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Amgen - Biology vs. Chemistry

June 22, 2016 – Excerpt from Q2 2016 letter to IMA’s clients

Purchase of Amgen: First we need to explain a peculiar difference between pharmaceutical and biotechnology companies.  A simplistic explanation would point to the sciences they pursue – chemistry vs. biology.  

Pharmaceutical companies work with chemical compounds (some of which are derived from plants).  Biotechnology companies rely on biology since they are trying to duplicate or change the functioning of living cells. Biotechnology firms rely heavily on advances in genetic research.  

This difference in the fundamental building block of their research – living organism vs. chemical compound – has a profound impact on the economics of their respective businesses.  In theory, pharmaceutical and biotechnology companies receive the same patent protection under US law.  They are granted 20 years of exclusivity, after which their compound becomes fair game to any competitor that can prove to the FDA that their copy is the same (bioequivalent) as the original (branded) drug.  

Here is an example of what happens to a simple chemical drug after its patent expires:  Today a one-month supply of Pfizer’s Lipitor (branded drug) will cost a consumer $212.  However, a generic copy will cost only $10.50 a month.  Lipitor used to be the highest-grossing pharmaceutical – its sales in the US peaked in 2009 at $11 billion.  After its patent expired, sales dropped by 84% to $1.9 billion in 2015. 

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Vitaliy Katsenelson

I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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