How to Invest in Pharmaceutical Companies

Key Points

• Investing in the pharmaceutical industry can come with major risks alongside the potential for large profits. 
• Consider beginning investing in major pharma and biotech companies before moving onto smaller, more volatile stocks. 
• Research individual companies and consider factors such as the company's financial health, product pipeline and regulatory environment before investing.

Pharmaceutical research and development firms represent some of the most important companies in the United States. Investing in pharmaceutical companies can provide investors with a wide range of value growth opportunities, especially if the company issuing the underlying investment is on track to showcase a new development or successful trial results. 

But how do I invest in pharmaceuticals, and which companies are worth the investment? 

Retail investors can invest in pharmaceutical companies by purchasing shares of pharmaceutical stock traded on major exchanges. While investing in medical stocks is the same as any other major assets, research is fundamental. Read on to learn more about how to invest in pharmaceutical companies and how to research investment options. 

Overview of the Pharmaceutical Industry

Pharmaceutical companies research, develop and manufacture drugs and other pharmaceutical products to treat diseases and other medical conditions. These companies invest heavily in scientific research and development to create new drugs and improve existing drugs and technologies.

How do pharmaceutical companies make money? These companies earn money by developing and selling novel and safe drugs produced in the company's proprietary in-house lab processes. Pharmaceutical companies employ scientists, researchers and other professionals who work to discover new compounds, study their safety and efficacy and develop them into commercial products. They then conduct pre-clinical and clinical trials to test the safety and effectiveness of drugs. They submit their findings to regulatory agencies, such as the Food and Drug Administration (FDA), for approval.

Once approved, pharmaceutical companies manufacture and distribute drugs to healthcare providers and patients, often through partnerships with pharmacies and other healthcare organizations. These companies also use marketing and advertising to promote their products to healthcare providers and consumers.

What to Know about Pharmaceutical Companies

There are a few major sectors of the pharmaceutical industry that you'll want to be aware of when you select assets to invest in. Choosing investments from multiple types of companies can provide investors with exposure to both major names in pharmaceuticals and value pharmacy stocks for big gains. 

• Large pharmaceutical companies: These are the largest and most established pharmaceutical companies, with significant resources and global reach. They invest heavily in research and development. They typically have a broad range of products that include novel compounds developed by company teams, which may or may not be patented. Companies in this sector include Johnson & Johnson NYSE: JNJ and Pfizer Inc. NYSE: PFE.
• Generic drug companies: Generic drug companies specialize in producing and marketing generic versions of branded drugs that have lost patent protection. They often have lower costs than branded drug manufacturers and may be able to offer their products at a lower price. Examples of companies in this sector include Teva Pharmaceutical Industries NYSE: TEVA and Dr. Reddy's Laboratories NYSE: RDY. 
• Biotech companies: Biotech-focused companies focus on developing new drugs and therapies based on biological processes and technologies, such as gene therapy, monoclonal antibodies and cell therapy. Browse a list of some of the best biotech stocks to buy. 
• Medical device companies: Medical device companies develop and manufacture medical devices, such as surgical instruments, implantable devices and diagnostic equipment. Examples of companies in this sector include Medtronic PLC NYSE: MDT and Abbott Laboratories NYSE: ABT.

Browse a complete list of healthcare stocks on MarketBeat. 

How to Evaluate Pharmaceutical Companies for Investment 

Evaluating pharmaceutical companies for investment requires commitment and research. The following are a few key metrics to consider when investing in pharmaceuticals.

Step 1: Choose a list of companies to investigate.

The first step to researching pharmaceutical companies is to narrow down your list of contenders from the thousands of pharma companies trading on the market. If you're new to investing, start by examining the largest players in the pharma sphere. MarketBeat's healthcare stocks list is a great resource; you can search by total market capitalization. 

Step 2: Take a look at the financials.

After narrowing down your list, explore each company's financial information. Publicly traded companies make their debt, cash reserves, profitability and P/E ratios accessible to retail investors. You can access this information through each company's website or a stock information database like the one available from MarketBeat. Look for companies with a history of positive revenue growth and stable debt management. 

Step 3: Examine product pipelines.

After identifying stable companies with their financials in order, explore the products that the company is currently developing. Most pharmaceutical companies will issue a press release each time a drug or device in development reaches a new testing phase. Look at each company's current website to view drugs being developed and learn more about which stage of testing each product is in. Consider investing in companies with products in late release stages or which showcase new and patented compounds. 

Step 4: Take a look at the overall market.

Finally, examine broader market trends that could impact the pharmaceutical industry. This includes analyzing demographic trends, healthcare policy changes and consumer behavior shifts. Think about how the companies' products you just researched will fit into this shifting landscape. 

How to Invest in Pharmaceutical Companies

Investing in pharmaceutical companies follows the same basic principles as investing in any other type of publicly-traded companies. Use the following steps to add pharmaceutical companies and the top biotech stocks to your portfolio. 

Step 1: Open a brokerage account.

Once you've identified a pharmaceutical company to invest in, you must choose a broker. A brokerage account is a type of investing account you can use to buy and sell shares of stock as a retail investor. Several online brokers offer quick account signups for retail investors, with popular options including Charles Schwab, Robinhood and Webull. 

After choosing a broker, open a brokerage account and fund it with money to invest. You can transfer funds from your bank account using a direct wire transfer or use a credit or debit card to make a deposit. 

Step 2: Place an order.

Search for the company's ticker using your brokerage account to access the order page. Place a buy order for the number of shares you want to add to your portfolio. If you have a set purchase share price, use a limit order to lock in the rate and the number of shares. If not, you can use a market order to buy a predetermined number of shares at the current market price. 

Some brokers also allow you to buy in dollars rather than shares using a market order. If the number of shares you purchase doesn't reach an even number, your broker will use fractional shares to complete the order. This can be useful for casual investors looking for a faster way to invest long-term. 

Step 3: Monitor your investments.

After buying shares, it's essential to monitor your investments regularly. Keep track of the stock's performance and any news or developments that could affect its value. Check your investments multiple times daily if you're using a short-term trading strategy like shorting or scalping. 

Step 4: Consider expanding and diversifying.

Investing in pharmaceutical companies carries risks, so it's important to consider diversifying your portfolio. This means investing in various companies and industries to spread out your risk.

Pros and Cons of Investing in Pharmaceuticals

Be sure to consider both the pros and cons of pharmaceutical companies before investing, as these companies may carry higher levels of risk. 

Pros

Check out some of the benefits of investing in pharmaceuticals:

• Potential for high returns: Successful pharmaceutical companies can offer high returns on investment, especially if they develop a blockbuster drug. If you can buy into a pharmaceutical developer at a low cost and the company releases a successful product, you could see higher profits when compared to low-volatility options like consumer staples. 
• Stable demand for products: The demand for healthcare products and services remains relatively stable, providing a more stable investment than other industries. While individual stocks can be risky investments, you can mitigate your risk by investing in a pharmaceutical ETF. 

Cons

Now, the downsides: 

• Higher risk of financial mismanagement: Developing a new drug can be a costly and time-consuming process. Companies may spend millions or even billions of dollars on research and development without guaranteeing success. This can lead to massive losses in share prices and, in some extreme cases, delisting. 
• Dependence on regulatory approval: Pharmaceutical companies are subject to regulatory approval, which can be lengthy and uncertain. A delay or rejection in getting a new drug to market can significantly impact the company's financial performance.
• Patent expirations: Patents on successful drugs eventually expire, which can lead to increased competition from generic drug makers and declining revenues.

Future of the Pharmaceutical Industry

The pharmaceutical industry is expected to continue to grow and evolve in the coming years, especially as millennials and Gen Xers reach middle age. Genomics and other technologies are making it possible to develop drugs tailored to an individual's unique genetic makeup, which may lead to an increased focus on personalized medicine.

In recent years, the pharmaceutical industry has been subject to increased levels of scrutiny by both regulators and consumers alike. This may lead to delays and increased costs for drug development, adding another layer of risk to investors in the pharmaceutical industry, and is expected to continue in coming years. 

Consider the Risks of the Pharmaceutical Industry

Overall, investing in pharmaceutical companies can offer high potential rewards but also carries high risks. Before investing in pharmaceutical companies, it's important to carefully research each company's financials and history of successful drug trials. As a new investor, consider sticking with the top 10 world pharma companies before branching out to smaller, more risky operations. 

FAQs

Learn a little more about big pharma companies and their competitors using the sections below. 

How do you invest in the pharmaceutical industry?

To invest in the pharmaceutical industry, you can buy stocks of individual pharmaceutical companies or invest in exchange-traded funds that track the industry's performance. It's important to research individual companies and consider factors such as the company's financial health, product pipeline and regulatory environment before investing.

Which pharmaceutical company is best to invest in?

The pharmaceutical companies that best complement your portfolio may vary depending on your investing goals. For example, if you're a long-term investor looking towards retirement, choose major names like Pfizer and Johnson & Johnson. If you're a short-term trader employing an active strategy, smaller and more volatile options may better suit your needs. 

What should you look for when investing in the pharmaceutical industry?

When investing in the pharmaceutical industry, some important factors include the company's financial health, product pipeline and regulatory environment. Look for companies with a strong balance sheet, consistent revenue growth and a diversified product pipeline that includes both new and established products.