Pharmaceutical and biotechnology companies play an important role in the global economy by coming up with drugs that cure drugs. As a result, they have helped to prolong the life expectancy rate of the world.
Also, as we saw during the Covid-19 pandemic, these companies came up with vaccines that helped end the pandemic.
In this article, we will explore the pharmaceutical industry and highlight some of the top companies to invest or trade.
Pharmaceutical vs biotechnology companies
A common question is on the difference between pharmaceuticals and biotechnology companies. While the two industries are usually used interchangeably, they are actually different.
Biotechnology companies are those that conduct studies using biological systems like bacteria to come up with drugs that fight illnesses. Examples of popular biotech companies are Novavax, Novo Nordisk, BioNTech.
Pharmaceutical companies, on the other hand, conduct studies using chemicals to find drugs that people use today. Examples of the most popular pharmaceutical companies are Johnson & Johnson, Roche, Novartis, and GlaxoSmithKline among others.
It is worth noting that many large companies in the industry do both pharmaceutical and biotechnology work.
Data compiled by Companies by Market Cap shows that there were 700 biotech publicly-traded companies that are valued at over $5.3 trillion. There are 695 pharmaceutical companies that have a combined market cap of over $5.2 trillion. However, these companies are interconnected.
How pharmaceutical companies work
Pharma companies have huge barriers to entry that help to protect the established companies. The most important barrier to entry is the fact that most of these companies are started by people who have gone to school to study complex fields like biotechnology and analytical chemistry. Very few people take these STEM courses today.
Further, these companies need a lot of money to come up with drugs that are acceptable by most regulators like the Food and Drug Administration (FDA). It is not uncommon for most companies to spend millions of dollars to come up with drugs that are rejected by these regulators.
Pharmaceutical and biotech companies use different strategies. Some, which are typically early-stage companies, focus on doing the research and getting approvals. After receiving these approvals, they then sell their intellectual property (IP) to large companies that have a manufacturing capacity.
Other large companies focus on acquisitions. This is where they spend little on research and development (R&D) and then buy early-stage developers.
Further, large companies like Johnson & Johnson, Roche, and Novartis research and develop their own drugs.
Why invest in pharma stocks
There are several reasons why it makes sense to invest in pharma stocks. First, these companies are known as defensive firms that do well in all market conditions, including during recessions.
That’s because, as the world’s population grows, the number of people with health challenges will continue rising. As such, these companies will continue making money in the future.
Second, most people in the US and other countries don’t pay for their hospital bills using cash. They rely on their insurance providers, who handle the payments.
Therefore, this situation makes the demand for pharmaceutical products high. Data by Georgetown University estimates that there are over 131 million Americans with prescriptions.
Third, pharmaceutical companies are high-margin ones. The average gross profit margin for these companies is 71%. Their average net profit margin stands at over 30%. As such, these companies are some of the most generous in terms of payouts to investors.
Further, as mentioned, pharma companies have high barriers to entry. Most of them have patents that protect them from the competition.
How to day trade pharma stocks
The next common question is on how to day trade pharmaceutical companies. The concept of day trading pharma stocks is similar to how you trade companies in other industries like technology and financials.
However, there are several things that move these companies that you can watch. First, always look at a company’s pipeline.
A pipeline refers to the drugs that a company is studying at the moment and their regulatory status. In most cases, a news report on regulatory action can lead to volatility in a stock.
Second, mergers and acquisitions (M&A) in a company can lead to broader market actions. In most periods, companies in the sector tend to do well when a giant company acquires a small or a bigger firm.
Other factors that move pharma stocks are earnings, patent expiry, and regulatory issues in the pharma industry.
Top pharma stocks to trade and invest
There are hundreds of companies that you can day trade or invest in today. Some of these companies are:
Johnson & Johnson (J&J)
J&J is the biggest company in the industry with a market cap of over $475 billion. The company develops drugs in the immunology, cardiovascular, & metabolic diseases. It also develops drugs in infectious diseases, neuroscience, and oncology among others.
The company’s annual revenue have jumped to over $94 billion while its net income has grown to over $17 billion.
Novo Nordisk is a major pharmaceutical company that focuses on diabetes, one of the top illnesses in the world today. It also creates drugs for obesity, hemophilia, rare diseases, and Alzheimers among others.
It is a Danish company with a market cap of over $315 billion and minimal debt. The company is listed in the US, making it available to American traders.
Eli Lilly is a top American pharmaceutical company valued at over $296 billion. The company researches and develops drugs in areas like cancer, obesity, Alzheimer’s, and immunology. Its stock is actively traded in one of the most active stocks in the industry.
Other top pharmaceutical stocks to trade are Pfizer, Moderna, and AstraZeneca among others. In addition, most investors seeking exposure to the industry do so via ETFs.
The most popular pharmaceutical ETFs are iShares US Pharmaceuticals ETF, SPDR S&P Pharmaceuticals, and Invesco Dynamic Pharmaceuticals among others.
Pharmaceutical companies tend to be boring firms that often make announcements that many people don’t understand.
However, they are excellent companies to day trade and invest in. In this article, we have looked at some of the best ways to invest and trade biotech and pharma companies.
External Useful Resources
- Pharmaceutical stocks to watch - CMC markets