Pfizer, Merck, GlaxoSmithKline, Sanofi-Aventis / Bristol-Myers Squibb, Novartis, Eli Lilly, AstraZeneca, the really BIG pharma, each with annual global sales over $1 billion, are also the hardest hit by patent expiration.

Investors have seen the financial prescription, and are cashing out: while the Dow Jones World Index rose 75% in the past six years, the FTSE Global Global Pharmaceuticals Index dipped almost 20%.

The gross margin on patented drugs runs 90% to 95%. After expiration, with open competition, erstwhile patented drugs are priced close to production cost.

WSJ on what justifies those margins:

It has never been easy to take a drug from the lab, through animal testing and into human trials. The industry estimates only one out of every 5,000 to 10,000 candidates makes it to human trials. And many drugs that work beautifully in animals fail miserably in people.

But those odds seem to have worsened in recent years, prompting debate about whether the cause is government regulation, corporate structure or an excessive scientific reliance on chemicals rather than biology.

Safety concerns are ongoing. While the bar for what constitutes "safe and effective" hasn't changed, the FDA is requiring larger trials, raising the stakes.

Many drug-company executives blame the FDA for pulling back on approvals.

While still pumping money in, the research pipeline is running dry, with few nascent blockbusters. The reaction is typical of any industry facing decline: mergers and reorganization. Reorganization may be good medicine.

Some say the industry's ballooning research budgets may be working against productivity. Most companies use a centralized system to allocate research money, and the growing budgets have left the decision making to too few people who are too far removed from the research, suggests Mr. Evans, who worked at Roche's U.S. subsidiary until 1998, spent several years as a Wall Street analyst and is now a consultant at a health-care-consulting firm. He calls the system "a nightmare of complexity."

As evidence of this problem, some in the industry point to Pfizer, with an annual research budget that has grown to $7 billion, highest in the industry. Yet only a handful of drugs discovered in its internal research labs have come to market in the past decade. And late last year, the company lost its most promising hope when the cholesterol drug torcetrapib failed in late-stage trials.

A few companies, including GlaxoSmithKline, notable to the patent community for hauling out the heavy artillery to fight the USPTO's asinine rule changes, has already begun conducting research using smaller groups.

The century old chemical analysis approach is running out of steam. "For all our amazing advances in the last 50 years, we are still working with the tools of the first pharmaceutical revolution...using advanced chemistry to treat disease symptoms," Eli Lilly chairman Sidney Taurel observed in 2003.

During the five years from 2002 through 2006, the industry brought to market 43% fewer new chemical-based drugs than in the last five years of the 1990s, despite more than doubling research-and-development spending.

The future is in biotech. Part of the reason for that is the regulatory regime. Another is in the nature of the product.

Biotech drugs are especially appealing because they face no competition from generics: No regulatory pathway yet exists in the U.S. for bringing to market generic biotech drugs.  And biotechnology products tend to target specialized areas of medicine that don't require mass advertising or armies of salespeople.

Big pharma spent $75 billion in the past two years acquiring biotech companies. Novartis and Pfizer are forming in-house biotech research units.

Generics mean competition, but there's still money to be made.

Aware that seven of the top 10 drug launches of 2006 were generics, pharmaceutical giants are pushing more deeply into that business. In first nine months of this year, Novartis's generics unit, Sandoz, grew roughly three times as fast as its branded-drugs business and accounted for nearly 20% of overall revenue.

Johnson & Johnson has its own generics unit. Other companies cut deals with generics manufacturers, licensing them the right to sell "authorized generics" that are identical to a branded drug that has gone off-patent.

Diversification is another route to sustaining profitability, with diagnostics the favored pickup.

Then there's the time-honored technique to boosting the bottom line: cut costs.

Big pharma is downsizing. One projection has the industry shrinking by 50,000 jobs over the next decade.

Outsourcing manufacturing to India, Eastern Europe, and China is a well-worn path in other industries, and so now goes pharma. Outsourcing research is the next step.

Last, but not least, oh no: the big boys bite the bullet.

"I'm talking to you from the 44th floor of an office on Park Avenue," [Bristol-Myers Squibb CEO James] Cornelius says. "A year from now, I won't be talking to you from the 44th floor because we're going to move downstairs out of these very expensive offices."