Serious Money:The "greying" of America has been a favoured theme among investors for more than a decade - a theme that should present clear-cut opportunities to astute investors because demographic trends, unlike most variables, are predictable years in advance, writes Charlie Fell.

Indeed, four million Americans are set to turn 60 each year over the next 18 years while the number of people aged 65 and over should double by 2030. Additionally, shifts in demand and profitability of certain goods and services are also reasonably predictable due to the distinctive age profiles of consumers.

Individuals exhibit discernable shifts in consumption patterns as they age - they will tend to gravitate from Budweiser to Californian Cabernets, from Marlboro to Cuba's Montecristo cigars, and from Las Vegas gambling trips to Caribbean cruises.

Of all the sectors that should benefit from an aging population, a decade ago none seemed more certain than an investment position in the large pharmaceutical companies.

After all, individuals aged 65 and over consume prescription drugs at three times the rate of the rest of the population. Additionally, drugs for acute illnesses create repeat business via an increase in life expectancy.

However, the sector has performed dismally since the turn of the Millennium. Stock prices have dropped more than 40 per cent from their respective all-time highs and are back to levels at which they traded in 1997. The traditionally defensive sector has proved to be anything but in recent years.

The pharmaceutical industry has been beset by a number of daunting challenges in recent years that have called its growth status into question.

Drug companies rely on a successful research and development (R&D) function for their continued survival and prosperity.

However, the costs of R&D have spiralled while the number of new drugs emanating from pipelines has declined significantly.

The full cost of developing a new prescription drug has increased from less than $140 million (€106 million) in the 1970s to almost $900 million (€683 million) today.

Not surprisingly, R&D as a percentage of sales has increased by seven percentage points to 16 per cent over the same period.

The rising costs have forced companies to focus their discovery efforts on blockbuster drugs, whose sales exceed $1 billion a year, and to neglect drugs for less common diseases.

Consequently, the number of new products emanating from pipelines has dropped significantly. The output of novel drugs dropped to 17 in 2002, the lowest level in almost two decades.

Although the number of approvals has risen to 30 in each of the past two years, it is still well below the more than 40 drugs approved in 1998.

Additionally, the narrower focus in drug discovery increases the risk of disappointment should a product fail to be approved by the Food and Drug Administration.

Contrary to widespread opinion, drug companies' increased focus on blockbuster products has not met with failure. Indeed, the number of blockbusters has trebled over the past decade.

However, this has not been sufficient to overcome revenue losses arising from an unprecedented level of patent expirations.

The industry has lost an estimated $17 billion in sales over the past 10 years and this is expected to rise to more than $30 billion over the next five years.

Compounding the problem has been a number of high-profile product withdrawals, which could cause delays in the approval process and reduce the value of pipelines.

Simultaneously, the industry is facing unprecedented political pressure on drug pricing.

Not surprisingly, revenue growth has dropped to the lowest level in decades.

Throw an ill-advised marketing blitz into the mix - sales-forces increased by 50 per cent in the five years to 2003, and the decline in profitability is easy to understand.

The drug majors are fighting back. They are shedding non-core assets, trimming sales-forces, shifting expensive clinical trials overseas, and licensing deals with biotechnology companies are at record levels.

The increased focus on core revenues and on cost containment should pay dividends.

For example, clinical trials, which account for half of all R&D costs, are as much as 50 per cent less expensive in emerging markets such as India than in the US.

Additionally, the relocation of trials to emerging markets brings with it access to large and growing markets. China, for example, is already the eighth largest market in the world and is recording growth of 15 per cent a year.

There is no doubt that the pharmaceutical industry faces daunting challenges in the years ahead. However, these challenges are more than reflected in current stock prices. The sector's price/earnings multiple was twice that of the overall market in 1998 but today most stocks trade at a discount.

Additionally, most stocks sport a dividend yield between 3 and 4 per cent. Patient investors will be rewarded handsomely.