For stock market analyst David Amsellem, keeping a close eye on drug companies is what he likes to do. In fact, the Senior Research Analyst at the investment firm Piper Jaffray & Co. is recognized as the number-one-ranked analyst in North America for “accuracy of earnings estimates in the pharmaceuticals sector” according to a Financial Times/StarMine ‘Best Brokerage Analyst’ survey.

So he’s also pretty good at sizing up the drug industry – particularly ‘specialty pharma’ companies. These are companies making expensive brand name drugs for chronic conditions or complex care issues like cancer, HIV-AIDS, hemophilia and other bleeding disorders, multiple sclerosis, rheumatoid arthritis and others.

Specialty pharmaceutical companies usually focus the majority of their efforts on one or two therapeutic areas that are served by specialized physicians. Their traditional mode of operation is to acquire under-promoted branded products from Big Pharma companies that are generating lower sales, and then try to significantly increase revenues through aggressive targeted marketing and promotional activities.

Writing in the 2009 Wall Street Transcripts Pharmaceuticals Report, Mr. Amsellem calls a spade a spade, in ways that are interesting not only to stock market investors, but to those of us whose doctors have ever written us a prescription for any name brand medication.

“Drug companies that are developing products that are not necessarily differentiated, that are more ‘me-too’ type products, that are not necessarily addressing major unmet medical needs, are finding it more and more difficult to get adequate compensation.”

Let’s review Mr. Amsellem’s expert opinions here.

He’s identifying three unusual pharmaceutical industry business practices that seem financially unsound:

1. they manufacture drugs that are too similar to other drugs already on the market
2. these drugs are meant to ride the coat tails of other similar money-making drugs
3. there are no diseases or conditions out there that are crying out for this drug

Mr. Amsellem continues:

“The reality in the specialty pharma business is that ‘assets’ have finite lives. So for specialty pharma, the goal for companies is to continually find ways to reinvent themselves. That is the challenge, and it’s a big challenge.

“You have a product that’s generating cash flow, but it goes ‘off patent’ and after three years, five years, seven years – whatever it is – you see a significant decline in revenue and a significant decline in earnings power.

“That dramatically impacts terminal value.”

And this helps to explain the dilemma of the average drug company.

There is simply too much money to be made, and too much money to be lost once a big-selling specialty drug is no longer under patent protection, and the marketplace then opens up to identical but cheaper generic drugs.

In the world of ordinary pharmaceuticals, most of which are simple chemical compounds, generics are perfect replicas of drugs that have lost their patent protections.

In the world of biotech drugs, the drugs are mostly complex proteins that are cloned and grown in temperamental cultures consisting of hamster ovary cells and other exotic materials. For these extremely complex drugs, some biotech executives argue, it’s almost impossible to ensure that any two protein cultures are identical.

It’s estimated that specialty pharmaceuticals now make up 75% of the global prescription drug market. That’s why we are seeing aggressive drug marketing campaigns. Drug companies just can’t afford not to do these things.

You can order the 76-page special Pharmaceuticals Report from Wall Street Transcripts.