The pharmaceutical industry may be ailing, but Warren Buffett has taken its pulse and predicts a recovery. His Berkshire Hathaway has bought into Glaxo SmithKline (Ticker: GSK) and Sanofi-Aventis (Ticker: SNY).

Firms today fall from grace with the alarming ease of wayward bishops; few industries, however, have tumbled as far, as fast and on as many fronts as drug makers. Ten years ago, big firms were celebrated as the purveyors of exciting new medicines, such as Viagra, and even more stimulating earnings growth.

But it has all gone horribly wrong for the dozen or so manufacturers that make up “big pharma”. The withdrawal of high-profile drugs, growing suspicion among consumers about drug companies’ ethics, and arguments with regulators and customers have all dented what until recently was one of the least-tarnished of industries. A string of books has attacked the marketing tactics used by the industry, while lamenting the diminishing returns from its much-touted search for new drugs. Some observers have questioned whether a business model that was once capable of producing huge and reliable profits has been irreparably damaged. The industry is struggling to come to terms with a changing environment in its biggest and most lucrative market, America.

The internal travails of the world’s leading drug makers have been compounded by a broader social debate about the purpose and practices of the industry, again mostly in America, which as the world’s largest drug market accounts for over 40% of global sales. American drug prices are largely set by the market, which has prompted pharma firms to invest here on a large scale. As a result, they have become a highly visible target for criticism. Europeans are far less exercised about the industry, in part because their drug bills are paid for mainly by their governments, and in part because they are shielded from pharmaceutical marketing.

Today, firms are seen by many as more profiteering than profit making. Companies are castigated for spending billions on research and development, only to deliver too many “me too” drugs and too few genuinely new ones.

Comparable sums spent on sales and marketing – particularly on direct-to-consumer advertising in America – are lambasted for corrupting doctors and creating demand on the back of fancy publicity rather than legitimate medical need or product superiority.

Efforts to fend off lower-cost competition from manufacturers of generic drugs through patent lawsuits leave companies accused of driving up the drugs bill in rich countries and depriving millions of life-saving medicines in poor ones. The shares of most big drug firms now trade at a discount to the market, as promises of bright times ahead are marred by risk.

To be sure, pharma companies come in for criticism not just because they are more profitable than those in other sectors but because they are profitable in a field, medicine, where money makes people uneasy. And not only are drug companies profitable, but also visible: In America, rising hospital and physician costs are as much to blame for soaring insurance premiums as pharmaceuticals, but it is drugs which are the most obvious recurring expense and the one that consumers are asked, at least in part, to shoulder directly. Firms are caught between shareholders, who fear drug prices will fall, and consumers, who complain about their rise. ...

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Big Money Watch, Special Report, March 2008.

GlaxoSmithKline plc (GSK) is a global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products. It has and operations in some 114 countries, with products sold in over 140 countries.

The Company operates in two segments: Pharmaceuticals (prescription pharmaceuticals and vaccines), and Consumer Healthcare (over-the-counter medicines, oral care and nutritional healthcare). The markets for its products are the United States, France, Japan, United Kingdom, Italy, Germany and Spain. In June 2008, the Company completed the acquisition of Sirtris Pharmaceuticals, Inc. (Sirtris). Sirtris will become part of GSK's Drug Discovery organization.

Sanofi-Aventis is a pharmaceutical group engaged in the research, development, manufacture and marketing of healthcare products. The Company's business includes two main activities: pharmaceuticals (prescription drugs) and human vaccines.

In its pharmaceutical activity, Sanofi-Aventis specializes in six therapeutic areas: cardiovascular, thrombosis, metabolic disorders, oncology, central nervous system (CNS) and internal medicine. In the human vaccines activity, the Company offers vaccines in five areas: pediatric combination vaccines, influenza vaccines, adult and adolescent booster vaccines, meningitis vaccines and travel vaccines. (Google Finance)

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