The pharmaceutical sector is commonly referred to as one of the universal safe-haven assets for any type of crisis, but during a health crisis, it definitely becomes the center of attention. In this article, we will consider the promise of investing in pharmaceutical stocks and find out how to evaluate the promise of biopharmaceutical companies at the IPO stage.
Pharmaceutical stocks: an important player in global markets
The pharmaceutical industry discovers, develops, manufactures, and sells drugs to patients for the purpose of treating them, vaccinating them, or alleviating the symptoms of a disease.
Pharmaceutical companies may sell generic or brand-name drugs and medical devices. They are subject to various laws and regulations governing the patenting, testing, safety, efficacy, and marketing of drugs.
An interesting and relatively obvious fact is that the pharmaceutical sector is the first sector in the world in terms of investment in research. However, the pharmaceutical sector is also often shrouded in controversy and allegations.
The term “big pharma,” for example, is used in the press and on various online blogs to refer to the enormous power wielded by various pharmaceutical companies (usually the largest ones such as Pfizer, GSK, Bayer, and Novartis); and so the term takes on a negative connotation, sometimes conspiratorial.
The pharmaceutical sector, from the height of its medical and scientific prestige, remains an environment far removed from most people who, not understanding it, tend to demonize it.
Undoubtedly, the pharmaceutical sector has a large share of capitalization in world markets. For example, below we can see the top 10 global biotech and pharmaceutical companies by market capitalization in 2021.
- 1. Pfizer;
- 2. Roche;
- 3. Abbvie;
- 4. Johnson & Johnson (Janssen);
- 5. Novartis;
- 6. Bayer;
- 7. Merck (Merck Sharp & Dohme);
- 8. Bristol Myers Squibb (BMS);
- 9. GlaxoSmithKline (GSK);
- 10. Sanofi.
The biopharmaceutical sector leads in terms of the number of companies entering the IPO: in the last three years, the share of biopharma among stock exchange placements ranges from 23% to 40%. This is due to the high return on investment in this sector.
The biopharmaceutical industry is developing rapidly, new scientific directions are being created in it, and new areas of research are opening up. Of course, this gives rise to commercial interest on the part of investors. And not only venture funds but also individuals, as well as large pharmaceutical companies. After a biopharmaceutical player enters an IPO, the number of potential investors multiplies, and this further stimulates the growth of stocks on the public market.
Let’s consider how an investor can evaluate a biopharmaceutical company that is going for an IPO.
When evaluating a biopharmaceutical company, its product is of great importance. You should find out what it is and at what stage of research it is.
The drug research phases include:
Preclinical study. At this stage, the experimental drug is evaluated for safety, laboratory testing, and animal testing.
Phase I. The drug is tested mainly on healthy people. Its tolerability, safety, and, to some extent, efficacy are being evaluated.
Phase II. The purpose of this phase is to better evaluate the effectiveness, side effects, and potential risks of the drug, as well as to determine the dosage and method of administration. The study is conducted on several hundred patients suffering from “profile” diseases.
Phase III. This phase involves from several hundred to several thousand patients. The study is conducted by a “double-blind” method: neither the researcher nor the patient knows who is receiving the experimental drug and who is receiving the placebo. At this stage, all the necessary information is collected in order to evaluate the efficacy, safety, and risks of the experimental drug. Next, the company submits an application for registration of the drug to the FDA (Food and Drug Administration, USA) or EMA (European Medicines Agency, European Union). If approval is received, the new drug goes on sale.
Phase IV. At this stage, additional information about the product is collected and its risks are assessed in the long term. This stage can take years.
The closer a product is to the commercialization stage, the more interesting it is for investors. However, there are exceptions. Sometimes companies at the preclinical stage of research when entering an IPO still show growth of more than 100%. This may be due to the strong demand for new drugs in the global market.
In most cases, biopharmaceutical companies at the IPO stage are not yet generating profits. On the contrary, they are “burning” money because they are in the research phase and do not sell anything yet.
Those who are interested in investing in companies at the IPO stage also should consider the following factors: large investors, the company’s debt load, and market opportunities.
It is recommended to find out which major investors have already invested in the project (such as RA Capital, ArrowMark Partners, Perceptive Advisors, OrbiMed, and Novartis Bioventures Ltd). If well-known players with expertise in the pharmaceutical market have acquired the company’s shares, it means that they consider it promising. The experience and assessment of such investors can be trusted, although they, of course, can be wrong.
Does the listed company cooperate with well-known pharmaceutical corporations that have been on the market for a long time? Such cooperation makes it possible for a company to gain the reputation of a “senior” partner, and gain access to established sales channels and joint marketing activities.
The company’s debt load.
Another important question to consider is the debt load and distribution of proceeds that the company is going to receive during the IPO. Usually, biopharmaceutical companies enter the stock exchange with large debts: accordingly, they direct a significant part of the money raised from IPOs to repay loans and not to their development. The lower a company’s debt load, the more money it can invest in research and marketing.
Before investing it is smart to explore the potential of the market where the company plans to release its product. If the drug is intended for the treatment of the most common diseases, this is its competitive advantage, because a large number of patients will need such medicine.
The biopharmaceutical sector leads in terms of the number of companies entering the IPO. This is due to the high return on investment in this sector. The risks here are also among the highest.
When evaluating a biopharmaceutical company, the research phase of a drug is of great importance. The closer a product is to the commercialization stage, the more interesting it is for investors, but there are exceptions.
For investors who are interested in pharmaceutical stocks there is a good app called Gainy. It allows users to learn about effective investing methods, earn money, and build strategies for future investing. With this decision, investing is not as risky as it can seem.