3 Key Aspects to Look out for in Pharmaceutical Companies

The pharmaceutical sector is one of the most dynamic and fast growing. With an ageing population and longer life expectancy, healthcare expenditure is set to rise. Those who wish to invest in this sector should look out for these three aspects of a company that can make it stand out from the competition.

A strong pipeline and capable research team

The stringent nature of the healthcare industry means that researching for new drugs can be a long and expensive process. However, if a drug has a substantial impact on patient care, it can reap a huge financial reward.

While scrutinizing a company’s pipeline, investors should be aware of three basic fundamentals to assess the research that is being done.

First, we need to look at what stage the research is at. Usually, before a company can release the drug for sales, it needs to undergo safety and efficacy testing. This usually consists of three stages of human trials before the US Food and Drug Administration (FDA) can approve the drug. Some companies may be overly optimistic when reporting these trial results to investors. It is up to us to assess the clinical trial stages and to do due diligence on its progress.

Second, is the revenue potential of the drug. Drugs that are developed for a more widespread disease will have a larger potential market. At the same time, that may also mean that there are other competitors operating in the same space due to the sheer size of the market. It may sometimes also be useful to look out for drugs that are being developed for a lesser-known disease but with fewer drugs treatments available at the moment.

Third, is the availability of substitutes. Blockbuster drugs that can make a big impact on a company’s bottom line usually have few substitute drugs available in the market. This gives them the ability to price the drug profitably.

Patented technology

Patents are essential in ensuring that a company, after spending time and research on a new drug can reap the rewards of their efforts without having to worry about copycat competitors.

When analysing companies with patents, it is important to look at the length of existing patents and new potential patent technology that the company is developing.

Diversity in product offering

Drug sales can be highly unpredictable due to the fickle nature of the medical community, and the constantly evolving industry. A successful drug can just as quickly disappear from the market if better substitutes are developed. Unexpected side effects may also cause FDA’s withdrawal of the drug’s license.

As such, it is extremely important to look out for companies that have a wide range of product offerings, to reduce the concentration risk.

The Foolish bottom line

Numerous pharmaceutical companies have performed admirably in the last few decades due to growing technology and a larger healthcare market. Some have even gone on to become dividend aristocrats due to their constantly growing earnings. Investors who wish to look out for good pharmaceutical companies to invest in should first ensure that they have these three fundamental characteristics.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.