Big pharma stocks are appealing to investors on account of their relative stability and their nearly limitless growth potential over the very long term. But the biopharmaceutical industry isn't exactly like any other, and it's often difficult to get a sense of how a company (or its stock) will fare over time.
Thankfully, there are at least three must-know tricks that can cut down on your uncertainty by quite a bit when you're evaluating which pharma stocks to buy.
1. Check out the strategic plan
One of the easiest and most useful tricks to use when investing in big pharma stocks is to look at companies' strategic plans. In those strategic plans, which are typically available via their investor websites, you'll find all manner of useful information that'll shed potential light on the future of your investment.
For instance, a look at its plan shows Vertex Pharmaceuticals (VRTX -0.06%) is attempting to diversify its business away from solely focusing on making therapies for cystic fibrosis (CF), an indication for which it has already commercialized four medicines. As part of its efforts, Vertex could commercialize three new medicines for a total of four new indications in the near term. One of those candidates is for CF, another is for acute pain, and the last treats both sickle cell disease (SCD) and beta-thalassemia.
Vertex's plan implies a few useful pieces of information. First, the company will be treading outside of its well-worn areas of competency with its research and development (R&D) operations and exploring new disease areas. That means the risk of falling short with its clinical trials will be slightly higher. More importantly, it plans to continue to develop its CF portfolio to ensure that it can continue to capture a large portion of the market, even as it focuses the bulk of its resources elsewhere. Investors should thus appreciate that the company's top line is unlikely to get eroded by expiring exclusivity protections for its CF therapies, which could be a key component of a bull thesis for buying shares.
2. Examine the pipeline for the therapies of tomorrow, not today or yesterday
The drug development pipeline is the foundation upon which nearly all success is built in the biopharma sector. But for a candidate to move through the clinical trial process from phase 1 to being approved for sale by regulators, it can take between seven and 18 years, not to mention upwards of $2 billion in investments. Furthermore, only 14% of candidates are actually proven to be safe and effective such that they can be commercialized, so most programs end in failure. With those odds and such a variable (and long) period of time from clinic to market, a lot can happen.
Nonetheless, investors will have more success when they invest in pharma businesses that are stuffing their pipelines with innovative programs rather than just going for previously explored routes. Though there's no single definition of what's innovative, innovative programs can be thought of as those that use a new mechanism of action or modality of therapy to try to treat previously unreachable patients or diseases. In other words, programs that target markets where there are already competing products can be much less lucrative than those that target new and unexploited markets. And that's especially a concern when the product being developed uses an already-established approach to treating or preventing the indication in question.
3. Make an investing plan based on major catalysts or transitional periods
Once you understand a company's strategic plan and you've developed an investing thesis that you feel good about, you can make an investing plan to take advantage of the ebbs and flows of revenue implied by major catalyst events and transitional periods. Making such a plan is a core trick because it can set you up for success with a stock for years if it's executed properly. Let's examine Pfizer (PFE 0.55%) as an example.
Pfizer expects to lose around $17 billion in revenue due to expiring exclusivity protections between 2025 and 2030. At the same time, it plans to add on around $20 billion by 2030 from the medicines that it'll launch through the first half of next year. It's also planning to onboard another $25 billion via business development deals before the end of the decade. But at the moment, its revenue is crashing, as demand for its coronavirus vaccine and antiviral pill are plummeting from their highs over the last couple of years.
With this knowledge in hand, assuming you're interested in investing in Pfizer in the first place, you can map out a few periods where it might make sense to consider being more aggressive about adding to your position. Right now, when its top line is shrinking, but its long-term growth plans have yet to yield fruit, might be one of those times. The point is that you're buying shares while the valuation is somewhat lower than the company's long-term norm. But it'd also be reasonable to think about buying more shares as its revenue gets eroded by generic drugs stealing its market share, which it knows will soon happen.
In contrast, buying shares when the price is likely to be more expensive, like after a major acquisition announcement, is something that your plan should remind you is a questionable idea. And with the help of the company's strategic plan, you'll even have a good idea of when those periods to avoid might be.
