(FORTUNE Magazine) - JUDGING BY THE HEADLINES, IT WOULD BE EASY TO THINK that Big Pharma is on the brink of collapse. In 2006 the industry is poised to lose more than $23 billion in sales to generic competitors, its worst-ever year for patent expiration. Merck, the sector's erstwhile flagship, faces a long slog through the 6,000-odd lawsuits stemming from its Vioxx disaster. And insurers and drug-benefit managers are aggressively countering Big Pharma's marketing might at every turn. Most alarming of all, however, is the fear that despite the $40 billion that the industry spends on research and development annually, the once gushing pipelines of the giant drugmakers have run dry.

Not so. In 2000 there were 36 blockbuster drugs (those that generate sales of $1 billion or more a year) on the global market. Today, according to research firm IMS Health, the number of blockbusters worldwide stands at 92. Those medicines were responsible for almost half of pharmaceutical market growth during 2005. And experts say the number of blockbusters is expected to keep rising over the next several years.

It's true that the industry is facing a difficult transition from its tried-and-true formula of mass-market medicines to more elegant biotech drugs, which are derived from genetic research and tailored to smaller, more targeted groups of patients. But that promises to be a long-term process. And when you combine the aging of the baby-boomers with greater access to health care in places like Eastern Europe and China, notes IMS Health senior VP Murray Aitken, the overall drug market is expanding at an increasing rate. Consider that while the global market grew almost 7% in 2005, this year it's expected to increase by as much as 9%, reaching some $650 billion. By 2009, IMS predicts, it could be $845 billion.

So which new drugs will lead the charge--and which companies (and perhaps stocks) will benefit most? Pfizer, the biggest of Big Pharmas, has at least two potential blockbusters that could gain FDA approval in 2006. Exubera, the U.S. market's first inhalable insulin powder for juvenile and adult-onset diabetes, could be a big seller for the nation's 18 million diabetics for one simple reason: no more needles. This year is also likely to see Pfizer's first foray into major cancer treatments with Sutent, an oral medication that kills tumors. The FDA granted Sutent fast-track review status last August based on unique properties that allow it to "starve" cancerous tumors of protein. Within the next few months the FDA is likely to approve Sutent at first for treatment of gastrointestinal tumors; Pfizer is evaluating the oral treatment for fighting breast, lung, prostate, and colorectal cancers.

No cancer treatment is likely to make a bigger splash than Merck's Gardasil, the first vaccine for human papilloma virus, a main cause of cervical cancer. Gardasil is nearly certain to gain an FDA go-ahead by this summer; its status as a future blockbuster depends on whether national health agencies worldwide add it to their lists of recommended vaccines. Whatever happens, Gardasil should help Merck move beyond the Vioxx recall and restore faith in the company among doctors, patients, and investors.

Orencia, a novel rheumatoid arthritis remedy expected from Bristol-Myers Squibb this year, is the first drug to prevent joint inflammation by regulating the autoimmune response of so-called T-cells. According to Bristol-Myers research, Orencia helped patients who received little comfort from existing medications.

And then there's Sanofi-Aventis's much anticipated anti-obesity pill, Acomplia, a medicine that proves the drug industry is still capable of dazzling artistry. Rather than addressing appetite suppression via the gut, like other fat-fighting medicines, Sanofi's researchers probed the brain's cannabinoid receptors (the same ones that produce a euphoric tingle after a few puffs of marijuana). By jamming signals sent to them, Acomplia suppresses appetite--particularly, Sanofi claims, the urge for fatty foods and sugary treats. The drug could thus be used as a diabetes treatment as well. And since it's been shown to help curb the desire for cigarettes too, it could also be approved as a smoking-cessation aid. In short, it's potentially a wonder drug, with analysts projecting peak annual sales between $2 billion and $5 billion. "In the area of obesity, patients are forever looking for a magic bullet," says Tim Anderson, an analyst with Prudential Equity Group, "which suggests that when Acomplia first launches, its uptake will be rapid." That's just the kind of boost Big Pharma needs.

FEEDBACK first@fortunemail.com

Five Blockbusters for 2006

FORTUNE TABLE

JUDGING BY THE HEADLINES, IT WOULD BE EASY TO THINK that Big Pharma is on the brink of collapse. In 2006 the industry is poised to lose more than $23 billion in sales to generic competitors, its worst-ever year for patent expiration. Merck, the sector's erstwhile flagship, faces a long slog through the 6,000-odd lawsuits stemming from its Vioxx disaster. And insurers and drug-benefit managers are aggressively countering Big Pharma's marketing might at every turn. Most alarming of all, however, is the fear that despite the $40 billion that the industry spends on research and development annually, the once gushing pipelines of the giant drugmakers have run dry.

Not so. In 2000 there were 36 blockbuster drugs (those that generate sales of $1 billion or more a year) on the global market. Today, according to research firm IMS Health, the number of blockbusters worldwide stands at 92. Those medicines were responsible for almost half of pharmaceutical market growth during 2005. And experts say the number of blockbusters is expected to keep rising over the next several years.

It's true that the industry is facing a difficult transition from its tried-and-true formula of mass-market medicines to more elegant biotech drugs, which are derived from genetic research and tailored to smaller, more targeted groups of patients. But that promises to be a long-term process. And when you combine the aging of the baby-boomers with greater access to health care in places like Eastern Europe and China, notes IMS Health senior VP Murray Aitken, the overall drug market is expanding at an increasing rate. Consider that while the global market grew almost 7% in 2005, this year it's expected to increase by as much as 9%, reaching some $650 billion. By 2009, IMS predicts, it could be $845 billion.

So which new drugs will lead the charge--and which companies (and perhaps stocks) will benefit most? Pfizer, the biggest of Big Pharmas, has at least two potential blockbusters that could gain FDA approval in 2006. Exubera, the U.S. market's first inhalable insulin powder for juvenile and adult-onset diabetes, could be a big seller for the nation's 18 million diabetics for one simple reason: no more needles. This year is also likely to see Pfizer's first foray into major cancer treatments with Sutent, an oral medication that kills tumors. The FDA granted Sutent fast-track review status last August based on unique properties that allow it to "starve" cancerous tumors of protein. Within the next few months the FDA is likely to approve Sutent at first for treatment of gastrointestinal tumors; Pfizer is evaluating the oral treatment for fighting breast, lung, prostate, and colorectal cancers.

No cancer treatment is likely to make a bigger splash than Merck's Gardasil, the first vaccine for human papilloma virus, a main cause of cervical cancer. Gardasil is nearly certain to gain an FDA go-ahead by this summer; its status as a future blockbuster depends on whether national health agencies worldwide add it to their lists of recommended vaccines. Whatever happens, Gardasil should help Merck move beyond the Vioxx recall and restore faith in the company among doctors, patients, and investors.

Orencia, a novel rheumatoid arthritis remedy expected from Bristol-Myers Squibb this year, is the first drug to prevent joint inflammation by regulating the autoimmune response of so-called T-cells. According to Bristol-Myers research, Orencia helped patients who received little comfort from existing medications.

And then there's Sanofi-Aventis's much anticipated anti-obesity pill, Acomplia, a medicine that proves the drug industry is still capable of dazzling artistry. Rather than addressing appetite suppression via the gut, like other fat-fighting medicines, Sanofi's researchers probed the brain's cannabinoid receptors (the same ones that produce a euphoric tingle after a few puffs of marijuana). By jamming signals sent to them, Acomplia suppresses appetite--particularly, Sanofi claims, the urge for fatty foods and sugary treats. The drug could thus be used as a diabetes treatment as well. And since it's been shown to help curb the desire for cigarettes too, it could also be approved as a smoking-cessation aid. In short, it's potentially a wonder drug, with analysts projecting peak annual sales between $2 billion and $5 billion. "In the area of obesity, patients are forever looking for a magic bullet," says Tim Anderson, an analyst with Prudential Equity Group, "which suggests that when Acomplia first launches, its uptake will be rapid." That's just the kind of boost Big Pharma needs.

FEEDBACK first@fortunemail.com

Five Blockbusters for 2006

FORTUNE TABLE