Long term investing in the pharmaceutical industry has generally led to excellent returns. The standard advice over the years has been to buy “big pharma” and watch your shares rise in value while you collect dividends. In the last twenty or more years the number of new technologies being applied to treatments has grown exponentially. A question for long term investing is whether investment in one of the larger companies is your best bet or if a little homework and investment timing will allow you to take part in the early growth of new companies associated with new technologies.
Long Term “Buy and Hold” Investing in Pharmaceuticals
The names may change with mergers and acquisitions but the basic nature of the game in big pharmaceuticals stays the same. A company develops a medicine and then holds the patent for a few years while it recoups its investment costs and takes a healthy profit. Typically the Mercks, Lillys, and Glaxos of the world will find a variation on a current medication and develop that variation in order to extend their patent rights and profitability.
Because of competition from generic drug makers when a drug goes off patent the major pharmaceutical companies need to be active in research or acquisitions in order to have a stable of profitable drugs to sell. “Buy and hold” long term investing in pharmaceuticals presupposes that the big pharmaceutical company will keep replenishing its stable of profitable drugs.
Because of the increase in new technologies in the pharmaceutical world, a well run pharmaceutical giant can continue to be a cash cow into the distant future. The question for long term investing in pharmaceuticals is whether a little diversification, homework, and investment timing might not pay off even better than less thoughtful long term investing strategies.
Long Term Investing in Pharmaceuticals with Investment Timing
Much of the basic research in pharmaceuticals occurs in small startup companies. For long term investing to succeed in this realm one needs to be lucky, to be very diversified, and to do one’s homework. On this page we suggest homework and investment timing. The obvious point is that you want to get in at the lowest reasonable price.
In the United States there are a number of tests that a drug must pass in order to be approved for use by humans. Here is where investment timing for long term investing comes in. The point here is to get familiar with the testing process, namely New Drug Applications plus Phase One, Two, and Three trials as well as Phase Four when required. Stock prices fluctuate greatly just before the results of one of the drug trials is about to be announced. For long term investing the point is not to jump in and out of a stock but to time your purchase by putting in a well researched buy order.
Long term investing in a winning company can lead to excellent returns. There is no reason why one should lose out on a four-fold gain at the beginning because of poor investment timing.
Another advisory is that drug startups are very technical. It is wise to do your reading and to stick to one or two technologies. Long term investing in this area can be very lucrative. For example, patentable stem cell cures for diabetes, degenerative joint disease or Alzheimer’s disease will make a lot of people very rich as well as provide new lives for millions, if not billions.