Imagine you’ve been in business for years.  Imagine you’ve been successful. (Of course, you have been!  Why else would you be in business!) Now, imagine the world is going to change overnight.  What would you do now?

Well, in real life that scenario never really happens.  Because, in real life, no one recognizes that the world is about to change overnight.  You may see or feel some inklings- but dependent upon your psyche- and your advisors- you may elect to assume that nothing drastic will affect you.  Until that disruption is staring you in the face.

That’s the true story of the railroads.  After all, they were very successful for years.  And, they knew that their business was railroading.  They did not see their business as a basic component of the transportation sector.  So, they had gut-wrenching changes- and years of decline to accommodate.   (The glorious Pennsylvania Railroads and New York Central lines merged, oping to stave off the inevitable, only to disappear and become Conrail (a US owned freight company (their passenger service was already part of Amtrak).  And, Conrail was then split between CSX (itself a merger between the Chesapeake and Ohio Railroads and the Seaboard Coast Lines) and Norfolk Southern (a merger of the Norfolk and Western lines and Southern Railroad).

Only recently, as the price of fuel has skyrocketed, as environmental concerns have elevated the consciousness of consumers, as the costs for truck drivers have skyrocketed, is it true that the railroads have been making profits.  (Big profits, I might add.)  These better managed entities have profited by transporting the goods that we need and by coordinating with our nation’s ports (to handle imports and exports), thereby insuring the profitability of their railroads.

There are plenty of other examples.  One of the newest ones to be afflicted with a dramatic shift-  and this segment has waited a pretty long time to change its model- has been the generic drug industry   It doesn’t take a genius to figure out that, if the number of patented medicines being developed each year are decreasing dramatically,  then there won’t be a slew of these drugs coming off patent for someone to copy and sell.

That is why one of the largest (and most profitable) generic drug companies, Teva Pharmaceuticals (Israel), had begun to develop its own medications, as well as complicated generics like intravenous (IV) drugs, lower-priced versions of complicated biologic drugs, and easier-to-take formulations of some popular drugs a few years ago.   Because there are fewer and fewer drugs for it to copy and from which it can generate a profit.  So, it needs to make its own.   Teva also begun paring away the number of generics it sells, only keeping those whose profit margins make the endeavor worthwhile. Ranbaxy Laboratories (India) is doing the same preservation techniques- cutting generics that  are not highly profitable and creating its own brand-name offerings.

Another major component of the generic business model that is changing is due to the fact that Congress decided (2003) that multiple generic manufacturers could have the right to sell the same drugs.  Before that, it was only one firm (typically the first one to challenge the patent[s] of Big Pharma) that could sell the generic version of the now-patent-expired drug. And, that generic company was able to charge a premium (but below the costs for the patented drug) for the first six months, after launching the copycat, giving it valuable cash to propel that new business.

In 2012, the generics industry had accumulated some $ 50 billion in sales.  But, that sum will probably be its zenith; we can expect the generic drug industry’s gross revenue to tumble to 1/3 that number,  to $ 16 billion by 2016.  Moreover, profits will also fall by 2/3 to $ 3 billion  during that time period.  (Don’t forget that some $35 billion in patented drug sales expired in 2012- Plavix, Singulair, and Seroquel.  That’s the last big year for expiring drug patents.)

Pay attention to that industry segment.  Learn how the various companies adjust to their new realities. You might learn something very useful!

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