It's Still Snake Oil

Brian Hicks

Updated February 24, 2006

Dear Wealth Daily Reader,

“Just a spoonful of sugar helps the medicine go down, the medicine go doooown, the medicine go down… Just a spoonful of sugar helps the medicine go down, in the most delightful way!”

This song from the 1964 Disney film Mary Poppins is a classic, teaching kids the importance of an effervescent approach to the most menial daily tasks.

“In ev’ry job that must be done, there is an element of fun!”

Well, I don’t think that’s the general working-class cockney attitude towards chimney sweeping and such, but I’ll give the metaphor credit anyway.

Today, though, I want to address the literal meaning of choking down a pill with a saccharine smile.

A Spoonful of Splenda

It gets worse with each passing year. We are inundated with advertisements in every possible medium admonishing the masses to ask our doctors about this or that new medication.

In recent years, pharmaceutical ad spending has increased at a stupefying rate, topping 30% year-on-year and leading to an alarming overall trend within the industry:

Pharmaceutical companies spend twice as much on advertising as they do on research and development.

The result is that doctors’ offices around the world, especially in the US, have been turned into an absurd charade. Patients, thinking that a 30-second commercial suffices to place them above their care provider’s 10 years of medical school and residency, say “I really think I should be on ____!”

Like the snake oil salesmen of old, who traveled from town to town peddling miraculous elixirs to cure all ills and even bring rain during droughts, the pharmaceutical industry is not only pushing its products – it relies on the psychology of hope to make its money.

And make money it does. The pharmaceutical industry has an average annual growth rate of 8.2%, which is expected to carry it well into the next decade.

Successful lobbying plays a large role in this prodigious profitability, leaving big pharma with the lowest industry-wide tax percentage of any enterprise: 16% compared to 27% average for non-pharmaceutical companies.

Despite the startling potential of today’s litigious culture and the recent court award to users of Merck’s drug Vioxx, the pharmaceutical companies aren’t exactly quaking in their boots.

The same lobbying that has led to lower taxes has also gotten them one of the sweetest corporate gifts in the history of the U.S. government – the Medicare Prescription Drug Plan. Like a steroid shot to Goliath, this change in the way seniors obtain their meds will boost an already mammoth industry.

For every individual investor, all of this presents a quandary. Knowing what you know about how the government and industry interact, you probably think back as you read this on a couple of times you yourself dropped a drug name to your doctor after feeling a little heartburn.

All of us who have less-than-perfect health are potential cogs in this wheel. As critical thinkers we should be aware of the behemoth, but as investors we know that there is no better buddy than a big giant, especially in this age where Baby Boomers are about to hit age 60.

That’s right, the ads and political action we are seeing now are just the opening salvo in a barrage that will target the entire postwar generation and sweep up huge earnings in the process.

My advice to you is to take the surge for what it is, just as we take advantage of Peak Oil though it may tear the world apart before the innovation it causes heals the rift.

Medicine, after all, can make people better or it can lead to a spiral of treatments to cure ailments caused by other treatments, when all you needed in the first place was a good vitamin and a balanced diet.

Pharmaceutical profits will continue their upward momentum as long as there are enough patients and doctors who let the computer-generated graphics and understated side effects hypnotize them.

So, keep investing wisely, but be careful that your fat wallet doesn’t collapse your hip.

– Sam Hopkins

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