Read "The pharmaceutical industry: Beyond the pill" in The Economist of October 25th 2007.
Subtitle: "Drugs firms are casting about for new business models"

Excerpts:

“THE future is not terribly bright for most drug companies,” says a new report from Sanford Bernstein, a respected New York investment firm. Such blunt talk is unusual on Wall Street, but it is no exaggeration. Drugs firms, once rich and the favourites of investors, are urgently seeking cures to a variety of ailments.

One is the erosion of patent protection. Not only are the copy-cat manufacturers of cheaper generic drugs becoming emboldened by cost-conscious politicians and legal rulings in their favour, but big pharmaceutical companies are also facing an unprecedented wave of patent expirations over the next five years. Pfizer alone will lose some $13 billion in revenue a year when Lipitor, its blockbuster cholesterol drug, goes off-patent as early as 2010.......

As the Bernstein report notes, the global industry saw 24 new drugs approved by the US Food and Drug Administration in 1998 on the back of $27 billion spent on R&D. Last year, the industry spent $64 billion, but only 13 new drugs were approved by the regulator.

And even new drugs can no longer reliably command the huge premiums they once did. Peter Lawyer, of the Boston Consulting Group, reckons the global drugs market doubled in value to $600 billion in revenues in the decade to 2005, chiefly from growth in America. But there is little chance it will double again by 2015, he argues.

Marcia Angell recently said on Frontline:

[The pharmaceutical companies'] R&D costs are very high, in absolute terms. But they're quite small relative to their other expenditures and profits. The drug companies spend on average, by their own figures, last year, 15 to 17 percent on R&D. And that's a lot of money. But their profits are higher. Their profits are 18.5 percent. And what's really interesting is what they spend on marketing and administration, by their own figures, is on average 35 percent. That's over twice as much as what they spend on R&D. So if they point to their R&D costs as some sort of justification for the high prices, what on earth can they say about their marketing costs, which are over twice that much? ...

Comment: If you believe the stock market is efficient, the prices of stocks reflect the future earnings potential of the companies. If pharmaceutical profits are high now, and you believe they will stay high, buy the companies. But maybe The Economist is right, and these profit margins will not last. Maybe the current value of the companies reflect both the current profits, expected future profits, and risk due to future market uncertainties.

In part the high marketing cost of drugs is related to the system in which physicians make the purchasing decisions for their patients, and generally don't face the need to pay for that which they prescribe. But it also reflects the reality that it is hard and costly to provide the information to hundreds of thousands of physicians and others with authority to write prescriptions with the information they need about drugs, their uses, and their risks. JAD