Pill-Popping Nation

A government report released last Thursday confirmed a fact many already take for granted: Americans are becoming more dependent on drugs.

No, we're not talking illegal drugs here, but rather prescription medicines for everything from depression to high cholesterol. A report by The National Center for Health Statistics indicates that in the most recent period surveyed, 1999 and 2000, 44% of Americans reported using prescription drugs, up from 39% from 1989 to 1994. On the surface, this data looks very good for branded pharmaceutical companies such as Pfizer (NYSE: PFE), Eli Lilly (NYSE: LLY), and GlaxoSmithKline (NYSE: GSK).

Unfortunately for big pharma investors, pharmaceutical companies' benefits from these trends are tempered by other factors. The data show that individuals 65 and older remain the greatest consumers of prescription medicines. More than 80% of this group reported using prescription treatments in the most recent period, and about half of those surveyed were taking three or more medicines.

Medicare estimates that this population spends more than $11,000 per capita on health care, compared with $2,800 per capita for the rest of the population. Given this burden and the fact that many of these people are retirees reliant on Medicare and fixed incomes, their preference will likely be the cheapest option. In the drug world, this means generics, such as those supplied by companies like Teva Pharmaceutical (Nasdaq: TEVA).

Looking ahead, seniors' habits are not likely to change. The new Medicare drug program, scheduled to go into effect in 2006, will be administered by pharmacy benefit management companies such as Medco Health Solutions (NYSE: MHS) that have a strong interest in promoting generic drugs. And there certainly will be no shortage of new generic treatments hitting the market in the coming years: From 2005 to 2007, Pfizer alone will see patents expire that will affect $14 billion of its current revenue.

Pharmaceutical companies can take comfort in the most recent data suggesting that Americans are popping more pills. But its consumers will be pushed more than ever before to opt for cheaper alternatives.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.