The pharmaceuticals industry has always been one of the riskiest in the market. Companies operating in the pharma industry are required to invest heavily in research and development on drugs whose outcome is highly unpredictable. Companies like Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK), and Johnson & Johnson (NYSE:JNJ) among others, have toiled this red flagged industry for years. Note that, despite the risks associated with investing in the industry, the potential upside is always enormous. No wonder, they say, “the higher the risk, the higher, the return.” But this is not always the case.
What’s in this industry anyway?
The Pharma industry holds one of the biggest potential upsides across all sectors. Perhaps only Technology and Energy can compete on equal footing. Nonetheless, the attractiveness of this industry is yet the biggest peril for investors. Sounds like a paradox? Well, here is the deal. Some investors view the industry as next to gambling. Indeed, if a company, say Johnson & Johnson (NYSE:JNJ), manages to get things right and gets approval from Food and Drug Administration (FDA) to proceed with the licensing and the manufacture of a certain drug, then the returns are usually skewed to the right. The opposite is usually true.
A good example is the anticipated launch of three drugs by Pfizer, which have fuelled the demand for its stock, pushing it to a new five and a half-year high of $27.65, on February 1. The company received approval from FDA for its Rheumatoid Arthritis treatment available in pill form in November 2012, although it is yet to receive the marketing materials approval. It also received two more approvals in January.
Elsewhere, Johnson & Johnson is expected to improve significantly during the current campaign following the approval by FDA for a drug that is expected to treat a form of resistant tuberculosis that is uncommon in the U.S., but growing globally. On the other hand, Mylan Inc. (NASDAQ:MYL) is said to have received final approval from FDA for its Abbreviated New Drug Applications (ANDA) for Rizatriptan Benzoate Orally Disintegrating Tablets. The drug is a generic type of Merck’s Maxalt MLT and Maxalt tablets.
According to a report published by PriceWaterhouseCoopers (PWC) in November 2012, the pharma industry is expected to more than double its current value to the tune of $1.3 trillion by the year 2020. However, for large pharmas to romp in tandem with the industry, they are expected to change their game by diversifying their services and products, as the quandary of costs balloons to levels that could threaten disintegration. Indeed, this is already very evident with the rate of spin-offs already witnessed in the industry.