Considering Involvement in Pharmaceutical Shares? Ensure These Essential Factors Prior
The realm of pharmaceutical shares offers plenty of chances for investors. Due to their resilience in tough economic situations and frequently during market fluctuations, pharma stocks can serve as a steady anchor for your investment portfolio.
However, investing in this sector can be intricate if you're uncertain about what to scrutinize or how to evaluate a stock's worth. Let's delve into three aspects to consider before diving into any pharmaceutical investment.
1. Capital allocation plans
Pharmaceutical firms handle and generate substantial amounts of financial resources. For instance, Eli Lilly, represented by LLY (-1.77%), reported capital expenditures (capex) of over $8.3 billion in the preceding 12-month period. Analyzing a company's capital allocation plans helps you comprehend whether there will be any changes in spending across crucial sectors or not. If you, as an investor, remain unaware about a company's financial usage, your contribution as a shareholder will be uninformed regarding its efficient utilization or yield.
Rather than invest in hardware or major capital expenditure categories, pharma companies typically focus on research and development (R&D). In Lilly's case, its 12-month R&D expenditures amounting to $10.5 billion were approximately 26% of its revenue for the same period. R&D is critical for growth in the biopharmaceutical sector, as new medicines and biotechnologies cannot be developed without it.
However, dividends and share buybacks are also part of the capital allocation strategy, as is debt repayment. If the company you're considering has a substantial debt burden, but opts for a special dividend rather than addressing its debt issue, that could be a cause for concern before buying any shares.
Make sure to locate the capital allocation slide in the investor presentation and contemplate whether it appears to be a sustainable strategy for the business's longevity in the long-term.
2. Potential blockbuster drugs in the pipeline
High-earning medicines are those that bring in more than $1 billion in annual revenue, and identifying these early in the R&D process is essential for pharmaceutical investors.
The higher the demand for a specific drug, the more beneficial its manufacturer will be from economies of scale in marketing, manufacturing, and distribution, among other activities. Therefore, having several blockbuster drug prospects in the pipeline implies more favorable earnings down the line once approved for sale. If you're thinking of investing in a pharmaceutical stock, it's relevant to determine how many high-earners are likely in development.
For instance, Amgen's (AMGN 0.34%) weight loss program, MariTide, should report phase 2 clinical trial results before the end of this year. Some projections suggest that the primary market it targets, weight loss, could potentially reach $100 billion by 2030. Put simply, MariTide may not even need to capture a significant market share to become a blockbuster, which is a positive sign for Amgen's stock.
The alternative to a company with numerous blockbuster drug prospects is one with specialized programs. For smaller biotechs, specializing in a niche medical area is often sufficient to drive significant growth. However, for large pharmas, requiring substantial sales to generate earnings, focusing on numerous niche medications instead of a few major market contenders is not an adequate replacement.
3. High-earning drugs nearing expiration of exclusivity
When a pharmaceutical enterprise obtains a medication approved for sale, a timer starts ticking. The alarm sounds when its exclusivity protections expire, enabling competitors to produce generic versions. At that juncture, the drug's original developer usually observes a rapid decline in its market share due to the emergence of cheaper alternatives.
Thus, as an investor, it's important to monitor when a pharmaceutical company's most profitable earners will lose their exclusivity. If there aren't many new programs expected to hit the market to replace the lost income, the business will start dwindling after that. Keep in mind that it takes several years to develop a new medication, so it's impossible to initiate work to replace an aging giant at the last moment. The more significant the revenue a drug contributes, the more crucial it is to have viable alternatives lined up to reclaim lost market share as soon as possible following the expiration of the protections.
Management teams grappling with this problem aren't always successful in their approaches. Look for a plan that's explicitly communicated well before it's required — ideally at least three years in advance.
To effectively manage your investments in the pharmaceutical sector, it's crucial to consider a company's approach to financing and investing their financial resources. This includes evaluating their capital allocation plans, focusing on research and development, and considering dividends, share buybacks, and debt repayment as part of their strategy.
When investing in pharmaceutical stocks, it's essential to identify potential blockbuster drugs in the pipeline. High-earning medicines that generate more than $1 billion in annual revenue can significantly boost a company's earnings. Therefore, it's crucial to analyze a company's R&D efforts and pipeline to determine their potential for producing blockbuster drugs.
