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A good crop on the pharm

Picture a world where there are double the number of people between 40 and

75 than at present, a world where these people consume five times more

medicines than younger people and where an increasing number of diseases

and medical conditions are curable.

The year 2050 or beyond?

No, this could happen within the next 20 years.

Such is the pace of demographic change and technological innovation that

even the way we look after ourselves as we get older could change radically

in that time.

In 1920, the average life expectancy in the Western world was 57 but is

now closer to 75 and the healthcare industry is having to adapt.

As the world&#39s population ages, the cost of healthcare in developing

countries such as China will jump but it is likely to rise even more

quickly in the wealthier nations of the West. Demand for new medicines and

treatments for disease is growing fast. This year alone, pharmaceutical

companies will together invest $25bn in research and development.

Some of the bigger pharmaceutical companies such as Pfizer and SmithKline

Glaxo (as the merged company will in future be known) are already spending

as much as $4bn a year each on research and development.

World-beating drugs can transform a company in a short space of time.

When Warner Lambert produced Lipitor, a cholesterol-reducing drug, few

realised how quickly it would take off. Today, the drug accounts for 50 per

cent of sales in a world market worth $13bn a year and growing fast. The

success of Lipitor was a major reason why American Home Products and then

Pfizer bid for Warner Lambert. Pfizer eventually carried off the prize.

For investors, the pharmaceutical industry has long held attractions.

The sector has lagged the broader stockmarket indices over the past 18

months or so but this has had more to do with the lure of technology stocks

and to renewed noises from the Clinton administration about cutting the

cost of America&#39s Medicare programme than to fundamentals.

History shows that over the medium term, pharmaceutical stocks tend to

outperform the indices because investing in pharmaceuticals can be

defensive as well as leading to growth.

Healthcare is one of the few industries that is relatively unaffected by

economic cycles.

It is becoming increasingly global although the US remains by far the

biggest market for medicinal drugs.

The recent mega-mergers among pharmaceutical companies – Pfizer with

Warner Lambert and SmithKline Beecham with Glaxo Wellcome – have produced

bigger companies with bigger budgets for marketing as well as research and

development.

The bigger they become the more that pharmaceutical companies benefit from

economies of scale in producing new drugs and bringing them to a wider

range of international markets.

Increasingly, they are forming partnerships with smaller, more specialised

firms so promising products developed by smaller firms can be distributed

more widely with greater marketing support.

Alliances also open the door to new ideas, particu-larly in specialised

areas such as biotechnology or medical technology. Partnerships also help

the bigger drug companies to maintain a steady flow of new drugs on to the

market.

Making sure they have a healthy pipeline of new products and treatments is

one of the hardest jobs that many face and one of the things that analysts

look at most closely.

Patents protecting companies&#39 exclusive rights to produce drugs last for a

limited time. When they expire, companies can seek a short extension in the

US. They can also bring out an improved version of the same drug with its

own patent.

The success of drugs such as Lipitor has come about because the protection

afforded by patents can make a huge difference to a company&#39s revenues.

Unlike many dotcom companies that held sway with retail investors last

year, pharmaceutical companies can boast enviable profits as well as growth

rates to match.

SmithKline Beecham and Glaxo Wellcome recently reported strong results for

the first quarter of this year in advance of their merger.

It may be too optimistic to think that international pharmaceutical

companies will return to the heady growth rates seen during the mid-1990s.

Indeed, these heydays may not be repeated.

Yet without doubt, the healthcare sector is set to enjoy a resurgence of

interest among investors. It usually does well late in the economic cycle

as now when growth is still strong but interest rates have begun to rise.

Over the coming months we can expect many pharmaceutical companies to

boast double-digit rates of earn- ings&#39 growth. Those companies that can

squeeze out costs by merging with others or with successful new products

will do even better.

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