Looking at Pharmaceutical Companies From An Investors View

pharma investing

Pharma Investing

With much of the content on our site centered around the pharmaceutical industry, we thought it’d be helpful to do a post on investing in publicly traded pharmaceutical companies.  Even if you’re not interested in investing, understanding how an investor thinks about pharmaceutical companies is relevant to anyone taking or considering prescription drugs.

Investing in pharma companies simultaneously offers enormous risk and enormous reward.  A pharma companies market value can be erased in the blink of an eye with a drug failing to go through clinical trials.

Most recently, this was the case for Biogen and its experimental Alzheimer’s drug.  Following the termination of its late-stage drug trials last month, Biogen shares closed down nearly 30% on the day and lost $18 billion in market value.

On the other hand, pharma companies, especially early-stage, high growth ones, can see their stock prices double, even triple (even quadruple), in a matter of months with successful clinical trials.  Look no further than PhaseBio Pharmaceuticals.

Biologics vs. Pharmaceuticals:

Pharmaceutical drugs can be separated into two main groups: biologics and pharmaceuticals.

  1. Biologics are defined as drugs coming from living systems or that contain organic molecules,  Biologics are typically injected.  Consider Humira, the arthritis drug made by Abbvie,  considered the most successful biologic ever.  As the drug is made from over 1,000 amino acids, replicating the drug is a tedious and drawn out process (1).  This is great for the original drug maker (Abbvie in this case).  But, developing biologics are significantly more expensive than pharmaceuticals.
  2. Pharmaceuticals come primarily from chemicals, are used on larger numbers of people + treat more common conditions than biologics.  Pharmaceuticals are typically swallowed in pill/tablet form.  Think Lipitor, Pfizer’s high cholestrol drug.  Pharmaceutical drugs are cheaper to develop and market, but face biosimilar competition more easily than biologics.

Key Terms to Understand for Pharma Investing:

Branded drugs- think big drug names like Lipitor, Humira, Vicodin, Viagara, made by enormous pharma companies like Pfizer, Johnson & Johnson, and Abbvie.   These are original drugs approved by the FDA whose drugmakers receive patent protection for a certain period of time.  Not to be confused with generic drugs.

Generics/Biosimilars– the “copycats” who 1) steal market share from branded drugs post-patent expiration and, on the bright side 2) enable competition and keep drugs reasonably priced (or so we thought).

Pipeline- a drug company’s “batters on deck”.  These are the drugs being developed/going through clinical trials, hoping for the coveted seal of FDA approval.


Clinical Trial Process:

The clinical trial process in the United States begins with preclinical testing and ends with phase 4 testing.

  • Preclinical testing (pre-human testing)
    • This is when the drug company shows the drug’s safety in animals.  The company can then submit an IND (investigational new drug application) to the FDA.  An IND submission demonstrates the company is ready to use human testing.
  • Phase 1 clinical trials:
    • A drug company begins phase 1 clinical testing if the FDA assigns no restrictions/gives any feedback within thirty days of the IND filing.  During phase I trials, 20 to 100 healthy volunteers or people with the disease/condition are given the drug.  The length of the study is typically several months.  The primary purpose of Phase I trials is assessing the safety and dosage of the drug.  About 70% of drugs move to the next phase.
  • Phase 2:
    • During phase 2, studies involving hundreds of people with the disease are conducted.  The studies can last months to nearly 2 years, and are primarily used to assess the drug’s effectiveness (does the drug actually work?) and its side effects.  Roughly 33% of drugs move to Phase 3.
  • Phase 3:
    • This phase expands on Phase 2, testing 300-3000 patients with the disease.  The purpose of Phase 3 is to determine the effectiveness of the drug among large groups of people over longer periods of time (2-4 years) and to monitor any negative reactions to the drug.  Once this phase is complete, the drug company can request marketing approval of the drug from the FDA.  25-30% of drugs move forward to the next phase.
  • Phase 4:
    • The post-marketing trials.  The trials happen after a drug is approved for sale to patients.  The goal of Phase 4 trials is to study the drug’s long-term risk profile in the real world, and to make sure it performs as intended.


Pharma Investing: Questions to Consider

There’s many things to consider when evaluating pharmaceutical companies and questions to ask yourself.  Some are specific to the company of interest.  Others are concerned with the pharma industry as a whole.  Even others are politically-related, focusing on the Federal Drug Administration (FDA) and current administration.


Company specific:

  • Product diversification:
    • Simply, is the company making money off many different drugs? Or is it overly reliant on one drugs (as is the case for Abbvie, maker of Humira)
      • always remember, less diversification = more risk
  • Pipeline:
    • What does the company have in store for the future?  A large, diversified group of promising drugs, or a small, monogamous group of drugs?  What stage of clinical trials are they in?
      • A diverse and numerous pipeline signifies potential future revenue streams for the company in different disease markets
  • Future revenue forecasts:
    • What assumptions is the company making on their drugs’ future revenue growth? What about revenue drops for drugs facing biosimilar competition soon?
      • This is as detailed as we will get:
        • One way to forecast future earnings for a drug is comparing generic to biosimilar prices (cheapest biosimilar for worst case scenario).
          • For example, if you’re looking to forecasting Humira post-patent expiration, you could look at Imraldi’s 6 pack.  It’s priced at roughly €3,300 compared to Humira’s hefty price of  €5,300 for a 6 pack (2).  
            • Then, assume Humira must slash its price by the generic-to-branded difference (38%, roughly).  Finally, you’d assume a 38% drop for the market with active biosimilar competition.  So, for Humira at the moment, this would be Europe, which represented roughly 45% of Humira revenue in 2018.
  • Patent quality:
    • Duration and number of patents?
      • Patents protect the lifeblood of pharma companies.  No patents = no protection = lower margins (biosimilar competition)
  • Quality of management?
    • This is inevitable for any company.  What prior experience do they have with pharmaceutical products and governmental legislation?
  • Stage of clinical trials?
    • Where are the company’s drugs in the clinical trial process?
      • It’s critical to remember how long drugs usually take to approve at each stage of the development process.  A company’s best wish is to be granted Breakthrough Therapy Designation (BTD) by the FDA.  BTD is designed to speed up the development and review of drugs that are intended to treat a serious condition and that show improvements in patients relative to the available therapies on the market.


Industry specific:

  • Political risk:
    • For Americans, what does Trump’s 2020 budget look like for reimbursements and prescription pricing?
      • As you may know, prescription drug pricing reduction was a major theme in his 2020 budget proposal.  Lower drug prices= lower earnings for big pharma.
    • Consider the positioning of the FDA commissioner:
      • Does his/her reputation lean pro or anti-price competition? (officially, they should all be pro-competition)
        • Scott Gottlieb, the most recent FDA commissioner (retiring this month), is on his way out.  Gottlieb had a reputation for dropping, or at least trying to drop, prescription branded drug prices.
          • The attitude of the new FDA head will impact the bottom line of all pharma companies in a big way.


Branded vs. Generics/Biosimilars:

An in-depth understanding of biosimilar competition and their impact on branded drugs is critical to pharma investing.

Generics are near-identical copies of branded drugs that come to market when companies go off-patent.  The FDA’s review process ensures “generic medications perform the same way in the human body and have the same intended use as the name brand medication…. All generic drugs approved by FDA have the same high quality, strength, purity, and stability as brand-name drugs” (3).  Thus, generic drugs pose no legitimate health risks compared to their branded equivalents.

Interestingly, branded companies can postpone the patent expiration on their drug by exploiting these exact FDA rules governing the biosimilar drug introduction process.

They do this primarily by:


Restricting Access to Branded Drugs:

1) Branded drug companies postpone the availability of their drug to generic drug companies looking to develop and market biosimilars.  They accomplish this by exploiting the FDA’s Risk Evaluation and Mitigation Strategy (REMS) guidelines.  REMS guidelines require that “generic drug makers need up to 5,000 doses of a brand drug in order to run bioequivalence and bioavailability studies to prove the generic medicine is the same as its brand drug” (4).  The branded companies essentially restrict the generic companies’ access to the required doses of their drug, delaying generics entrance on the market.  More time on patent = more $$ for the branded drug maker.


Citizen Petitions:

2) Branded drug companies also file “citizen petitions” that question the safety of efficacy of biosimilars.  While technically created for citizens, many pharma companies end up filing citizen petitions against their generic drug competitors.  The FDA takes months on end to respond, delaying biosimilars from getting to the market.  In 2016, brand-name pharma companies filed 92 percent of 505 citizen petitions, according to this 2016 study. More time to respond to citizen petitions= more time on patent = even more $$ for the branded drug maker.



Many qualities/themes dominate the pharmaceutical industry. Volatility, innovation vs. competition and experimental uncertainty all come to mind immediately.  As Americans’ lifespans increase and medicine progresses,  one can only expect the pharmaceutical industry to grow.

This article should give you a good idea of the pharma industry’s layout, and an investor’s framework for pharma investing, on a very **basic** level.  Look for more pharma investing articles in the near future.

Let us know if you have any questions in the comments below!





  1. //www.drugbank.ca/drugs/DB00051
  2. //www.apmhealtheurope.com/freestory/0/61001/sandoz-aligns-price-of-humira-biosimilar-hyrimoz-with-germany-s-cheapest–biogen-s-imraldi
  3. //www.fda.gov/drugs/resourcesforyou/consumers/buyingusingmedicinesafely/genericdrugs/ucm567297.htm
  4. //www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm609365.htm
  5. //investingnews.com/daily/life-science-investing/pharmaceutical-investing/investing-in-pharmaceutical-stocks/ (image)

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