There are a lot of reasons why investors love the pharmaceutical and biotech sectors. The pharmaceutical industry is recession-proof, considering that people need new medicines regardless of what part of the business cycle the economy occupies. It's also a booming industry, as data aggregator IMS Health (NYSE:RX) proved when it announced the size and growth of prescription drug sales earlier this week.
According to IMS Health, prescription drug sales in the U.S. jumped 8.3% to $275 billion in 2006. This is nearly two percentage points higher than the current dollar growth of the U.S economy, which expanded 6.4% last year. An even better prognostication by IMS is that the pharmaceutical industry is expected to grow 6% to 9% on a compounded basis until 2011.
This growth in pharmaceutical drug sales occurred even though some of the top-selling drugs -- like Pfizer's (NYSE:PFE) cholesterol treatment Lipitor -- experienced prescription declines in 2006, and other products like the blockbuster depression drug Zoloft started facing generic competition last year.
The strength of the pharmaceutical industry is interesting because drug companies that produce branded products aren't the only ones thriving; so are generic drugmakers. Generic drug producers were the big winners of the growing use of pharmacological agents in 2006. Sales of generic products in the U.S. grew 22% in 2006, with patent protection expiring on several top drugs, including Merck's (NYSE:MRK) nearly $4 billion a year Zocor. This trend in generic drug growth will continue in the near term; $27 billion worth of branded drugs will potentially face generic competition in 2007, according to the consulting firm Bain and Company.
With the whole drug industry growing so strongly, those looking for a safe place to park their investing dollars would be smart to take a look at some of the largest generic drugmakers, like Teva Pharmaceuticals (NASDAQ:TEVA) or Watson Pharmaceuticals (NYSE:WPI), or one of the diversified large-cap pharmas like Merck.
Merck is a former Income Investor, and Pfizer is a current Inside Value pick. To take these or any other of our newsletters for a free 30-day trial, click here.
Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.
