Abbott Laboratories (ABT), Merck & Co., Inc. (MRK): The Proprietary Drug Business Just Got Riskier

Note that the court did not outlaw “reverse payments.” Rather, it allows regulators and consumer groups to sue when these payments have anticompetitive effects. Now, courts will be able to invoke the “rule of reason” to evaluate these payments on a case-by-case basis and determine whether they violate antitrust laws.

So while proprietary-drug companies may still be able to use the reverse-payment strategy, the new court ruling adds the risk of greater regulatory scrutiny and expensive litigation costs.

The Foolish takeaway
The proprietary-drug market was always risky. Companies put a lot of capital at risk when they attempt to develop new blockbuster drugs, which may or may not get FDA approval. Success, however, can bring in boatloads of cash as the developer’s monopoly on the drug gives it tremendous pricing power in addition to its unchallenged access to consumers who want the product.

In addition to the risks already present in the proprietary-drug market, investors should consider the possibility that they may also lose up on some of the upside that came with the years of unchallenged monopoly enjoyed by these companies on their blockbuster products.

The article The Proprietary Drug Business Just Got Riskier originally appeared on Fool.com.

Motley Fool contributor M. Joy Hayes, Ph.D. is the Principal at ethics consulting firm Courageous Ethics. She has no positions in any of the companies mentioned. Follow @JoyofEthics on Twitter. The Motley Fool has no position in any of the stocks mentioned.

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