Should you invest in the pharmaceutical sector?

on Aug 30, 2012 in Equity, Home |

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The pharmaceutical sector can be a good place to invest. Pharmaceutical firms can enjoy hefty profit margins and have a clearer and longer flow of earnings, especially if they develop the next blockbuster drug or lifesaving treatment, despite the potentially high-risk nature of a business heavily dependent on research and development of new products, and patent protection. At the same time, the developed world is trying to rein in the cost of government-subsidized healthcare.

Many investors have abandoned the pharmaceutical industry lately due to the lack of drug pipelines, blockbuster patent expirations, a more stringent FDA, generic competition, research failures, and drug safety concerns.

Big pharmaceutical companies have realized the evolving market place and many are undergoing heavy transformations to change the way they do business.

For example, many of them are now focused on cutting out the “fat” that they’ve accumulated over the years. Companies are also developing new systems, technologies and sales tools to combat the increasingly hostile environment. Instead of focusing on developing blockbuster drugs, companies are spreading their resources into more focused indications on smaller patient populations. They’re entering newer markets, particularly in Asia where significant growth opportunities exist. They’re also participating in more joint ventures, and acquisitions to prop up their pipelines. Finally, companies are outsourcing many activities like R&D, clinical research and sales to third-parties.

The pharmaceutical industry is not only attractive for its high-paying dividend yields. In addition, many companies are currently trading at low multiples to earnings and to sales.

Instead of looking for the next blockbuster, the prudent investor will look for where true value exists. There are still great benefits to be reaped! In the end, how can you beat a business that makes a pill for a few cents and sells for a few Swiss Francs?