Investing in Pharmaceutical Companies: What You Need to Know

Investing in pharmaceutical companies can make for an interesting proposition for the business of saving lives.

pills pharmaceutical investing

Pharmaceutical companies work towards achieving the goal of bringing new cures or treatments to the market and improve the treatment available for patients. 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 we already have in the form of drugs designed to help the human body.

A market report from the US International Trade Administration found over $50 billion are invested in research and development yearly. The US is the largest pharmaceutical market, with the report detailing in 2015 drug sales 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 stock for companies that may be on the verge of finding new cures or advancing the treatment for a serious virus like Zika. 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.

As with many other areas of investing there are huge companies with a tremendous grasp on pharmaceutical, these stocks aren’t competing for innovation on treatment but rather rely on their success and seek acquisitions or partnerships to evolve. AbbVie (NYSE:ABBV), Bristol-Myers Squibb (NYSE:BMY), and Pfizer (NYSE:PFE) can always be counted on for big market stocks available for investors.

Another interesting proposition in the area is the smaller companies that are running against one another to create new drugs or find an improved way to handle a disease. Investopedia recommended Achaogen (NASDAQ:AKAO), Keryx Biopharmaceuticals (NASDAQ:KERX) and Enanta Pharmaceuticals (NASDAQ:ENTA) as niche stocks with a promising start in 2017.

Trials in Patience

One of the many challenges pharma companies face is the constant cycle of trials for their products. The US Food and Drug Administration is a leader in the regulatory world as it seeks to guarantee every product that enters the market works and does it well. The regulatory process is a necessary step in authenticating the claims made by a company putting forward their drug.

At the beginning of February 2017, the FDA received criticism for holding back “miracle drugs” or treatments due to their regulation process. That said, the organization was already running at the fastest speed it can, while US president Donald Trump called for an acceleration into the FDA. The president has put forward Scott Gottlieb to head the agency and, taking his previous claims as proof, Gottlieb seems to agree with Trump as he assumes his role.

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

In 2016, the FDA fully approved a variety of new drugs ranging from treating spinal muscular atrophy developed by Ionis Pharmaceuticals (NASDAQ:IONS), a treatment for all six major hepatitis C virus from Gilead Sciences (NASDAQ:GILD) and a treatment for hallucinations and delusions from psychosis experienced by some Parkinson’s disease patients from Acadia Pharmaceuticals (NASDAQ:ACAD).

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 company. All of this is to say investors should be ready to play the long game when it comes to pharmaceutical investing. Dips in share price are common if a company misses a target deadline or a drug doesn’t perform exactly as it was promised during a trial.

Teva (NYSE:TEVA) missed a targeted goal for a phase 3 trial in early May 2017, which caused speculation following previous misses in deadlines. Shares of Active Biotech (STO:ACTI), TEVA’s partner in this trial particular trial, dipped 66 percent following the news.

However, success can also come from trial results. Case in point, at the beginning of August the Investing News Network reported on Dynavax Technologies’ (NASDAQ:DVAX), whose stock jumped over 70 percent based on the positive review from the FDA Advisory Board.

FDA on the track for competition

FDA commissioner Scott 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 a presidential campaign by Donald Trump.

The agency plans to lower the mandated waiting time after a company claims the license for a new drug from five to seven years down to between eight and 10 months. A significant reduction which would see more small cap pharmaceutical companies adopting products with little to no competition. The agency expects this increase in competition to bring down the prices of drugs and stop situations like the EpiPen price hike from Pfizer (NYSE:PFE).

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. As part of their 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 the pharmaceutical sector for some long-term returns and the potential to support a company developing a novel drug for a serious disease or breaking ground on a brand new treatment angle.

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, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

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