The Expanding Drug Investment Market

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This historical piece offers some great insight into the current drug industry. Spotting these kinds of trends in the future depends on understanding the past.

If new products were a hallmark of growth, then the growth record of drug makers is indeed impressive. Within the past two decades, they have introduced such major products lines as antibiotics, antihistamines, synthetic hormones, amino acids, radio-isotopes, tranquilizers, energizers, diuretics (for heart disease), polio and other antiviral vaccines.

It has been estimated that seven out of every 10 prescriptions filled today could not have been filled in 1935. That's certainly growth, in the most literal sense. In terms of measurable contributions, drug makers are believed to have been largely responsible for adding, over the past two decades, nearly 10 years to the average American's life span. To boost their life expectancy that much, Americans had to increase their annual purchases of drugs nearly tenfold. In the ten-year period between 1946 and 1956 retail drug sales tripled from $512 million to $1.5 billion.

The industry should continue to share in the worldwide population boom resulting from a rising birth rate and an increased life expectancy. The human urge to fight disease and postpone death is universal. Sales of drug products are expected to grow rapidly both here and abroad. Increasing volumes should more often offset a modest decline from the height of the industry's profit margin achieved in the 1958-59 period when it luxuriated in profits from its major advances in tetracycline, antibiotics, steroids, diuretics, antidiabetic drugs, etc. The Asian influenza epidemic also bolstered drug profits during that period. In 1960, on the other hand, no major triumph of research was reported despite record research expenditures.

From a long-term viewpoint, consistently high expenditures should mean more profitable products. Anyhow, high-level research is the only way of gaining new markets and fighting competitive threats to existing lines. It's pretty safe to evaluate the quality of drug companies, especially those operating in the ethical phase of the business, on the basis of their ability to maintain a continuous flow of new products via high-level research programs.

The drug industry is essentially made up of two groups: ethicals (prescription) and proprietaries, the latter being closely associated with personal-hygiene products. Ethical drugs account for about three-quarters of total drug sales.

In evaluating ethical drug companies, emphasis should be placed on the quality of their research as well as on their ability to turn out profitable new products. On the other hand, the strength of proprietary makers is based on their marketing organization and on their ability to build up and maintain brand loyalties. Generally speaking, the industry's greatest growth potential exists in the ethical field where most drug fortunes were made and will continue to be made.

There are plenty of medical frontiers to be explored. For instance, the battles against mankind's top killers, heart disease and cancer, have hardly begun. As the nation's number one killer, heart disease has understandably become the prime research target for many drug firms. The most interesting development appears to be Vick Chemical's MER/29, which offers an entirely new (biochemical) approach to heart disease. Vick is a diversified operation in ethical and veterinary drugs, proprietary drugs, and chemicals and plastics.

Basically, MER/29 is designed to reduce cholesterol in the body by inhibiting its production. Since a substantial number of medical experts believe there is a link between excess cholesterol and heart troubles, the introduction of MER/29 could be of major significance. If the relationship between cholesterol and heart disease should be definitely established, the potential market for MER/29 would be enormous. Trade sources estimate that total sales of all types of cardiovascular drugs, currently running at $180 million a year; should approach $450 million by 1970.

New drugs, new companies...but investors continue to look to pharmaceuticals for a good return.

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