Take Lipitor – the world’s best-selling cholesterol drug – for example. Each $3 Lipitor pill only costs Pfizer about $0.25 to make. So the company collects 90% profit margins.

One way the drug industry has learned to reap those outsized rewards with less risk is through “me-too” drugs. Me-too drugs are essentially copycats – like generics but with fat margins.

For example, after Pfizer’s (PFE) Viagra wowed the market, Eli Lilly (LLY) and Bayer jumped into the fray. Now the market has three drugs – Viagra, Cialis, and Levitra – to treat the same condition. Viagra and Cialis fetch more than $1 billion per year. Levitra, the laggard, still generated $500 million in 2007 sales.

But the me-too well is running dry. These days, the FDA won’t approve new drugs unless they offer a clear advantage over what’s already on the market. Recently, me-too drugs vying to compete with Merck’s Januvia (a diabetes drug) and Gardasil (a cervical cancer vaccine) faced serious setbacks. Neither drug satisfied the FDA’s higher standards.

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Now a new class of drugmakers is taking a slightly different tack: They pick existing drugs and make them better. So a company might make a drug available as a pill rather than an injection. Or it might change a three-pill daily regimen into a once-a-day routine.

These so-called “specialty pharma” companies start with what works and go from there. With thousands of drugs on the market, specialty pharmas have no shortage of lucrative products to choose from. Here’s an example of how it works

Until recently, many schizophrenics had to struggle with a complex dosing routine that included capsules of Risperdal (a popular treatment option). So Alkermes (ALKS), one of the biggest specialty pharma outfits, collaborated with Johnson & Johnson, Risperdal’s maker, to create Risperdal Consta.

The new version is a bimonthly injection, and it generates more than $1.2 billion in revenue a year. Besides Alkermes, investors can choose from a handful of pure-play specialty pharma outfits

Specialty pharmas boast profit margins almost as big as the brand-name drug business 70% or higher. And by modifying drugs the FDA has already cleared, they take on much less risk.

Recently, the industry has far outperformed the general market These five stocks are up 3.5% over the last three months, while the S&P is down 8%. I’ve been busy digging through the short list in search of the best company. If you are looking for a low-risk way to get in on the lucrative drug business, this is a great place to start.

Good investing,

George Huang, editor, S&A FDA Report

Source: Where to Earn Monopoly Profits, Minus the Risk

• PepsiCo Inc. (PEP) announced yesterday (Thursday) that a big rise in international revenue helped offset higher commodity costs and boost its first-quarter profit by 5%. Net income for the first quarter jumped to $1.15 billion (70 cents per share), up from $1.10 billion (65 cents per share) last year. Revenue in the international division grew the most, rising 27%, the Associated Press reported.

• Credit Suisse Group (CS), Switzerland’s second-largest bank, announced a ($2.1 billion) loss for the first quarter. The bank also said it had net writedowns of $5.3 billion for big buyout loans and mortgage-backed securities. The bank, which employs 48,000 people worldwide, said earlier this week that it was cutting a further 500 employees in addition to the 1,000 jobs it has already eliminated in investment banking, the Associated Press reported.

• Billionaire Nelson Peltz’s Triarc Companies Inc. agreed to buy Wendy’s International Inc. for about $2.4 billion, bring the third-biggest U.S. hamburger chain under the same umbrella as his Arby’s Restaurant Group Inc. restaurants, Bloomberg News reported. Wendy’s put itself up for sale last June, under pressure from Peltz, who controls nearly 10% of Wendy’s and has repeatedly pressed the chain for better financial results.

• Earnings for AstraZeneca PLC (AZN), Bristol-Myers Squibb Co. (BMY) and Bayer AG (OTC:BAYRY) declined for the first quarter, as the drugmakers faced increased competition from generic manufacturers. AstraZeneca’s net income unexpectedly fell 3.7% to $1.50 billion. Bristol-Myers’ first-quarter net income fell 4.2% to $661 million. Bayer reported that profit that beat analyst estimates, but net income fell 73% to $1.21 billion.

• State-owned aviation company Dubai Aerospace Enterprise said it plans to spend a further $2 billion through 2009 to expand its fleet. In November, the company ordered 200 Airbus SAS and The Boeing Co. (BA) planes, Bloomberg reported.

• Merrill Lynch & Co. Inc. (MER) shares gained after the securities firm announced it would maintain its dividend yesterday (Thursday). The board of directors declared a regular quarterly dividend of 35 cents per common share payable May 28, 2008, to shareholders of record on May 8, 2008, the company announced in a statement.

• Newmont Mining Corp. (NEM) Chief Executive Officer Richard O’Brien said yesterday (Thursday) that gold could reach $1,100 an ounce in 2009, Reuters reported. O’Brien went on to cite a number of factors that make him bullish on gold, including “diminishing mine output, strong jewelry demand, inflation and the dollar weakness.”

• Celestica Inc. (CLS), maker of Microsoft Corp.’s (MSFT) Xbox 360 video-game console, earned $29.8 million in profit for the first quarter compared to a $34.3 million loss for the same period on the prior year. Earnings of 13 cents per share compared to a loss of 15 cents per share the year prior beat analyst expectations, sending the stock up over 30% prior to the close yesterday (Thursday).