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Investing in pharmaceutical stocks

The market is massive but competition between brand-name and generic drugmakers is fierce.

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The pharmaceutical industry is sizable, with the US commanding the largest slice of the market. But competition within the sector is cutthroat and regulatory approval is an ongoing hurdle.

What are pharmaceutical stocks?

Pharmaceutical stocks are stocks from companies that research and produce pharmaceutical drugs and medical equipment.

The industry is dominated by big names like Pfizer, Johnson & Johnson and GlaxoSmithKline — famous for blockbuster drugs netting over USD$1 billion in annual sales, like Advair, Lipitor and Zoloft.

But there are numerous up-and-comers in the industry offering a spectrum of entry points for investors, like livestock medicine manufacturer Zoetis or Neoleukin Therapeutics, a biopharmaceutical company that targets immunological disorders.

Why invest in pharmaceutical stocks?

The global pharmaceutical industry is massive — and the US holds the largest slice of the market. In 2018, worldwide pharmaceutical revenue sat at USD$1.2 trillion, with the US commanding a 40.4% share of the market with pharmaceutical sales of USD$484.5 billion.

Between 2011 and 2019, Canada’s pharmaceutical sales went up 35.3% to CAD$29.9 billion. Most of this is in retail drug sales, but hospitals also account for a chunk of the revenue.

According to Statista, the US also happens to have some of the highest prescription drug prices in the world — bad news for the general public but profitable for well-established drug companies like Pfizer and its shareholders. Given that drug prices in Canada and many other countries are much lower than drug prices in the US, millions of American residents import drugs from outside the country each year to save money.

Pharma stocks also have the potential to outperform the broader market. For example, the SPDR S&P Pharmaceuticals ETF has outperformed the S&P 500 since its 2006 inception.

And if the potential for profit isn’t incentive enough, investors also have the opportunity to back potentially groundbreaking, life-saving medicine — medicine that they or a loved one may one day rely on.

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Risks of investing in pharmaceuticals

Pharmaceutical stocks present a potentially lucrative investment opportunity but carry significant risks, including competition from generic drugmakers, product patent expirations and the substantial cost of research and development (R&D).

It’s estimated that pharmaceutical companies spend approximately 20% of their revenue on research and development. In fact, in 2018, US companies collectively spent $80 billion on R&D, according to Statista. Between 2004 and 2019, anywhere from $790 million and $1.33 billion was spent each year on drug research in Canada.

What makes this expense especially unpalatable is the risk drug companies face in having their products rejected by regulatory authorities like the Health Products and Food Branch (HPFB) of Health Canada and the US Food and Drug Association (FDA). A company could spend millions researching and developing a product, only to have it rejected by the FDA.

Pharma companies also face steep competition from generic drugmakers attempting to undercut brand-name products with cheaper alternatives — especially for drugs with patent expirations on the horizon.

The industry is far from foolproof, and while pharma stocks could be a potentially profitable addition to your portfolio, make sure you understand the risks involved before you invest.

How has COVID-19 affected pharmaceutical stocks?

In the wake of the coronavirus pandemic, pharmaceutical companies have been thrust into the global spotlight as over 155 vaccine candidates scramble for regulatory clearance. Many of the big-name drug manufacturers with COVID-19 vaccines in trials have seen their stock prices rise alongside press releases of potential efficacy rates, including Pfizer, Moderna and AstraZeneca. These so-called COVID stocks may continue to see market growth, but the gains related to the pandemic may be short-lived.

There’s money to be made from selling a COVID-19 vaccine, but analysts warn that as more drug companies enter late-stage trials, the number of viable vaccine candidates will grow and no single manufacturer will be able to monopolize vaccine sales.

  • Medexus Pharmaceuticals Inc. (TSX: MDP)
  • Bausch Health Companies Inc. (TSX: BHC)
  • Nuvo Pharmaceuticals Inc. (TSX: MRV)
  • Knight Therapeutics Inc. (TSX: GUD)
  • Cipher Pharmaceuticals Inc. (TSX: CPH)
  • Roche Holding AG (OTC Markets: RHHBY)
  • Merck & Co., Inc. (NYSE: MRK)
  • Bayer Aktiengesellschaft (OTC Markets: BAYRY)

Pharmaceutical stocks

These pharmaceutical stocks hail from companies headquartered in the US and around the globe.

What ETFs track the pharmaceutical category?

Pharmaceutical ETFs contain baskets of stocks from a range of businesses within the industry, including pharmaceutical companies, medical device manufacturers and more.

  • Invesco Dynamic Pharmaceuticals ETF (NYSEArca: PJP)
  • iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE)
  • KraneShares MSCI All China Health Care Index ETF (NYSEArca: KURE)
  • SPDR S&P Pharmaceuticals ETF (NYSEArca: XPH)
  • VanEck Vectors Pharmaceutical ETF (NasdaqGS: PPH)

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Bottom line

Pharma stocks offer investors the opportunity to back groundbreaking drug research, but competition in this industry has the potential to threaten profits.

To invest in pharmaceutical companies, you’ll need a brokerage account. Compare your platform options to find the brokerage that fits your budget and investment goals needs.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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