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In This Issue
Nature of The Business
Before we talk about competitive advantage, let us remind you that the pharma business has a lot of restrictions and limitations. This is an industry that deals with people who suffer. Pulling too much money from them seems unethical and politician knows it. This is also the reason why we do not invest in coronavirus vaccine makers. The government will use it as a campaign. And if there is a political substance in business, we prefer to stay away.
So this is a highly regulated business.
Governed Business: How Patent Works.
For readers who don’t familiar with the pharma business, we inform you that every drug in the market has been patented. The manufacturer of that drug or medicine is the patent holder. Let say we have company Y as a patent holder for drug X. For a specific period of time, let say, 5 years, the patent gives privilege to company Y as the sole manufacturer and marketer of drug X. For 5 years, there is no other company other than Y that can manufacture and market the drug X.
Once the patent expired, the honeymoon is over. Another pharma could copy the substances of the drug the marketing it – Eliminating privilege for the former holder. As consequence, the prices of that drug will drop due to alternatives. For this reason, we strongly encourage investors to pay attention to the patent expiration, especially when the patented drug contributes a large portion of the company’s revenue.
Take a look at the Amgen case. In 2009, its white blood cell stimulant, Neulasta, enjoyed the monopolistic business. It generated more than 4.6 B sales before plunging in 2019 with 3.2 B sales.
No Copycat Protection
In 2019, a rival like Sandoz, Coherus BioScience, and Mylan launched their own version of white blood cell stimulant under the name: Ziextenzo, Udenyca, Fulphila. The existence of competitor alternatives makes the competition for Neulasta become much harder.
The Pharma industry is a copycat’s battlefield.
High Barrier of New Entrant as Competitive Advantage of Amgen
See the obstacle? It is the government’s approval – the patent. And it acts as the double edge sword. It makes business more difficult and regulated: pharma companies could only maximize their profit for a specific period of time before a copycat strikes.
This patent provides a barrier for newcomers. And this is the first layer.
Getting that approval, the patent is another painful process.
Delivering one medicine or dose to the customer’s hand is a long and uncertain process. In the beginning, the researcher has to find the molecule that could overcome a specific disease. The bad news is, this effort just has a 10% success rate, which means that for every 10 molecules tested, it is only one that is viable.
Now let say after that painful effort, the molecule is discovered. The company still needs to wait since the rule dictates that the medicine needs to pass several phases. These phases could be long enough to give clear or guarantee that the medicine is secure and safe with little or no side effects.
Overall, this process could take around 10 years. And after that long journey, the result isn’t yours forever. As we have said, after a specific period of time, to becoming a good guy that doesn’t pull off a lot of money from the suffering, the patent holders share the “secret ingredient” of their drug so, others can copy it.
Not all company willing to play a game like that.
This is layer 2.
Invention. Race with Time. Expertise in R&D and Deep Pocket is the Competitive Advantage of Amgen.
So if you are a pharma company, you are racing with time. You need to discover a new source of revenue, a new kind of medicine or drug, otherwise, when the patent expiration kicks in, it will strip away your earnings. Shortly speaking, to survive or to retain your market, you need continuous invention.
As consequence, you have to be accompanied by a solid research team and a deep budget. They have to co-exist. A great team without a budget or deep budget is meaningless.
The pharma R&D team has to actively search for new kinds of potential undiscovered molecules that can cure or ease certain diseases. In The pharma industry, you can’t keep your guard off. The absence of invention could blow serious consequences on financial performance.
So far we have talked about potential new entrants that are prevented by the high barrier as an economic moat. This section tells us that even within the industry if you invent nothing, it is difficult to survive.
Economies of Scale as Competitive Advantage of Amgen.
With invention is mandatory, there is an alternative for the pharma company to gain the advantage. That is by acquiring another potential smaller company. If making a new drug or medicine from the scratch is extremely difficult, big pharma could look at smaller or startup entities.
In this case, size matters a lot. The bigger, the easier it is to capture another promising company. Also, the bigger size ensures capital access, government support, and market target.
In these matrices, Amgen has a good position as the big 20 (rank 13) pharma in the world. A long fame reputation and prestigious brand help Amgen to gain talent for R&D, access capital, and get government support line.
Government Support is one of Competitive Advantage of Amgen
Another Amgen’s economic advantage over others is its special relationship with the government. These cards will be very useful in situations where the disease is very rare but has no medicine could cure.
This rarity makes the sales of products could not achieve economies of scale. For instance, it is easier to make influenza medicine – or even COVID medicine someday – since there are so many people (millions maybe) who get that disease. What about developing the medicine for 10 years just for 3,000 patients?
Here the relationship with the government plays its role. Since it is not for profit, no corporation will take it, there is no “noble mission to save people”, The government is willing to pay and fund it. In the medical world, the product of that project is called “orphan drug”
This is what happens for Amgen in 2007 with its brand Epogen.
Under chemotherapy or kidney failure, patients usually experience anemia or decreasing in his/her red blood cell. Lack of red blood cells could result in death since it is responsible for energy and nutrition circulation. Epogen is there to stimulate the body to produce more those blood cells.
Surprisingly, Epogen turns to be one of the most successful drugs n history – not for its role, but for its sales. Here we see how the competitive advantage of Amgen paid off.
Competitive Advantage of Amgen: Investor Takeaway
- Due to the nature of the industry, the competitive advantage of Amgen can’t last forever.
- For an investor who has an interest to invest in this company or any other drugmaker, please pay attention to the expiration of the patent. A stellar sales in one year doesn’t guarantee could stay there for long period. Another thing to be considered is its research and development. The drug industry is a game of copycat, a good team of research and development could make some ingredients that difficult to replicate, but contrary, they could copy if a rival’s patent gets expired.
We have another example – and more complete – analysis for other pharma companies, check our post about AbbVie here.