A sector in the spotlight: Investing in pharmaceutical companies

From antibiotics to vaccines, should you invest in the pharmaceutical sector?

The average person can expect to enjoy a longer lifespan, according to data published by the Office for National Statistics (ONS).

Males born between 2018 and 2020 are now expected to live for 79 years, while females are expected to live for nearly 83 years. In comparison, males born between 1980 and 1982 were expected to live for nearly 71 years while females were expected to live for nearly 77 years.

One of the reasons life expectancies have increased is because of the advances in healthcare, according to the ONS.

Over the past four decades pharmaceutical companies have issued new medicines and innovated certain technologies.

So, does it make sense to add these firms to your portfolio?

Pharmaceutical companies form part of the healthcare sector, which focuses on providing medical services to the public.

More specifically, the pharmaceutical sector includes firms which are involved in the research, production or development of medicines. This can refer to companies which make paracetamol to businesses researching a possible treatment for a certain type of cancer.

But its position in the modern world has perhaps been redefined by the sector’s response to the COVID-19 pandemic, with companies like Johnson & Johnson and Pfizer playing a vital role in researching, trialling and producing a vaccine to combat the virus.

Its shares, along with companies like AstraZeneca, continued to rise during the pandemic.

While pandemics come and go, there will be ongoing demand for vaccines and medicines. To understand why, consider a separate study by the ONS.

According to its research the UK population is ageing. Nearly 19% of people are now over the age of 65, up from over 16% of the population in 2011.

As people age, their reliance on medical treatment generally increases. According to Government data, there were 16.6 million hospital admissions in 2017. Of this number, over 22% of admissions were from those aged 75 or older, despite them only making up just over 8% of the entire population.

So, as we age could there be an increased demand for medicines and medical treatment? While you can use this data to make a case for investing in pharmaceutical companies, there are risks to consider.

In other industries, one of the first figures you’ll look for in a company is its profit and loss column. This can give you an indication of how the company is performing, and if it’s yielding consistent profits you could be in line for a promising dividend pay-out.

But this might not be the best way to research start-up pharmaceutical companies.

This is because researching, trialling, and eventually releasing medicines into the market is a lengthy, regulated process.

The time it takes for drugs to be tested and approved varies, but according to Cancer Research UK some treatments might take 10 to 15 years before they complete all three clinical trials.

This means a start-up could go years without a main revenue stream, and all the while it has to pay normal expenses such as salaries and laboratory maintenance costs.

Many pharmaceutical companies therefore operate at a loss, but if you’re invested in the company for the long-term this could change once it begins selling its medicines.  

Therefore, you might want to begin looking at a start-up pharmaceutical company by evaluating how much capital it has raised against its regular expenses. This should give you an indication of how long the company can continue to operate at a loss before it needs to raise more capital.

With this in mind, you can then look for any potential medicines it’s readying for release. A drug in the third round of clinical trials is much closer to being approved for market consumption than a treatment which is still in the research phase.

It might also be worthwhile analysing larger pharmaceutical companies with a reliable revenue stream. If it’s readying three new drugs for imminent use, then it could increase profits.

However, always remember that regulatory approvals can be unpredictable, and there could be a chance that even in the third round of clinical trials these drugs still might not be ready for release.

AstraZeneca and Dechra Pharmaceuticals are just two listed pharmaceutical companies in the UK.

In fact, AstraZeneca is one of the largest companies by market capitalisation on the FTSE 100 and is worth close to £187 billion, according to the London Stock Exchange. It’s headquartered in Cambridge, and is known for producing one of the COVID-19 vaccines, researching cancer treatments and developing other medicines.

One of its most successful drugs is Nexium, which can be bought over the counter at your local pharmacist and is used to lower stomach acids.

Dechra Pharmaceuticals, meanwhile, operates in a more niche area. It researches, develops, and produces veterinary pharmaceuticals. It doesn’t only research treatments for your pets but also medicines for livestock across the world.  

Given that pharmaceutical companies form part of the healthcare sector, we’ve listed some of the top-performing healthcare funds in the year to April.

You should note that these funds aren’t solely invested in the pharmaceutical market and will be exposed to other areas such as healthcare equipment and services. 

_{Source: Lipper/Moneyfacts Investment Life and Pensions Magazine. Note: the table above is ordered by the best performance up to 1 April 2023 over the past five years.}