Best Pharmaceutical Stocks To Own: Investing in pharmaceutical companies is not easy. Less than 14% of drugs in development ever receive approval by the FDA and the rate of approval for cancer drugs is barely over 3%.
Whether you think those are good betting odds depends on your tolerance to investing risk. Some people simply do not have the stomach, net worth, or investment strategy to make a bet on pharma worth it.
Those who ante up tend to can that the share price of one of these companies pops every time a drug moves between phases or receives approval – and that process can take years.
Investing in Pharmaceutical Companies
Pharmaceutical companies are very diverse. Some organizations develop prescription medications while others manufacture the drugs and still others test them. Know what you are investing in before you buy a single share.
Sometimes these firms are one in the same but not often. The expertise required to properly develop and test drugs, meeting FDA standards, and keeping costs low is highly specialized. It is simply easier to outsource than manage those activities in-house.
Teva Pharmaceuticals Lasers In On Generic Drugs
Teva Pharmaceuticals (TEVA) has been on many investor radars after a strong 3Q19 report. The company is major player in the prescription medicines market. One of the things that makes Teva unique is that its portfolio emphasizes generic drugs and over-the-counter (OTC) products.
It sells more than 500 products that meet this description in over 2,000 dosages and is the leading generic drug maker in the US. Teva also makes a business selling active pharmaceutical ingredients (or APIs) to third parties.
Cost control has been a problem for Teva.
After all, one of the defining characteristics of generic drugs is the price and the company has been under pressure to squeeze its margins.
Some of this stems from the way its customers are consolidating – larger purchases can extract greater deals – but there has also been some issues with the way the FDA has changed its generic drugs approval process.
In December 2017, Teva announced that it would implement a cost cutting plan, but those measures can only go so far.
In October 2019, Teva announced that it would pay $23 billion in a settlement that alleged the company was complicit in the opioid crisis. The company will need to effectively oversee its operating costs to manage these pressures and still be profitable.
Taro Pharmaceutical Boasts High Margins
The company is comprised of three divisions:
- Taro Pharmaceuticals (effectively “Taro Canada”),
- Taro Israel, and
- Taro USA
Both Taro Israel and Taro Canada do research and development as well as manufacturing for sale in Israel and Canada (respectively) and export.
Those entities also handle the marketing for those items. Taro Israel has over 100 medications available while Taro Canada sells more than 200 drugs.
Taro USA markets and distributes Taro products in the United States. It handles all the clinical and regulatory activities as well as post marketing.
Taro has over 20 products under review with the FDA as well as many other products under development in its drug pipeline.
Taro deals in generic drugs as well as proprietary medicines. The generic markets can be very competitive.
Often pricing pressures force manufacturers to operate with slim margins. However, Taro boasts some of the highest margins in pharma.
Add to this a range of proprietary medicines that risk success or failure in the approval process and you have a product portfolio that is inherently hedged.
BioHaven Targets Neurological Conditions
Most of these target neurological or neuropsychiatric conditions, some of which are fairly rare. Per its website, Biohaven is “focused on advancing therapies for which there are currently no adequate treatment options.”
The company, which had its IPO in 2017, relies on its own research as well as intellectual property it licenses from other companies. This includes Yale University, Bristol-Myers Squibb, and AstraZeneca amongst others.
The drugs that Biohaven develops center on glutamate modulation, the inhibition of myeloperoxidase (MPO), and the antagonism of calcitonin gene-related peptide (CGRP) receptors.
Biohaven developed several migraine medications on the CGRP Platform, several of which have already completed their phase 3 FDA clinical trials and filed for approval.
Drugs on the Glutamate Platform are being develop that treat everything from ALS to Alzeheimer’s, Obsessive-Compulsive Disorder (OCD) to anxiety while the Biohaven used the Myeloperoxidase Platform to develop a multiple system atrophy (MSA) medication.
Several hedge funds have been bullish on the company, but much of its future success will depend on the success of the drugs it is developing.
AbbVie Is Tied To Humira
The move seems to be designed to help the pharma company diversify its revenue streams, and acquiring a significant revenue stream can sometimes be easier (and faster) than developing one from scratch.
Previously, AbbVie derived more than 60% of its revenue from the sale of Humira but the drug, which is a popular treatment for arthritis and Crohn’s disease, is facing pressure from drugs that are biologically similar.
The company is also under fire for alleged abuse of the patent system, which defendants claim delayed competitive drugs from becoming available. Some of AbbVie’s medications could lose their patents sooner than anticipated as a direct result of these issues and related problems.
Best Pharmaceutical Stocks To Own Summary
Pharmaceutical stocks are high-risk, but that doesn’t mean they don’t have a place in the portfolios of long-term investors.
They can be a solid money maker when you do your research and stay on top of company events and the approval process.
Pay attention to what is in the company’s pipeline and the previous successes it has had.
Many drug developers leveraged drug discoveries to find new pharmaceuticals that can use the same functions in the body.
Having a strong track record of successful trials helps, but it isn’t everything. Also, understand that there is risk. As high as a share price can climb after a drug is approved, it can plummet by just as much or more when a clinical trial fails.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.