Avoid This Multibillion-Dollar Market

There's no doubt that psychiatric drugs are big business for some drugmakers. In years past, all you had to do was show that a drug was better than placebo, throw up a bunch of direct-to-consumer advertisements, and watch the sales come rolling in.

But we've entered a new era with a high number of generic drugs, which should have you thinking twice before investing in companies with new drugs that are trying to enter the market; the current treatments just aren't as ripe for being picked off as they are for some other markets.

This'll make you depressed
The top-selling drugs for depression are a good example of how hard it is for an antidepressant to enter the market.

Drug

Sold by

Generics Available?

Lexapro

Forest Labs (NYSE: FRX  )

No

Zoloft

Pfizer (NYSE: PFE  )

Yes

Cymbalta

Eli Lilly (NYSE: LLY  )

No

Effexor

Pfizer

Yes

Desyrel

Apothecon

Yes

Celexa

Forest Labs

Yes

Prozac

Eli Lilly

Yes

Source: Forbes.

Back in the day, Forest Labs was able to switch patients from Celexa to Lexapro, but now new entrants have a lot more drugs to contend with. Add in a plethora of cheap generics and it becomes extremely difficult to compete. Before Pfizer bought Wyeth, Wyeth launched a me-too version of Effexor called Pristiq, but sales only amounted to $223 million in the first half of the year; not horrible, but a far cry from a blockbuster.

And perhaps a little crazy
It's the same situation for schizophrenia drugs. There's plenty of competition between AstraZeneca's (NYSE: AZN  ) Seroquel, Pfizer's Geodon, and Eli Lilly's Zyprexa. And Johnson & Johnson's (NYSE: JNJ  ) Risperdal recently went off-patent, adding a cheap generic to the mix. As more of the top sellers go off-patent, the challenges of launching a new drug to treat schizophrenia are only going to get tougher.

This is painful
Vanda Pharmaceuticals (Nasdaq: VNDA  ) was the Cinderella of 2009, turning rags into riches with an unexpected approval of its schizophrenia drug, Fanapt.

But fast-forward to present day, with the drug now licensed to Novartis (NYSE: NVS  ) . After initial stocking by pharmacies in the first quarter brought in sales of $20.7 million, Novartis ended up selling just $0.7 million in the second quarter. That's not a typo. It's not Vanda's royalties, which amount to about 10% of that or a little less than $70,000. Doctors just aren't prescribing Fanapt in large numbers, which isn't all that surprising given the other options.

Killing the pain
Eli Lilly saw the writing on the wall and expanded the use of depression drug Cymbalta into fibromyalgia. The expanded use helped the drug top $3 billion in sales last year.

The patent expiration on Cymbalta is approaching quickly, but Eli Lilly is going after one last hurrah, trying to get the drug approved for patients with chronic pain. A Food and Drug Administration advisory panel voted 8-6 in favor of the expanded use, which isn't exactly a ringing endorsement. We'll have to wait and see what the agency decides to do since it has the final call.

Pfizer tried to go the other direction, attempting to get its fibromyalgia drug, Lyrica, approved to treat generalized anxiety. After a couple of failed attempts, the company gave up -- probably a good move given the competition.

Buyer beware
Investors really need to be cautious about buying into this space. Management will tell you that patients often need to take multiple drugs before they find one that works, and it's true. But the last one into the mix is also likely to be the last one tried by doctors, especially when there are cheap generics around. 

Pfizer is a Motley Fool Inside Value selection. Novartis is a Motley Fool Global Gains recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. 

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of Johnson & Johnson and has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2010, at 4:14 PM, DannyHaszard wrote:

    Eli Lilly & Co, the world's biggest maker of psychiatric drugs,

    Psychotropic meds are indicated for true clinical conditions.

    Zyprexa was pushed by Lilly Drug Reps.

    They called it the "Five at Five" (5 mg at 5 pm to keep nursing home patients subdued and sleepy) and "VIVA ZYPREXA" (Zyprexa for everybody) campaigns to off label market Eli Lilly Zyprexa as a fix for unapproved usageI was prescribed Eli Lilly Zyprexa by my physician *off-label* for PTSD and it was all wrong,cost me a lot of money and the side effects damaged my pancreas and gave me life-long diabetes.

    Daniel Haszard Zyprexa whistle-blower http://www.zyprexa-victims.com

  • Report this Comment On September 30, 2010, at 5:09 PM, caballote77 wrote:

    VNDA's drug came on the market in January 2010 and it was a surprise approval.

    BE PATIENT! and give it time. wow i am amazed how short term we humans are.

    Geodon started with only 150 mill in sales and eight years later it is now a 1 billion dollar market.

    VNDA is selling now for liquidation value or LESS than the cash on the B.S. because of short sighted articles like this one. But THANKS a lot for the cheap shares.

  • Report this Comment On September 30, 2010, at 5:14 PM, caballote77 wrote:

    one more thing. Have you checked prescription growth?

    400 a month in Feb 2010 to 4000 a month as of June 2010.

    3Q #s are up in Nov 2010. If it keeps this RX growht this stock hits 20 bucks in a week!

    Prescription growth is the ONLY thing that matters here.

  • Report this Comment On September 30, 2010, at 9:13 PM, dgmennie wrote:

    The entire prescription drug market is ripe for a full-fledged investigation. Here we have an industry literally 'inventing' diseases (fibromyalgia) and then marketing hugely-overpriced drugs to 'treat' them. The bulk of the money required is sucked out of Medicare and private insurance plans that the general public ends up paying for in taxes, premiums, and deductables. A significant minority still gets NO HELP financially and relies on the 'kindness of strangers' or simply doies without.

    Those who enjoy profiting from the misery of others will love these pharmaceutical investments...provide they don't have all their cash tied up in real estate forclosures.

  • Report this Comment On October 01, 2010, at 11:38 PM, lowmaple wrote:

    Some of these drugs are very risky but for instance diabetes would be a god send for the medical problems he has now if indeed the drugs cured the original problems. However few people have his condition so the profits may be too small despite what the drug retailed for.

  • Report this Comment On October 05, 2010, at 7:07 PM, caballote77 wrote:

    Please see below for an update on RX growth on Fanapt:

    Hapoalim Securities has published a research report for Vanda Pharmaceuticals (NASDAQ: VNDA) reiterating its Buy rating.

    In the report, Hapoalim writes "Fanapt prescriptions for the week of September 24, 2010, were up 17% on a week-over-week basis and at an all time high since the launch. Based on weekly prescription trends, we estimate that demand-based Fanapt sales for 3Q10 will be approximately $11.3 million. If we assume that Fanapt inventory will fully normalize during the quarter, it implies Novartis reported sales to wholesalers of $2.1 million. Prescriptions continue to run at an average growth rate of 50 additional scripts per week and remain on track with our long-term Fanapt estimates."

    Hapoalim also maintains its $15 price target.

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