Pharmaceutical companies at pains to diversify their drug portfolios

Smaller companies are eager for partnerships, too, he adds.

Because of the financial crisis, going public is generally not an option for raising capital.

“They need cash. They’re looking for help, so there’s a motivation on the small-firm side to seek cash and relationships with big pharma.”

For large pharma firms, patent expirations aren’t the only major problem.

The industry’s fortunes have changed from the heady days of the 1990s and early 2000s for many reasons, says Patricia Danzon, a Wharton professor of health care management.

Many of the drugs that swelled bottom lines in earlier decades treated diseases that affected millions of people.

High cholesterol, for example, is almost a rite of passage for anyone entering middle-age—one reason Lipitor and other drugs that fight it are immensely popular.

Similarly, depression has been called the “common cold” of mental illnesses, so there was a huge market for Prozac, Zoloft, Cymbalta and other treatments.

Today, there is an overwhelming need for drugs to treat Alzheimer’s disease, but the ailment itself is poorly understood.

Scientists don’t even know whether Alzheimer’s is one disease or many, increasing the difficulty of developing treatments.

Cancer, another common illness, also is likely not one disease but many, making a blockbuster cancer drug unlikely.

In the wake of scandals over such products as Vioxx — a Cox-2 inhibitor recalled by Merck & Co. in 2004 after studies indicated the drug was associated with increased risk of stroke and heart attack -—the American public also has grown less tolerant of risk, one reason that the US Food and Drug Administration now approves only about 20 drugs yearly.

“There is the reality that the low-hanging fruit has been picked, that there are a lot of good drugs already on the market to treat the diseases that we know how to treat, so something new has to be superior to the existing drugs,” Danzon notes.

Partnering with a smaller company by investing in it or through a licensing agreement can give the larger firm a window into promising technology, says Wharton marketing professor Jagmohan S. Raju.

“If you’re an investor with $5 million in an early-stage company and ... have someone sitting on the board, you could move earlier than your competitors on a promising development because you would know that much more about it,” he says.