Why Buffett Is Just Saying No to These Drug Majors: Bristol Myers Squibb Co. (BMY), Eli Lilly & Co. (LLY), AstraZeneca plc (ADR) (AZN)

How these drug majors don’t fit into Buffett’s strategy

Even if you’re relatively new to investing you’ve probably heard the term “economic moat.” Buffett, and any serious long term investor, looks at businesses as castles that are constantly being attacked by competitors. A company’s competitive advantage works like a moat that keeps the competition from eating away at its core business. It also allows a company to charge more for its products, in this case drugs.

Cheap generic drugs are the barbarians constantly storming the castles of these drug majors. Just about the only thing keeping them out are patents, and that economic moat is drying up.

Image source: IMS Institute for Healthcare Informatics – Global Use of Medicines: Outlook Through 2016 PDF file, Adobe Acrobat required

According to the IMS Institute for Healthcare Informatics, global spending on drugs is expected to rise significantly over the next several years. Unfortunately for these drug majors, the market for branded medicines will experience flat to 3% annual growth through 2016. In Europe, austerity programs and healthcare cost-containment initiatives will significantly slow growth. In the US, a record number of expiring patents last year is already having an effect that will be slightly offset by the Affordable Care Act.

The general outlook for the above drug majors isn’t catastrophic, but I wouldn’t recommend buying any of them. If you’re already holding them, now might be a good time to set some stops.

The article Why Buffett Is Just Saying No to These Drug Majors originally appeared on Fool.com and is written by Cory Renauer.

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