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Pharmaceutical investing is both challenging and potentially very rewarding, but it requires understanding trends in the industry, including which drugs are going off-patent, insurer inclinations, and even the effect of media coverage like that of sometimes-controversial companies Valeant and Turing.
Overall, however, investing in pharmaceuticals appears promising, with Deloitte predicting an average increase of 4.3 percent in pharma spending through 2019, which will bring global pharmaceutical sales to $1.4 trillion (US). One key to a sound pharmaceutical investment strategy is understanding drug patents and generic drugs.
Up to 70 percent of total drug revenue for large pharmaceutical companies like GlaxoSmithKline is from patent and protected products. Once drug patent protection ends, these companies stand to lose major revenue streams for those drugs as generic competitors enter the market. To protect against these losses, companies have to have strong new molecule development programs, with an eye toward launching new products before aging products go off-patent. Some of this is done in-house, and some of it is done by acquiring smaller companies that are working on their own new products. Therefore, mergers and acquisitions in pharmaceuticals are frequent.
At the same time as drug giants are developing new products to put under patent, generics themselves can represent a potentially smart investment. Small molecule products worth around $121 million. Major generic drug manufacturers include Teva, Sandoz, Actavis Inc., Mylan, and Sun Pharmaceuticals.
The potential effects of multilateral trade deals like the Trans-Pacific Partnership (TPP) are being raised by physician advocates, who are concerned about availability of advanced medicines in developing countries. Organizations like Doctors Without Borders contend that the TPP's terms concerning cross-border intellectual property protection will result in higher drug prices in poor countries.
The Indian Pharmaceutical Alliance has expressed concern that the TPP will lead to "evergreening" of patents, extending average drug patent protection for at least five years. This could encourage innovators to pursue easier drug development efforts and simultaneously slow time-to-market of more affordable generics.
Mergers, acquisitions, political backlash over high prices, a presidential election, and potential effects of the TPP are some of the main factors expected to affect pharmaceutical investing in the coming year. Yet pharma stocks remain attractive, particularly to foreign investors. One particularly intriguing example is Vietnam's pharmaceutical industry, now that Vietnam's stock market has opened up to more foreign investment.
Pharmaceuticals' traditional business model of researching and developing new drugs has shifted in the wake of the many recent acquisitions of rival companies (or their drugs). That may seem counterintuitive in an industry where driving further innovation and establishing a value proposition are necessary, but pharmaceuticals are finding their footing in a rapidly evolving industry. Furthermore, the decision-making process by consumers has changed significantly in recent years concerning pharmaceuticals.
Developing a successful growth strategy will require that pharmaceutical companies understand the effect of expiration of drug patents and generic competition. Companies may elect to bolster short-term growth through acquisitions, and likely will monitor pushback from insurers, doctors, and consumers due to acquisition-induced price increases.
Tactics can keep things ticking along for the time being, but pharmaceutical companies that succeed long term are the ones with solid strategies for demonstrating value based on clinical performance or economics. Ultimately, success will depend upon creating innovative solutions, raising quality, and reducing costs. It could take a while for a "new normal" to settle out, and better intelligence on the industry will be absolutely essential to making the right pharmaceutical investments.