A small-molecule drug is any organic compound that affects a biologic process with a relatively low molecular weight, below 900 daltons. That's the short definition, and it doesn't tell you all you need to know, especially from an investor's standpoint.

The U.S. Food and Drug Administration more specifically defines any drug as any article intended to play a role in disease, or otherwise affect a structure or function in human or animal.

As for size and weight, you can basically consider a proton or neutron equal to one dalton. A hydrogen atom generally weighs 1 dalton, a carbon atom generally weighs 12 daltons, and so on.

The cutoff point of 900 daltons is somewhat arbitrary. It refers to your digestive system's intracellular absorption ability. Generally, any molecule over 550 daltons is tricky, but some antibiotics up to 900 daltons get across. 

As a healthcare investor, when you see the words "small-molecule drug" you need to consider two important factors:

  1. Small-molecule drugs are nearly always taken as pills. This can give them an edge over larger drugs that require injections.
  2. Their size and relative simplicity leave them more exposed to generic competition than larger, complex biologic drugs.

For example, about 6 million Americans suffer from psoriasis. For those with moderate to severe symptoms, Amgen's Enbrel and Johnson & Johnson's Stelara are two popular biologic drugs that require an injection. 

In addition to other inflammatory conditions, Enbrel has been available for treatment of psoriasis for over 12 years, and Stelara about seven. Both record billions in sales, but a new small-molecule drug from Celgene, Otezla, is rapidly gaining popularity among psoriasis patients. Approved less than two years ago for psoriasis, its sales have exploded and are expected to pass the $1 billion mark this year.

While a general preference for pills over injections is an advantage, once small-molecule drugs lose patent-provided exclusivity, generic competition can be brutal. Because of their relatively small size and simplicity, they can be easily replicated with 100% accuracy and usually don't require lengthy clinical trials to please regulators.

For example, Pfizer's Lipitor was once the best-selling prescription pharmaceutical products of any kind in the world, with 2010 global annual sales of about $10.7 billion, and $5.3 billion from the U.S. alone. Pfizer lost U.S. exclusivity for Lipitor in November 2011, and by the end of 2012 annual U.S. Lipitor sales had fallen to just $932 million. 
