The pharmaceutical market is expected to increase in value, meaning there are plenty of opportunities for investing in pharmaceutical stocks.
Market participants seeking to diversify their portfolios would do well to consider investing in pharmaceutical stocks.
Despite a reputation for being high risk, pharma companies can be compelling for long-term investors. With the possibility of patented entry into new areas of treatment, the pharmaceutical industry can present profitable opportunities for those who do their research.
When it comes to investing in a publicly traded pharmaceutical company, investors should keep a close eye on these firms when they reach the clinical trial stage. Clinical trials are often a make-or-break chance for companies and their products — successful results can lead to big gains in the market, but failures or lack of advancement can have the opposite effect.
To better answer investors who have the question, “Why should I consider investing in pharmaceutical stocks?” here the Investing News Network looks at how drugs are approved in the pharma industry, the treatment trends in healthcare and the industry’s future growth.
Investing in pharmaceutical stocks: FDA approval process
The US Food and Drug Administration (FDA) is the regulatory agency behind all of the medicines that get approved for commercial availability in the US. The FDA’s Center for Drug Evaluation and Research (CDER) does the job of assessing each product before it is sold on the market.
Before selling these products, drug companies are required by the FDA to test them. Results from drug candidates are sent to CDER to indicate safety, efficacy and intended use.
A green light from the agency means that CDER has reviewed the drug’s effects and that the positives outweigh the negatives. There are several approval processes that take place, including analyzing the disease the drug is targeting, looking at other treatment options, reviewing pluses and minuses from clinical trials and examining how to manage any risks associated with the product.
However, FDA approval in the healthcare sector can take years. Once a new therapy is developed by a drug company, it generally goes through three years of laboratory testing before the FDA even receives an application. Once approved, drugs then go through the clinical trial phases.
Of course, there is not a one-size-fits-all FDA application for drug candidates. According to the agency, there are five types of applications:
- Investigational new drug application — the first step in the FDA’s review process.
- New drug application — a proposal a drug sponsor makes to the FDA to sell and market a new drug in the US. It is the final step in the FDA’s review process.
- Abbreviated new drug application — an application to the FDA for a generic version of a drug that has already been licensed or approved by the agency.
- Therapeutic biologics application — this is required for licensing under the PHS Act.
- Drug applications for over-the-counter (OTC) drugs — OTC drugs are categorized as being safe for use by the public without needing advice or a prescription from a healthcare provider. The FDA reviews ingredients and labeling of at least 80 therapies rather than singular products. Each category receives an OTC drug monograph and, when a final monograph is done, drug companies can then use that footprint to develop an OTC product without needing approval from the regulatory agency.
In terms of new drug approvals, this area of the industry is perhaps the most attractive in terms of pharmaceutical stock opportunities. Novel drugs mean innovation and new products available on the market, particularly when it comes to rare diseases.
In 2019, the FDA’s CDER approved 48 novel pharmaceutical products, including the first to treat smallpox and the first treatment for hypophosphatemia.
These factors are seen creating the perfect conditions for pharmaceutical companies that cater to the most vulnerable in society: the very young, the very old and the diseased. A reduction in poverty may very well reduce disease; however, that still leaves the other two demographics for players to profit off.
Investing in pharmaceutical stocks: Biggest treatment areas and trends
According to data from Statista, in 2018 there were 10 major therapeutic areas in the pharmaceutical market. Global sales for these therapies generated total revenue of US$36 billion.
Oncologics, pain therapy and anti-diabetics are some of the top global drugs in terms of revenue, generating sales of US$100 billion, US$79 billion and US$40 billion, respectively.
Over the course of the year, treatments for non-small-cell lung cancer and breast cancer were the top diseases for which therapeutic drugs were being developed. Eli Lilly & Co.’s (NYSE:LLY)’s treatment Cymbalta to treat major depressive disorder and generalized anxiety touched US$36 billion in global revenue for the sector.
On that note, the top therapeutic areas in terms of global pharmaceutical revenue in 2018 included respiratory at US$60.5 billion, autoimmune diseases with US$53.5 billion in revenue, mental health at US$35.5 billion and immunology at US$34.2 billion.
Although Statista has not released global sales for 2019, EvaluatePharma forecasts that the sector will reach US$1.18 trillion in sales by the year 2024.
While niche drugs from top pharmaceutical companies are creating investment opportunities, policy around drug prices remains a hot topic. Former FDA Commissioner Scott Gottlieb put the agency on a crusade to lower drug prices by inciting competition between pharmaceutical companies.
In February 2019, Gottlieb said the agency had been taking steps to “support downward pressure on drug prices by helping to clear a path for more efficient generic development.” Generic drugs were the main method employed by Gottlieb to fulfill US President Donald Trump’s presidential campaign promises. However, as of July 2019, the president had yet to enforce the lowering of drug costs.
At a hearing in early 2019, the Senate Finance Committee blasted several pharma executives on the high cost of drugs, but pricing remains a constant topic of conversation and political debate.
The search for a coronavirus vaccine alongside the potential for prohibitive drug costs has placed further pressure on lawmakers to regulate the pricing of prescription drugs. During an interview in June 2020, US Senate Finance Committee Chairman Chuck Grassley said that he plans to push for a vote in 2020 on a bill that would cap increases to drug prices. Grassley said the bill has received an “emphatic yes” in terms of support from Trump.
Investing in pharmaceutical stocks: Market growth
While most of the leading pharma stocks are US based, the global pharmaceutical market is poised for exceptional growth, driven by Big Pharma as well as small- to micro-cap stocks.
According to a report from IQVIA, the industry has experienced a 3 percent compound annual growth rate (CAGR) since 2014. Looking forward, IQVIA is projecting a CAGR range of 2 percent to 5 percent to exceed $1.1 trillion in 2024.
Depending on your portfolio, you might like investing in big pharma stocks, or you might prefer smaller companies with potential. Overall, with speedier drug approvals, an ever-increasing customer base and many rising sectors, investing in pharmaceutical stocks could be a good move.
This is an updated version of an article originally published by the Investing News Network in 2015.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.