Investing in Pharmaceutical Companies: What You Need to Know


medical pills and needles

Pharmaceutical companies work towards bringing new cures to the market and improving treatments available for patients.

When it comes to the life sciences sector, pharmaceutical companies work towards bringing new cures to the market and improving treatments 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 all the infectious disease variants that affect humanity.

As such, companies in the pharmaceutical sector expand the potential of treatment and seek new ways to work with what medicine already exists. For example, a pharmaceutical company might develop drugs for multiple indications or could look at addressing broader categories, such as pain.

The US is the world’s leader in research and development (R&D); according to Catalyst Pharma, since 1980, R&D efforts in the country have grown significantly, rising from US$2 billion to US$83 billion as of 2019. Additionally, the US is the largest pharmaceutical market.

Prescription drug sales in the nation are also robust, and are expected to add up to US$600 billion by 2023, up from an estimated US$500 billion in 2019.

Investors interested in this growing industry may want to put their money into companies that could be on the verge of finding new cures or advancing treatments for rare diseases. However, there are many challenges when investing in these companies, and investors should note that time and patience plays a large role when it comes to the pharma space.

For one thing, it’s important to know that while the biggest pharma companies in the industry are pursuing their own pipelines, they are also using partnerships, licensing deals and collaborations to expand drug candidates. AbbVie (NYSE:ABBV), Bristol-Myers Squibb (NYSE:BMY,OTC Pink:BMYMP) and Pfizer (NYSE:PFE) are a few of those players and can always be counted on as big market stocks available for investors.

It’s also key to note that the overarching pharmaceutical industry goes beyond the biggest pharmaceutical companies. Small- to medium-cap drug companies continue to make an impact in developing innovative pharmaceutical products and attract a variety of investors.

Investing in pharmaceutical companies: Drug approvals

One of the challenges drug manufacturers face is the cycle of trials to develop innovative therapies.

As mentioned, the US is the biggest healthcare market globally, and its regulatory agency, the US Food and Drug Administration (FDA), ensures that every medication that is marketed goes through the same organization: the Center for Drug Evaluation and Research (CDER). Essentially, CDER reviews each new therapy before it can be commercialized and sold on the market.

The new drug approval process requires patience from pharmaceutical manufacturers and investors alike. In order to receive any kind of approval from the agency, companies submit an application to the FDA for approval, which can take up to two and a half years.

Before this even happens, the entire process can take over 10 years and no less than US$350 million to develop a drug and bring it to the market. After a therapy is developed, it goes through over three years of laboratory testing before an application is made to the FDA. If the FDA approves, the drug will then go through three phases of clinical trials.

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

Pharmaceutical companies play a vital role in ensuring clinical trials are managed efficiently. It’s up to the drug company to make sure processes such as enrolling patients and 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 drug discovery and initial development, a medicine is moved into preclinical research before it can be tested on humans.

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.

Investing in pharmaceutical companies: Lower drug prices?

During his time in office, former FDA Commissioner Scott Gottlieb put the agency on a crusade to lower prices for prescription drugs by inciting competition between pharmaceutical companies.

In a statement issued 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. Around the same time, a US Senate Committee on Finance hearing in early 2019 blasted several pharmaceutical executives on the high cost of drugs.

In late 2020, the Trump Administration enacted a set of rules aimed at linking drug reimbursement to less expensive foreign drug prices and allowing medication imports from Canada, as well as requiring pharmaceutical companies to send discounted drugs purchased by low-income health centers to commercial contract pharmacies.

Unsurprisingly, big pharma has brought the fight against those regulations to the courts. Although lowering the price of prescription drugs for Americans is still a high priority for the Biden Administration, the new regime is expected to either withdraw the contentious rules and come up with new regulations or make regulatory tweaks to the existing rules to reduce their impact.

The stakes have been raised by emerging markets such as China which has increased drug patent life from 20 to 25 years, the longest timeframe in a major market. In addition to increasing competition, this move will let companies benefit from five additional years of sales before generic products can be produced.

Investing in pharmaceutical companies: What’s ahead?

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 in this area of the health sector are finding new and innovative ways to stay relevant, often by changing focus.

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

  • Chronic disease is increasing, which is pressuring “already stretched” healthcare budgets.
  • Government policy is interfering with physicians’ recommendations and prescriptions.
  • The expansion of easily accessible electronic medical records is allowing patients to demand faster, cost-effective solutions as they can compare and review different treatments.
  • Moving forward with clinical solutions “renders previously fatal diseases chronic.”
  • Medicine demand in emerging economies is outgrowing demand in industrialized areas.
  • Despite the lack of investment in pre-emptive measures, governments are focusing more on prevention than continuous treatment.
  • Regulators are displaying increased caution when deciding to approve “truly innovative medicines.”

Although they are high-risk stocks from the get-go, investors can look to pharmaceutical companies for some long-term returns. Pharmaceutical exchange-traded funds also exist as a way for investors to introduce themselves to the market or watch trends.

This is an updated version of an article originally published by the Investing News Network in 2016.

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

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