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Editor's Note: Today, we'd like to welcome Ernie Tremblay to Money Morning. He's been providing his bioscience research to our premium services for over a year now and we couldn't be more thrilled with the results, including a 457% gain on one of his recommendations. So here's how Ernie does it…

Traditional pharmaceutical blockbusters like Pfizer's Lipitor treat millions of patients at relatively low cost. It's a high-volume business model that has kept the pharmaceutical industry afloat for a long, long time. But over the past decade, out of necessity, a new model has taken the industry by storm.

As big moneymakers, like Lipitor, reach the "patent cliff," their intellectual rights protection are evaporating, and generic drug makers are taking over their markets.

Big Pharma needs fresh drugs to take the place of those they're losing. But replacing these products with new ones is expensive. Most experts agree that it takes about $800M in capitalized costs to develop a single new drug. And frankly, the "easier" medical riddles, like treating high LDL cholesterol, have mostly been solved. The remaining tough ones, like cancer and Alzheimer's, will drive costs even higher.

So how do the major pharmaceutical companies meet the challenge? By letting small, smart start-up biotechs do the R&D legwork on new drugs, then either making distribution deals with them or buying the small companies out.