Investing in Pharmaceutical Companies: What You Need to Know

- September 26th, 2018

Pharmaceutical companies work towards achieving the goal of bringing new cures or treatments to the market and improve the treatment available for patients.

Pharmaceutical companies work towards achieving the goal of bringing new cures or treatments to the market and improving the treatment already available for patients.

However, diseases aren’t easily targeted; there’s no specific cure for all types of cancer or a direct method for stopping the various ailments that affect humanity.

As such, companies in this sector expand the potential of treatment and seek new ways to work with what is already in place in the form of drugs designed to help the human body. Some ways to do this is by developing drugs for multiple indications or more broad categories, such as pain.

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Most recent numbers and figures show that a 2016 market report from the US International Trade Administration found over $50 billion is invested in research and development yearly t. The US is the largest pharmaceutical market, with the report detailing drug sales in 2015 lead to $333 billion.

“The United States will remain the world’s most important market for the foreseeable future with healthy growth expected across all product sectors,” the report stated.

Investors have the option to place some of their money on stocks for companies that may be on the verge of finding new cures or advancing the treatments for rare diseases. However, there are many challenges when investing in these companies and investors should note how time and patience plays a large role when it comes to pharma.

Some of the biggest names in the industry—while each still competes with their own innovative pipelines—are also using partnerships, licensing deals and collaborations to expand drug candidates. AbbVie (NYSE:ABBV), Bristol-Myers Squibb (NYSE:BMY), and Pfizer (NYSE:PFE)  are a few of those examples and can always be counted on for big market stocks available for investors.

Looking at the overarching pharmaceutical industry, it goes beyond the Big Pharmas. Small-to-medium market cap companies continue to make an impact on the landscape and attract a variety of investors.

Investing in pharmaceutical companies: Trials in Patience

One of the many challenges pharmaceutical companies face is the constant cycle of trials to develop products. As the US is the biggest healthcare market globally, its regulatory agency, the US Food and Drug Administration (FDA) ensures every product which is marketed must go through the same process.

While some believe President Donald Trump hiring Scott Gottlieb as FDA commissioner made for a quicker drug approval process, others have said  the FDA programs were already shortening the process by a year.

Despite some clamoring for this faster process, the easier barrier for entry for pharmaceuticals could lead to unforeseen reactions or faulty products slipping by the tests from the FDA.

Pharmaceutical companies also play a vital role with insuring clinical trials are managed efficiently. It’s up to the company to make sure processes such as enrolling patients, gathering and submitting trial results are done correctly.

Each clinical trial has a different length, study participation and purpose, but this begins even before a drug is in a clinical trial. After discovery and initial development, a drug or molecule is moved into preclinical research before it can be tested on humans.

Once in trial, there are three phases which all measure different properties of a drug in human. Altogether, trials can last even decades depending on enrolment, funding and other factors.

However, the FDA more than doubled the amount of novel drug approvals from 2016 to 2017, from 22 to 46, respectively. As of September 26, 2018 the amount is more than the same time in 2017, meaning this year could have even more novel drug approvals than ever before.

Some of these approvals in 2018 include: GW Pharmaceutical’s (NASDAQ:GWPH) Epidiolex, Teva Pharmaceutical’s (NYSE:TEVA) Ajovy, Verastem Oncology’s (NASDAQ:VSTM) Copiktra and Alynlam Pharmaceuticals’ (NASDAQ:ALNY) Onpattro.

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Investing in pharmaceutical companies: Risk from trials

The work for all the approved drugs took years of research and several trial stages, each with a high level of risk for the respective companies. All of this is to say investors should be ready to play the long game when it comes to investing in pharmaceutical companies. Dips in share prices are common if a company misses a target deadline or a drug doesn’t perform exactly as it was promised during a trial.

A clear example of this pressure was when Achaogen’s (NASDAQ:AKAO) share price dropped after an FDA approval in June 2018. It caused over a 23 percent share price decrease in the company’s stock price.

Wedbush Securities analyst Robert Driscoll told the Investing News Network (INN) the drug may have been “oversold” with an additional indication which was not approved.

Positive news investors gave attention to was Ophthotech’s partnership announcement, also in June 2018. Although the company is just at the beginning of clinical trials with its new technology, its share price increased over 60 percent during the day. This is indicative investors have interest in every stage of clinical trials, even from the beginning.

Investing in pharmaceutical companies: FDA on track for competition

Gottlieb has put the agency on a crusade to lower drug prices by inciting competition between pharmaceutical companies. Generic drugs are the main method employed by Gottlieb to fulfill Trump’s presidential campaign.

The agency plans to lower the mandated waiting time from five-to-seven years down to eight and 10 months after a company claims the license for a new drugs. This reduction would see more small-cap pharmaceutical companies adopting products with little-to-no competition.

Even with Martin Shkreli’s sentencing in March 2018 from his part in increasing drug prices and deceiving investors for pharmaceutical drug prices, companies still haven’t lowered drug prices. This brings into question how serious Trump’s claim may be.

Raising the stakes in China, the country has increased the drug patent life from 20 to 25 years, making it the longest time frame of a drug patent in major markets. In addition to increasing competition with this move, companies will benefit from five additional years of sales before generics can be produced.

Investing in pharmaceutical companies: What is ahead for pharma?

Moving forward, the pharmaceutical sector is bound to evolve. Despite reliance on trusted methods and practices, progression is natural especially in a market that must look forward as much as this one. Companies big and small are finding new and innovative ways to stay relevant, often by changing focus.

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As part of its Pharma 2020 report, PWC indicated seven trends that are currently “reshaping” this medical space:

  • Chronic Disease is increasing which pressures the “already stretched” healthcare budgets.
  • Governing Policy is interfering with the doctor’s recommendations and prescriptions.
  • The expansion of easily accessible electronic medical records allows patients to demand faster cost-effective solutions as they can compare and review different treatments.
  • Moving forward with clinical solutions renders “previously fatal” diseases obsolete as well as their drugs. Also, the self-medicating market keeps expanding.
  • Medicine demand is outgrowing in the emerging economies compared to the industrialized ones.
  • Despite the lack of investment in pre-emptive measures, governments are focusing more on prevention rather than continuous treatment.
  • “Regulators are becoming more cautious about approving truly innovative medicines.”

Despite being high-risk stocks from the get-go, investors can look to pharmaceutical companies for some long-term returns. This also gives investors the potential to support a company developing a novel drug for a serious disease or breaking ground on a brand new treatment angle. Pharmaceutical ETFs also exist as a way for investors to be introduced to the market, or watch trends.

What pharmaceutical companies are you noticing the best returns with? Let us know in the comments below.

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

This is an update to an article originally published on the Investing News Network in 2016.

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

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