Why Consider Investing in Pharmaceutical Stocks?

- October 17th, 2019

The pharmaceutical market is expected to increase in value, meaning there are plenty of opportunities for investing in pharmaceutical stocks.

Investors seeking to diversify their portfolios would do well to look at the pharmaceutical space.

Despite a reputation for being high risk, pharmaceutical 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 publicly traded pharmaceutical companies, investors should keep a close eye on these firms when they reach clinical trials. 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.

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Here the Investing News Network looks at how drugs are approved in the pharma industry, the biggest treatments available and the industry’s future growth to better answer investors who have the question, “Why should I consider investing in pharmaceutical stocks?”

Investing in pharmaceutical stocks: FDA approval process

The US Food and Drug Administration (FDA) is the regulatory agency behind all of the drugs 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 first test them. Results from pharmaceutical products are sent to the CDER to indicate safety, efficacy and its intended use.

The green light from the agency means that CDER has reviewed the drug’s effects and that there are more positive ones than negatives. There are several approval processes that take place, including: analyzing the disease the drug is targeting and other treatment options as well as reviewing positives and negatives from clinical trials and how to manage any risks associated with the product.

However, the approval process from the FDA can take years. Once a new therapy is developed by drug companies, it generally goes through three years of laboratory testing before the FDA even receives an application. Once approved, drugs then go through phases of clinical trials.

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Of course, there is not a one-size fits all FDA application for pharma treatments. According to the agency, there are five types of applications:

  • Investigational new drug application, which is the first step in the FDA’s review process.
  • New drug application, which is the final step a drug sponsor takes by way of a proposal to the FDA for a new drug to sell and market in the US.
  • Abbreviated new drug application, which is an application to the FDA for a generic drug approval of an drug that has already been licensed or approved by the agency.
  • Therapeutic biologics applications, which are required in order to be licensed under the PHS Act.
  • Drug applications for over-the-counter drugs (OTC). 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 and 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 pharma investment opportunities. Novel drugs means innovation and new products available on the market, particularly when it comes to rare diseases.

In 2018, the FDA’s CDER approved a record 59 novel pharmaceutical products, including the first to treat smallpox and the first treatment for hypophosphatemia. Midway through 2019, the regulatory agency has approved just 16, which means it’s likely that record won’t be broken two years in a row.

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These factors are seen dovetailing to create the perfect market 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, there are 10 major therapeutic areas in the pharmaceutical market. Global sales for these therapies generated total revenue of US$36 billion thanks to mental health drug spending.

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.

Despite niche drugs from top pharmaceutical companies creating investment opportunities, policy around drug prices remains a hot topic of debate. Former FDA Commissioner Scott Gottlieb put the agency on a crusade to lower drug prices by inciting competition between pharmaceutical companies.

We found the top performing pharma stocks to watch this year

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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 are the main method employed by Gottlieb to fulfill US President Donald Trump’s presidential campaign. However, as of July 2019, the president has yet to enforce the lowering of drug costs.

Even with the Senate Finance Committee’s hearing in early 2019 blasting several pharmaceutical executives on the high cost of drugs, drug pricing remains a constant topic of conversation and political debate.

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 touched US$1.2 trillion in 2018, up US$100 billion from 2017. By 2023, the market is projected to grow at a compound annual growth rate between 4 and 5 percent to reach US$1.3 trillion. Despite this growth, that rate is slightly less than the period between 2014 and 2018.

Depending on what your portfolio is like, you might like investing in major pharmaceutical stocks, or you might prefer smaller companies with growth 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.

Don’t forget to follow us @INN_LifeScience  for real-time news updates.

Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.

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