biotech buyout

Big drugmakers are scrambling.

Right now, some of their most-lucrative blockbuster drugs are coming "off patent" - meaning they face the loss of $170 billion in annual sales.

But I'm going to let you in on a secret that Wall Street investment pros hope the little guy never learns: The very same problem that has Big Pharma execs wringing their hands even as you read this is also creating one of the biggest profit opportunities we've seen in years.

To show you what I mean, allow me to tell you two quick stories.

The Secret Path to Biotech Profits

Late in my business journalism career, I spent three years covering the biotech sector.

Let me tell you: That reporting job brought me to a very quick understanding of just how challenging this business really is.

Wall Street and Big Pharma executives beat the drum about their successes - the new "miracle drugs" that treat or cure obesity, arthritis, depression and cancer. We hear about those achievements all the time.

What I found in my reporting, however, was that the failures dwarf the success stories.

The failure numbers are actually downright mind-numbing.

For every 1,000 "compounds" (drug candidates) that enter laboratory testing, only one will ever make it to human testing.

Indeed, once a company develops a drug, it's usually looking at about three-and-a-half years of testing in the lab before it can even apply to the U.S. Food and Drug Administration (FDA) for approval to begin testing in humans.

Of all the drug candidates that enter Phase I trials - the first of three phases that mark the path to FDA approval - only one in five ever makes it to market.

The bottom line, as I discovered, is this: It can take 10 to 12 years and $1 billion or more to develop a new drug.

For Big Pharma CEOs who are staring at eroding patent coverage and searching for replacement blockbusters, that's too much time and way too much risk.

They're not abandoning internal drug development. But they're also pursuing an alternative strategy: Sniff out the small players already developing the new potential blockbusters and either buy the drug, or buy the company outright.

That urgent multi-billion-dollar shopping spree is going on right now... boosted to the max by a need to keep boards and shareholders happy.

As Merck & Co. (NYSE: MRK) CEO Kenneth Frazier recently told an investor group: "My goal is to augment the pipeline. The way to augment is to find those assets that we can acquire."

That's easier said than done.

For one thing, Big Pharma/Big Biotech companies are fat with cash. That means there's a lot of competition in the search for new drugs or entire companies to buy. For another, there's a "scarcity of growth assets," as Goldman Sachs Group Inc. (NYSE: GS) said in a new report.

Although that supply/demand scenario is a tough one for Big Pharma, it's a terrific one for investors like us: It puts pressure on the suitors to buy whatever's available. And it means the prices will be high when they do.

And, as my second story demonstrates, those deals do happen.

In fact, our subscribers recently reaped a big payday from just that kind of deal.