The prescription drug boom in the US has to come to an end. In fact, according to this Pharma Times article, many believe it already has. Even back in October, life sciences advisory firm VOI had concluded that prescription drug use among US seniors had “plateaued.” After decades of exponential growth that saw per capita drug utilization grow 80% from 1990 to 2010, VOI is predicting just 2% total growth in that metric from 2010-2030.
When you think about this logically it really has to come. Anybody who has regular contact with seniors in the US is aware that a huge number of them take a mind-boggling daily regimen of pharmaceuticals. Visits to multiple specialists over the years have left them with a complicated drug regimen that can lead to them taking more than 20 pills per day. According to the National Center for Policy Analysis, 31% of American seniors take more than 10 pills per day. I am not a doctor, nor do I wish to play one on the internet, but common sense dictates that this situation is neither healthy nor sustainable.
It is most likely, however, that it will not be the possibility of over-medicating our seniors that will force change in this area, but rather the most powerful driver of change there is; cost. Dealing with healthcare costs has been seriously delayed in the US. Politicians join the public in shocked disapproval when other countries begin to factor cost into healthcare decisions, even as they know that the US will have to do the same before too long. The simple fact is that that day must come.
You might assume that the market, in its usual forward discounting manner, was fully aware of this and that growth in drug company stocks had slowed. You might assume that, but you would be wrong. I used the word “boom” earlier for a reason.
The above chart shows the comparative 5 year performance of the S&P 500, in red, and the Powershares Dynamic Pharmaceutical ETF (PJP), in blue. It is not just the manufacturers that have outperformed either. The major US drug stores have also done well. RiteAid (RAD), Walgreens (WAG) and CVS (CVS) have all beaten the broader market over the same time period.
Of course, as most of us are aware, this growth has not just been driven by seniors consuming ever more drugs. There has also been tremendous innovation over the last fifteen years, with drugs being developed that treat common complaints better and that treat increasingly obscure diseases and problems. Even there though, simple logic dictates that the rate of innovation has to slow. There are only so many illnesses that can be treated and from a layman’s perspective some of the “complaints” and marketing are beginning to feel like a bit of a stretch.
There will probably be pockets of success on the development and innovation side. Immunotherapy treatments offer hope of a truly effective treatment for various cancers and research on cognitive disease could lead to a breakthrough, but from an investor’s perspective this is better played by investing in a select few small biotech firms than broad based investing in the sector. In the short term and in specific areas the drug industry could well be fine, but over time and in more general terms underperformance looks likely.
When everything is taken into account it would seem like a good time to reduce exposure to the drug industry, both in terms of the wholesalers and the retailers. The likelihood of a trend toward doctors rationalizing patients’ drug regimens, the increasingly urgent cost concerns, and the natural slowing of the pace of innovation all add up to an uncertain long term future for the industry. Pharmaceutical stocks and drug stores have had a great run, but it is hard to escape the conclusion that that run may be drawing to a natural close. For long term investors, it is probably time cut down on the drugs.