Diversification is a concept that most investors readily embrace. As important as this idea is when it comes to picking stocks, it is also applicable in examining behavior in the pharmaceutical industry. In recent years, a lot of the pharmaceutical giants such as Pfizer (NYSE:PFE) and Merck (NYSE:MRK) have focused on developing billion-dollar blockbuster medicines. Given the risks involved in drug development, it's not surprising that drug manufacturers often try to swing for the fences and produce big earners.
Not to be left out, Novartis (NYSE:NVS) likewise recently has cast its net to pull in a potential sales mammoth. The company announced on Wednesday that it had signed a deal with two British companies, Arakis and Vectura Group, to pay as much as $375 million for the rights to AD 237, a drug in phase 2 development for chronic obstructive pulmonary disease. The drug, should it be approved, would go head-to-head with Pfizer's Spiriva, which is expected to generate annual sales of $1 billion.
While 10-figure sales are enticing, the blockbuster strategy has its drawbacks, especially when the patent on such medicines expires and there is nothing in the pipeline to replace their sales. Most of the pharmaceutical giants are vulnerable to this pitfall. Fortunately, Novartis has a pretty diversified portfolio -- it has just two blockbusters, and its top seller Diovan comprised just 16% of sales in 2004. By comparison, Pfizer's Lipitor made up nearly 21% of sales while Merck's Zocor accounted for almost 23% of sales.
However, Novartis also has taken a broad view of diversification by looking beyond its branded drugs pipeline. The company's purchase of generic outfits Eon Labs and Hexal is a measured bet that current trends will continue and the entities footing health-care bills, from insurance companies to national governments, will increasingly turn to generics to contain costs. Novartis' move into generic injectables is particularly interesting, given the high barriers to entry in this area and the increasing number of injectable drugs coming off patent in coming years.
In summary, Novartis can't be blamed for pursuing drugs with blockbuster potential. Investors can rest assured, though, that the company's strategy won't leave it as vulnerable as other outfits to the drawbacks of blockbuster medicines.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
