Pfizer Inc. (PFE) and Merck & Co., Inc. (MRK): 2 Dow Stocks We All Need but Shouldn’t Own

While a drug patent does last 20 years, a large portion of that time is spent in trials and the FDA approval process. Once a company finally gets approval, the clock has already been ticking for a long time, and it may have only 10 years or less of sole rights to the drug until the generic companies can move into the market with a copy of the compound. Once that happens, profits dry up quickly.

We all need the big brand-name drug companies such as Pfizer and Merck. Their endless efforts of searching for the next big drug will keep innovation moving forward, which ultimately gives everyone around the world the ability to live longer, healthier lives. But these companies are also continuously under pressure to produce new drugs, either through research or acquisitions, to reward shareholders in both the short and long term. And every new research project or acquisition is risky, because each one is so capital-intensive with no guarantees.

The generic drug industry also has an important purpose that it serves well — to prevent monopolies from forming and keep prices low. The generic companies carry less risk and lower costs because the off-patent drugs they make are already proven. But the trade-off is that they give investors less chance of an upward reward, because of the lower risk.

The tortoises and the hares
It’s unlikely that a generic drug will ever make $131 billion in revenue, the way Lipitor did for Pfizer, but on the other hand, I wouldn’t bet that Pfizer or any of the other major drug manufactures will enjoy Lipitor-like blockbuster success on a regular basis. In my opinion, the slow but consistent revenue from the generics beats the fast but erratic revenue of the major pharmaceutical companies.

The article 2 Dow Stocks We All Need but Shouldn’t Own originally appeared on Fool.com and is written by Matt Thalman.

Fool contributor Matt Thalman owns shares of Mylan. Follow Matt on Twitter: @mthalman5513. The Motley Fool recommends and owns shares of 3D Systems and LinkedIn and has options on 3D Systems.

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