remedies out of their own pockets, circumventing the nitpicky and frugal insurance industry.
In sum, it's no coincidence I haven't recommended any of the traditional drug companies to my readers. I've done quite the opposite, actually, pursuing companies that will directly profit from Big Pharma's woes and the industry's attempts to dig itself out of its hole...
Stay tuned for more of the same in 2008...
Good investing,
Rob Fannon
Editor, Phase 1 Investor
