And You Thought Biotech Was High-Risk, High-Reward

We usually think of development-stage drugmakers as being risky. And they are. Going from zero to one drug (or not) is the reason Dendreon (Nasdaq: DNDN) is up 56% year to date, while InterMune is down 29% over the same time.

But there are a few pharmaceutical companies that are taking bigger risks than biotechs could ever imagine. Investors are shielded from big losses because they have drugs on the market, but it's still going to hurt if these drugs for cardiac conditions fail. Just look at the size of these trials:

Source: Clinicaltrials.gov.

Both drugs are using the prevention of heart attacks and other heart complications as the measurement of success. Fortunately -- for patients, but not the company -- they occur rarely. And taking other drugs like aspirin or sanofi-aventis and Bristol-Myers Squibb's (NYSE: BMY) Plavix decreases the rate of heart attacks even further.

The rare occurrence of heart problems translates into a lot of patients being required to show a statistical difference between the group taking the drug and the control group.

Companies don't break down the cost of clinical trials, but the large size of the years-long clinical trials likely pushes the cost into the hundreds of millions of dollars. Failure will be costly.

The next Lipitor (that wasn't)
Pfizer (NYSE: PFE) learned the lesson the hard way a few years ago as it tried to develop a drug to replace Lipitor. Torcetrapib, which was designed to raise good cholesterol, made it through three years of a 15,000-subject clinical trial before the data monitoring board stopped the trial when it became clear that the drug was doing more harm than good; 82 people taking torcetrapib died compared with 51 in the control group. All told, Pfizer spent nearly $1 billion on the trial.

Unfortunately, that's not Pfizer's only cardiovascular failure. In 2003, the company bought Esperion for $1.3 billion, mostly to gain control of ApoA-I Milano, a drug that was designed to reduce plaque in blood vessels. The development of the drug seems to have gone nowhere, and Pfizer recently sold the rights to the drug to The Medicines Company for a measly $10 million. The 0.8% recovery on the investment would increase if TMC gets the drug onto the market -- milestone payments and royalties were part of the deal -- but Pfizer would be lucky if it recoups its entire investment.

Big rewards
Of course, there's a reason Pfizer, Glaxo, and Merck are willing to risk so much on cardiovascular drugs: The market is huge. And with an aging population, the number of potential clients will only increase.

Of the expected top-10 selling drugs this year, four drugs -- Lipitor, Plavix, Novartis' (NYSE: NVS) Diovan, and AstraZeneca's Crestor -- treat cardiovascular diseases. We're talking multibillion opportunities for each one (the lowest on the top 10 list is expected to bring in $5.8 billion).

Their dominance can make it hard to enter the space. Witness Eli Lilly (NYSE: LLY). It introduced Effient, a competitor to Plavix, which managed less than $9 million in sales during its second full quarter since being approved.

Merck and Glaxo seem to have the right idea, testing their drugs on top of current therapies instead of against them. If that works, that'll be especially important because many cardiovascular drugs will face generic competition relatively soon. And there's even the possibility of making a combined drug once they become generic, like Merck has done with Vytorin, a combination of Zetia and generic Zocor.

Balancing the risk
For those who don't have the stomach for biotech investing, pharmaceutical companies developing cardiovascular drugs can give you a little taste without big risk. If Merck's or Glaxo's drugs fail, their stock would go down, but not to the same extent that a development-stage drugmaker would drop from the loss of its lead pipeline candidate.

Just keep in mind you're not likely to see huge upside from positive phase 3 trials, either. Even if the drugs are instant blockbusters, the sheer size of Merck and Glaxo would mute the increase in revenue somewhat.