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The Path of Least Resistance

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Today simple illnesses such as ear infections, strep throat, and gonorrhea – all once very treatable by basic antibiotics – are becoming difficult to treat effectively. A recent study by the National Institute of Allergies and Infectious Diseases found that more than 70% of hospital-causing bacteria strains are resistant to at least one of the antibiotics used to treat them. The FDA states that more people are killed in the United States each year by drug-resistant strains of bacteria than AIDS.

Microbial resistance went from being a worst-case scenario to one of highest probability. The CDC is worried that a superbug lurking in a hospital could lead to a very serious epidemic. This year over 100,000 people will die from infections acquired in hospitals in the United States. In 1992 that number was just 13,000. Imagine an illness as commonplace as the common cold that did not have a readily available cure. It may be difficult to envision. We live in a culture where a prescription is just a trip to the doctor’s away. We take the prescribed drug. We get better. End of story. Right?

Big Pharma: Innovation at Work?

The innovation and diversity of the pharmaceutical industry in the past several decades may be unrivaled by any other sector of economy. Today antibiotics are separated into 21 different classes with over 100 unique drugs (only 16 of those are classified as penicillins). However, worrisome trends in the industry are threatening antibiotic research progress. Shifts in consumer profiles, such as an aging population and decreased government involvement, are forcing the industry to turn its focus away from antibiotics. The once innovative pharmaceutical industry has shown little interest and has few answers for the growing problem of resistance.

The overall efficiency of the $900 billion pharmaceutical industry is decreasing. The amount of money spent by companies is returning less in terms of new molecular entities (NMEs) introduced to the market. In 2002 fewer NMEs were made than in 1993, but pharmaceutical companies paid twice as much. One reason: more “home-run” drugs are being pursued now than in the 1990s, which increases costs and, potentially, profits.

'All Your Antibiotics Are Belong to Us' – The Superbugs

One may argue that there are few if any cash-rich antibiotics yet to be produced in a market where there are over a hundred drugs, most of which are generics. Consider Genentech and Roche’s blockbuster breast cancer drug Herceptin, which has generated over $10 billion in sales. It would be difficult for a single antibiotic to outperform its competition in efficacy or bankroll with the ease of Herceptin.

Not every molecule in the pipeline can be a home-run like Herceptin, but as research and development costs soar pharmaceutical companies are wary of pursuing drugs that will produce only small gains. Unfortunately, antibiotics are small gain drugs. No one will rush to their E*Trade account if they see the headline “Pfizer to Provide Funding for Yet Another (yawn) Antibiotic”.

The dim attitude toward antibiotics is reflected by some troubling numbers. GlaxoSmithKline (NYSE: GSK) and AstraZeneca (NYSE: AZN), the only major pharmaceutical companies with active antibiotic development arms, admit that bringing a new antibiotic to the market can cost north of $800 million and take up to 15 years. In fact, from 1980 to 1989 the FDA approved 29 new antibiotics. Between 2000 and 2009 only nine were approved. Is all hope lost?

When Pfizer (NYSE: PFE), the world’s largest pharmaceutical company, abandoned all antibiotic research last year, it certainly didn’t look good. The move – accompanied by thousands of layoffs – was aimed at retaining profits when Lipitor comes off patent. If the industry continues to answer to Wall Street instead of the medical community’s needs, then all hope will be lost.

The Future of Antibiotics

Luckily, there is this thing called capitalism. And while the current state of antibiotics research is worrisome the industry will respond if money can be made. The FDA, NIAID, CDC, and numerous other domestic and international entities are creating incentives for companies to combat antibiotic resistance. These include R&D funding and reimbursement, faster approval, shifts in primary endpoints, and longer patent protection. Hopefully, the industry can change before we are faced with a major outbreak.

Pfizer will remain one of the world’s largest pharmaceutical companies, but I believe they made a huge mistake by leaving the antibiotic field. Antibiotics may be one-time-use prescriptions, but they affect a much larger population than home-run hopefuls. Furthermore, a drug being developed to treat infectious diseases is nearly twice as likely to be approved as a cancer drug across all stages of development.

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Foolish Bottom Line

All three pharmaceutical giants discussed above face uncertainty in the coming years as they lose patent protection on profit-generating stalwarts. How these companies maneuver this stage of their development will undoubtedly affect their long-term prospects. While antibiotics are not the answer to profitability now they will certainly play a tremendous role over the coming decades.

Pfizer and AstraZeneca are clearly lagging GlaxoSmithKline when it comes to management and future growth. GlaxoSmithKline has brilliantly trimmed R&D costs and is expecting nearly 30 drugs to reach late-stage development within the next three years. Therefore, I am going to make a CAPScall on GlaxoSmithKline to keep track of my research-driven opinions expressed above (with super-long horizons).

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and biopharmaceuticals @BlacknGoldFool.


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