Drugs Are Not Immune To Adversity

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As true today as in the past, the drug industry has its ups and downs. This piece from the 1960s gives some interesting insight that still has relevance today.

In 1959, profits of the drug makers failed to keep up with the advanced market level of their shares, especially in comparison with equities of other growth industries, which made better progress in earnings, though selling at lower price-earnings multiples.

The situation worsened in 1960. In the second quarter of that year, for instance, ten leading drug companies reported a decline of 7.4 percent in earnings over the corresponding period of 1959, though sales were generally slightly ahead of 1959 levels. This trend of falling profits continued in the third quarter of 1960.

As a result, investors began to cast doubt on drugs as a growth industry. Moreover, Kefauver's Senate antitrust investigations put the drug industry in a bad light. The industry was said to have made undue profits at the expense of the public. The cost of many drugs was said to be only a fraction of the price when sold in the drugstore. Many drugs, especially the "wonder" drugs, were said to be obtainable abroad at considerably lower prices than those charged by domestic makers.

Typical was the charge made by John Blair, the Senate subcommittee's economist, that Bristol Laboratories (a division of Bristol-Meyer Co.) produced tetracycline for $5.03 per 100 tablets, while the druggist paid $30.60. That kind of publicity possesses an inherent appeal for the public, especially at a time of ever-rising medical and drug expenses. People had little interest in the answer of Philip I. Bowman, president of Bristol Laboratories, who said that price included only production costs, not costs for research or promotion.

There is no denying that the profit margin of drug makers has been traditionally higher than that of most other industries. Testifying before the Senate subcommittee, W. G. Malcolm, president of American Cyanamid, said the company set a profit goal of 15 percent on sales after taxes which, though twice the average profit margin of American industries, was said to be moderate in view of drug makers' heavy costs.

As a percentage of sales, the drug industry probably spends more on research than any other established industry. Research expenditures reached 9 percent of sales in 1959 against only 4.6 percent of volume as recently as 1955. That was proportionately twice as much as chemistry (another research-minded industry) was spending or four times the 2.2 percent of America's average industry.

Nor was this heavy research outlay always fruitful. Lederle Laboratories (a division of American Cyanamid), for example, spent about $13 million to turn out an oral polio vaccine that was rejected by the U.S. Public Health Service. It was revealed and generally agreed at the Kefauver committee hearings that drug research was a gamble at best—the average chance of commercial applications being about one in 2,500. Even successful drugs tend to be short-lived.

This is true even of the so-called breakthrough products. When a major product is successfully introduced, the initial profit to the discoverer firm is, of course, enormous. But profits tend to decrease as competitors enter the field.

What was true in the end of the last century still have merit today. Drug company investments are available, and investors need to understand the ups and downs of this huge and constantly changing market.

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