Pharmaceutical stocks you should invest in

Issuing new shares would cause dilution in the value of existing shares. Going into , the company expects an FDA decision on tafamidis, a treatment for progressive heart damage. It’s possible that pharma companies will also have to negotiate directly with CMS for Medicare in the future. Healthcare Sector Definition The healthcare sector consists of companies that provide medical services, manufacture medical equipment or drugs, provide medical insurance, or otherwise facilitate the provision of healthcare to patients. These can be diseases, cancers, or viruses that attack the nervous system, skin, heart, and so on.

What is the pharmaceutical industry?

The pharmaceutical industry is one of the few Wall Street sectors that caters to nearly any investing style or strategy. But determining what makes one stock or fund a good investment over another can be tricky. How should an investor evaluate the inherent risks — and avoid the potential pitfalls — in an industry that can be anything but predictable? Though investing in this space can be intimidating, the key is understanding the basics. We’ll dive into these essential concepts everyone should know before investing in pharmaceutical stocks:.

What is the pharmaceutical industry?

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.

Some are really big, while others are relatively small. But all these pharmaceutical stocks look like promising picks for 2019.

The pharmaceutical industry is one of the few Wall Street sectors that caters to nearly any investing style or strategy. But determining what makes one stock or fund a good investment over another can be tricky. How should an investor evaluate the inherent risks — and avoid the potential pitfalls — in an industry that can be anything but predictable? Though investing in this space can be intimidating, the key is understanding the basics.

We’ll dive into these essential concepts everyone should know before investing in pharmaceutical stocks:. The pharmaceutical industry comprises companies that develop, produce, and market medications designed to treat, prevent, or cure a medical condition.

The industry can be divided up into two main classes of therapeutics: pharmaceuticals and biologics. Pharmaceutical drugs are made up of plant-based and synthetic chemicals fused together in tablet or pill form. Shoould example, Pfizer ‘s NYSE:PFE Lipitor, an oral pill for the treatment of high cholesterol, is a pharmaceutical drug made from a byproduct stocos fungus along with a host of synthetic ingredients. Given their small size, manufacturing hundreds of thousands of pharmaceutical tablets and pills is relatively straightforward on an industrial-level scale.

As a drug reaches the end of its patent life or market exclusivity more on this latergeneric drugswhich are chemical copies of an approved drug, can easily steal market share. As branded drugs reach this patent cliffthe drop in sales can be dramatic as doctors and patients opt for cheaper alternatives.

Biologicson the other hand, are large, protein-based molecules made from living cells. With a more complex structure comes a more extensive manufacturing and approval process. Products like vaccines, medications for blood disorders such as hemophilia, and gene therapies are considered biologics.

Unsurprisingly, biologic treatments like AbbVie ‘s NYSE:ABBV Humira, for the treatment of rheumatoid arthritis and psoriasis, tend pharmaeutical be more much expensive than chemically derived drugs; it’s not unheard-of for biologics to command six-figure price tags.

Additionally, these drugs generally require restricted distribution by specialty pharmacies. The higher costs and complexity associated with biologic manufacturing keep the barriers to entry high, and biosimilar competition relatively at bay. Biosimilars are products considered close but not identical copies of branded biologics. Additionally, to have its drug considered a biosimilar, a competitor shoul demonstrate there’s no clinically meaningful difference between the two products.

The path to approval for biosimilars is fairly new. The process was laid out in the Affordable Care Act, passed inand it took another five years for the U. Since then, only nine biosimilar drugs have successfully gained marketing approval. Even though these drugs are similar to their biologic counterparts, they are not true copies.

Therefore, biosimilars can’t be considered interchangeable equivalents in the same way that generics are, which limits switching. This means the patent-cliff risk for branded biologics is lessened, albeit not completely.

Add it all up, and biosimilar producers have not had an easy path. More reading on biologics: How to Invest in Biotech Stocks. Every minute, seven American baby boomers will turn That means over 10, men and women every day, and over 3. And this pharmzceutical isn’t expected to slow down until at least As this cohort of baby boomers hits retirement, the impact of the aging baby boomer population will likely drive national healthcare expenditures — and company revenues — higher.

Healthcare spending is even expected to outpace gross domestic product GDP by one percentage point, boosting the healthcare share of GDP from This figure is expected to grow at an annual average rate of 6. But it’s not just the growth opportunities that attract investors.

The safety in economic downturns draws investors as. During the recession, spending decreased in every consumer spending category except for healthcare. With such expenses often being the last budget category to get nixed in tough times, this makes the healthcare sector itself largely recession-proof, particularly for established companies like Amgen NASDAQ:AMGN. The company boasted an impressive Combining this with a well-timed share buyback program and positive clinical trial results for a pipeline drug, the stock was one of the best-performing large-cap biopharmas.

So whether you’re looking for long-term growth or phsrmaceutical a recession-proof strategy ih your invsst, investing in the pharmaceutical youu could be one of the best places to park your cash in both good times and bad.

Here are several other industry tailwinds poised to drive growth in the long term:. Before diving into how to evaluate pharmaceutical stocks, it’s important to note that all the same basic investing rules apply. Learning how to assess a company’s financial positionvaluationand pharmaecutical growth opportunities is essential for every investor.

To start, here are the most common metrics to use when evaluating profitable pharmaceutical companies:. The lower the ratio, the cheaper the stock. As one of the most widely used relative valuation metrics, it serves as an easy reference point to compare stocks within an industry.

Price-to-earnings-growth ratio PEG : Pharmaceutical investors often buy stocks based on the growth opportunities ahead. A PEG ratio below 1 means a stock is trading below its stocms growth rate, and is generally considered undervalued. A PEG ratio above 2, however, would signal that the price of the stock has exceeded the future growth rate; it may indicate an investor should wait on the sidelines. Profit margin : A stovks of profitability, a profit margin measures how much net income a company produces for every dollar spent generating that revenue; to calculate it, divide net income by revenue.

Generally, the higher the margin, the more profitable the yiu. On the long road of drug development, it may take decades for a company to become profitable. Here are a few important metrics to use when assessing a company before it reaches profitability:. For very-early-stage companies, you can even use future expected sales in the calculation:.

Generally, early-stage biopharmaceutical companies are valued at between 3 and 5 times the expected peak annual sales of each company’s lead drug candidate.

If you find a company trading for less than 3 times future sales, and the prospects for gaining approval and market share look favorable, you may have hit the jackpot. Cash burn and cash phafmaceutical : Bringing a drug successfully sjould market is no easy — or cheap — feat. And for a company with no approved products on the market, the stakes are even higher, with little to no recurring revenue stream to keep the lights on. That’s why a company’s cash balance is one of the most important balance-sheet items a pharmaceutical investor should know.

Cash burn is simply how much cash a company is using every quarter. Cash runway is a measure of how long the company will be able to keep that spending up before pharmaceutifal runs out of money; it can be calculated by taking a company’s total cash balance and dividing it by quarterly cash burn.

The longer the cash runway, the better for pharmaceutical investors. It’s important to view multiple data points in context when considering whether a stock is priced favorably. For example, a company with a significantly higher debt load may have trouble making interest payments and, therefore, may be a riskier bet than a company with no debt on its balance sheet.

All other things being equal, you’d expect a company with no debt to trade at a premium to the company with higher leverage. While quantitative financial data points are helpful, often qualitative factors, like the quality of management, can be just as important in assessing whether or not to buy a stock in the pharmaceutical industry.

Management: A good place to start when evaluating a company’s management is to consider the experience of the executive team and the board of directors. Do they have experience developing pharmaceutical products? Have they successfully pharmaceutical stocks you should invest in regulatory authorities to bring a biologic to market? In such a heavily regulated industry, where mistakes are constantly made, there’s really no substitute for experience.

It’s also important to consider how transparent the management team is. Do they explain changes in clinical trial protocols? When clinical trial updates are released, do executives fully disclose and explain the results — both good and bad — or do they just tend to focus on the positive? Pipeline quality: Growth in a pharmaceutical company comes by the way of its pipeline, or the set of drug candidates currently in discovery or development phases.

While having a large quantity of drugs in the pipeline is ideal, it’s more important to assess the quality of those drugs, and what stage of development they’re in. Late-stage drug candidates those in phase 3, or under regulatory review for approval are significantly more de-risked than those in early-stage phase 1 trials.

Patents: Issued by the U. Patent and Trademark Office, these protect a drug company’s intellectual property IP for 20 years after an application is filed. Generally, the higher the number of patents a company has been issued, and the longer amount of time they cover, the better. Another way a company can protect its IP is to obtain marketing exclusivitywhich delays competitors from obtaining marketing approval for a set amount of time.

Marketing exclusivity, granted by the FDA once a drug gets approved, is intended to encourage biopharmaceutical shouldd to pursue patient populations with high unmet needs, and to reward innovation. It’s important to note, however, that market exclusivity and patent protection can run concurrently or independent of one another, and a company can even have patent protection without exclusivity.

Granted to drugs designated to treat conditions affecting fewer thanpatients in the U. Investing in pharmaceutical stocks is not for the faint of heart. And understanding the drug development process is the first step every healthcare investor should. Preclinical testing: Before a drug can even begin human testing, a company also known as a sponsor must demonstrate in preclinical testing that its drug is reasonably safe in animals.

Assuming the drug passes this first hurdle, the company can then submit an investigational new drug application IND to the FDA. This filing signifies that a sponsoring company is ready to take the drug candidate into the clinic with human testing. Phase 1: Within thirty days after an IND is successfully filed with the FDA, if the agency gives no feedback invrst restrictions, a company can begin phase 1 clinical trials.

In phase 1 trials, anywhere from 20 to 80 healthy volunteers are given the drug candidate to test for any initial signs of toxicity. The proper dosing and timing are also evaluated in this phase. Phase 2: This phase involves sampling a small subset of actual patients, generally a few hundred, in the intended target demographic, to determine the optimal dosing and identify any early signs of efficacy how well a drug works. Phase 3: Also known as late-stage efficacy trials, phase 3 trials aim to see how well a drug candidate would perform in a wider stocjs of patients — generally in the thousands — and over the course of several years.

Phase 4: Sometimes a drug can be conditionally approved as long as the sponsor conducts post-marketing trials, known as phase 4 clinical trials. The goal of these trials is to study the pharmaceutical stocks you should invest in long-term risk-benefit profile in a real-world setting, and ensure it performs as intended. It’s important for investors to realize that only one in 10 drug candidates ever makes it to market. Even the most promising early-stage drug can turn out to be a flop.

But getting a product to market is only the beginning.

We found the top performing pharma stocks to watch this year

Competition isn’t a significant worry for Vertex right. These experimental drugs represent a company’s opportunities for future growth. Biologics are given 12 years of exclusivity in the U. Compare Investment Accounts. Partnerships and acquisitions of start-ups account for between a quarter and a third of most large firms’ pipelines. But with overall prescription drug spending increasing, government and private payers are sould to find ways to control costs. There are many reasons why an investor may not feel comfortable investing in pharmaceutical companies. Partner Links. Each of these pharmaceutical companies should be able to leverage their past and current success into developing new drugs that will be the blockbusters of the future. By mid, Pfizer should begin moving past the negative impact on pharmaceuticl sales comparisons caused by the loss of exclusivity for several of its drugs, especially Lyrica. FDA for different indications, and established branded drugs will continue to face competition from biosimilars and generics. This tends to make these big pharma companies pharmaceutical stocks you should invest in risky overall than smaller drugmakers. Drugmakers also face the prospects of lawsuits from patients over safety allegations and from other companies over potential patent infringements. Researching and developing new drugs requires a lot of money. Related Articles. Vertex is conducting a phase 2 study of experimental pain drug VX Their risks include several developments that could exert downward pressure on drug prices, including any significant federal changes.