How to Profit from the Fall of Big Pharma
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Big Pharma is in trouble. Generic competition, patent expirations and slowing sales are all eating into profits.
So how can you turn a profit in this turbulent sector? By investing in contract research organisations, or CROs, says biotech expert Rob Fannon. When the big pharmaceutical companies outsource research to CROs they get paid whether or not the new drugs ever make it to market.
There’s another way to profit too - contract sales organizations, or CSOs. They’re another way for Big Pharma to outsource, but instead of doing research they sell. Investing in them is a low-risk method to turn a big profit from Big Pharma’s woes…
Today, I want to tell you about a group of stocks ready to explode as the world’s largest drugmakers slim down… As I’ve explained before in Growth Stock Wire, Big Pharma is in trouble. The industry is facing slowing sales, patent expirations, generic competition, and withering pipelines. Now drugmakers are on a massive diet. The biggest losers – Pfizer (PFE), Merck (MRK), and Sanofi-Aventis (SNY) – are dumping employees and slashing costs.
One of the winners in this situation is contract research organizations, or “CROs.” Rather than perform the work in-house, drugmakers are outsourcing research and clinical trial work. As I’ve written before, I love CROs. They get paid whether or not new drugs make it to market. So they’re a uniquely safe health care investment.
I recently told Phase 1 subscribers about another industry set to reap big rewards from drugmakers’ downsizing. Let me explain…
By far, the biggest victims of Big Pharma’s cutbacks are drug reps: attractive, well-paid twenty-somethings visit doctors bearing free samples and branded mugs. The largest drugmakers in the world are firing their rank-and-file sales force in record numbers. For the first time in more than a decade, the total number of drug reps actually fell last year.
Leading the bloodbath is Pfizer, the world’s largest drug company. Last October, it kicked off a cost-savings plan that included a 10% reduction in its global workforce: 10,000 jobs. That includes 2,200 sales positions, nearly 20% of its U.S. fleet. Shortly after, Pfizer’s peers announced similar cutbacks…
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—————————————– Britain-based AstraZeneca will trim 7,600 jobs, 11% of its roster, including most of its European sales force. Johnson & Johnson will cut 5,000 folks, including 400 drug reps right away. Sanofi-Aventis is firing one-third of its domestic sales force. And 3% of Novartis’ employees, including 500 U.S. sales reps, got canned.
Of course, these companies still need to sell drugs. But at $165,000-$170,000 a year, traditional drug reps are too darn costly. The industry must sell more efficiently. That’s where contract sales organizations, or CSOs, come into play.
Today, Big Pharma players can “borrow” sales reps on a temporary basis from a few CSO players. For example, Novartis may need a short-term team to push its flu vaccine in the fall. Or Merck might want to boost a drug launch and build brand awareness quickly. Using CSOs, drugmakers can supplement their internal sales force with top reps without taking on permanent, costly employees.
Right now, CSO reps make only 5% of total drug sales. This figure is set to triple in the next three years. That would make the substitute sales-rep industry worth about $2 billion. But CSOs do much more than farm out salespeople. They also recruit, train, and place new reps at drug companies. And they do market research, brand management, and other types of consulting.
The industry’s biggest player is inVentiv Health (VTIV). The company loans out sales reps, crafts sales and marketing strategies, and provides staffing services. It brings in about $1 billion per year
Like CROs, the CSO industry is a perfect example of a low-risk, high-reward way to profit on Big Pharma’s crash diet.
Good investing,
Rob Fannon
P.S. inVentiv is trading near fair value. But I prefer clear bargains… Last month, I recommended a CSO pioneer to my Phase 1 readers. Incredibly, the company was trading just above the amount of cash it held in the bank.
We’re up about 8% on the position in a few short weeks, but this is just the beginning. I expect the stock could net readers at least 50% returns in the next year. Click here to learn about a risk-free subscription to Phase 1.
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Tags: investing in biotech, MRK, Pfe, Rob Fannon, SNY, VTIVAbout the Author
Rob Fannon is the editor of Phase 1 Investor, a monthly conference-call service and investment advisory that covers the biotech industry and other small companies on the cutting edges of their industries. He later helped open a new biotechnology company in India and holds a master's degree in public health and an MBA from Johns Hopkins University. In February 2007, Rob launched The Medical Investor.
The Growth Stock Wire is a free daily e-letter that provides readers with a pre-market briefing on the most profitable opportunities in the global stock, currency, and commodity markets. It is a quick read on the best trading opportunities in the market, along with price and news updates on all the major stock markets of the world. You'll also be updated on the latest in gold, oil, copper, the dollar, and individual stock market sectors.