A guide to investing in pharmaceutical
and biotech stocks in Australia

Looking to invest in pharmaceutical and biotech stocks? Find out their pros and cons, the metrics to look for and how you may benefit from current market trends.

The pharmaceutical and biotech industries provide investors with many growth opportunities. Some pharmaceutical stocks come with good dividends and long-term investment potential, while many biotech stocks can produce massive profits.

But as with any industry, there are risks, so it’s important to research before you invest. Here’s what you need to know about investing in pharmaceutical and biotech stocks.

What are the pharmaceutical and biotech industries?

The pharmaceutical and biotech industries are important parts of the global economy. They both consist of companies that research, develop, manufacture and sell medicines, treatments and vaccines. However, there are important differences between the two industries.

Pharmaceutical industry

• Consists of companies that make drugs using synthetic or plant-based chemicals.
• Drugs are often cheap to manufacture.
• Drugs can be produced in bulk and copied by other companies.
• Pharmaceutical stocks can quickly drop in value.

Biotech industry

• Consists of companies that use living organisms and bacteria to create healthcare-related products such as vaccines, medications and gene therapies.
• As they are difficult to create, many products are unsuccessful.
• The products created are usually more expensive than pharmaceuticals.
• The industry has stricter restrictions on distribution.

What is driving the pharmaceutical and biotech industries?

In addition to the rising demand for healthcare services around the globe, especially in countries with increasing levels of wealth such as India and China, the coronavirus pandemic has underlined the importance of further scientific discovery and innovation.

While other areas of the economy have suffered during the pandemic, pharmaceutical stocks and biotech stocks have remained relatively strong.

After all, people need medication regardless of what’s happening in the market. This is one of the main reasons why pharmaceutical and biotech stocks have the potential for strong long-term returns that outperform the broader market.

What are the benefits of investing in pharmaceutical and biotech stocks?

Pharmaceutical and biotech companies develop products that people need, which can make them a good long-term investment. The following factors contribute to interest in pharmaceutical and biotech industries:

• People are living longer, which means they will need medication for longer.
• The healthcare sector is expanding in countries with large populations, such as China and India, making it a potentially good time to invest.
• There’s a much better understanding of the human body since the completion of the ‘Human Genome Project’ in 2003, which has led to significant advances in the development of medicine.
• Many governments are spending more on healthcare research, in part due to the coronavirus pandemic.

Other reasons why it may be worth investing in the pharmaceutical and biotech industries include:

• The pharmaceutical industry tends to perform well even during times of economic decline, largely because demand remains the same.
• If you do your research on the biotech industry, there’s potential for big profits. Many biotech stocks can be bought cheap, but if the company successfully develops a new treatment option, the stock can rise significantly.
• It can be a profitable, socially responsible way of investing, particularly if you spend time looking at the specific treatments biotech companies are developing.

What risks are involved with pharmaceutical and biotech stocks?

Like all types of investing and trading, there are risks involved. With pharmaceutical and biotech stocks, this can include:

Clinical failure. There’s always the possibility that a drug or treatment won’t be effective or safe for consumption. This is one of the main reasons for biotech stocks to fall.

Regulatory problems. Even if a drug passes clinical trials, there’s still a chance it will have problems getting regulatory approval.

Selling the drug. Pharmaceutical and biotech companies need to convince insurers and healthcare providers to use the drug.

Competition. Pharmaceutical companies have to compete with other companies making generic versions of the drug after the patent exclusivity ends. With biotech companies, the patent lasts 20 years. After this time, others can produce their version of the product, which can push stock prices down.

What metrics should I look for?

When deciding on which biotech and pharmaceutical companies to invest in, you need to do your research. Firstly, there are four drug development steps you need to be aware of:

1. Drug discovery. This is when the company identifies drug candidates and specific diseases to target.

2. Pre-clinical testing. This is when the company tests drugs in test tubes and often on living animals.

3. Clinical testing. This is an important stage of the development where drugs are tested on human candidates. It can be broken into three phases.

• Phase 1. This involves a small number of people and studies how the drug impacts humans.
• Phase 2. This involves around 100 patients and studies safety, side effects and dosage amounts.
• Phase 3. This involves thousands of patients and studies the drug’s ability to treat the disease.

4. Regulatory approval

This is when the company looks to get approval from the government regulatory agency to sell the drug.

Tip: When researching, it’s important to be aware of the stage and phase that the company’s drugs are in, particularly with biotech companies as they’re more complex and prone to clinical failure. The earlier you invest, the bigger the risk.

You should also look at the growth prospects of biotech and pharmaceutical companies, outlined by their revenue and earnings growth. If their growth is slowing, it could be a sign that they are facing competition. Before investing, look into when their drug patents expire as cheaper alternatives often drive stock prices down.

Other metrics to look for include:

• Funding. It can take years for biotech and pharmaceutical businesses to create a specific drug, so it’s worth looking at the company’s cash reserve.
• Debt. Similarly, be wary of biotech companies that owe huge loans to private investors or banks.
• Research area. Companies that are targeting common diseases like cancer and heart disease are likely to be in high demand, if successful. However, ones targeting more niche diseases are likely to face less competition.

What pharmaceutical and biotech stocks can I invest in with eToro?

Through eToro, you can invest in a variety of pharmaceutical and biotech stocks. While there’re many different stocks to choose from, some popular stocks currently operating in the pharmaceutical and biotech spaces include:

Johnson & Johnson (JNJ)

Johnson & Johnson develops, manufactures and sells consumer health products, pharmaceuticals and medical devices such as Johnson’s, Listerine and Band-Aid. It was founded in 1886 and has a profitable history.

Pfizer Inc. (PFE)

Pfizer Inc. is a healthcare product specialist that operates through Pfizer Innovative Health (IH) and Pfizer Essential Health (EH) segments. In February 2021, Pfizer called for $15 billion in full-year Covid vaccine sales, and its stock went up when it announced its BioNTech-partnered Covid vaccine could help with mutated forms of the virus. It generated $7.8 billion in sales in Q2 2021.

Novartis (NVS)

Novartis is a Swiss-based researcher, developer, manufacturer and marketer of healthcare products which includes providing prescription medicines, active pharmaceutical ingredients, antibiotics and other biotechnology-based products.

Merck & Co. (MRK)

Merck & Co., Inc. is a healthcare company that operates through two segments worldwide: Pharmaceutical and Animal Health segments.

Abbott Laboratories (ABT)

Abbott Laboratories is a wide-ranging healthcare developer and manufacturer. It operates through four areas: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products and Medical Devices. It has a market cap of $228.39 billion and its sales increased by 9.8% in 2020 to $34.61 billion.

Stock prices as of 2 December, 2021.

Investing in pharmaceutical and biotech stocks is complex and requires you to do a lot of research.

Tip: While it’s often a good area of the economy to invest in, there’re always risks to buying pharmaceutical and biotech shares. Put in the time and research, stay informed and consider diversifying across multiple sectors to minimise risk.

With eToro, you can research and monitor stocks and invest with our trading platform from your favourite device.

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