Investing in the Pharmaceutical Segment – Strategies for Long-term Growth
Investing in pharma stocks requires careful consideration of several effective strategies.
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Successful online trading involves rightly analyzing the potentially winning trading strategies or opportunities. Even for a first-time investor with a high appetite for taking risks, the first stocks they trade will be typically the safest ones in their portfolio. Researching low-risk industries and companies that are most likely to perform well today as well as say after ten years, is crucial before taking riskier investment decisions. The pharmaceutical industry is one such top segment which is attracting interest from both investors and consumers, particularly during the COVID-19 pandemic. The impact of the pandemic has drawn considerable attention to pharmaceutical companies developing
coronavirus
drugs
and
vaccine
candidates.
The
global
pharmaceutical industry tops $1.2 trillion in sales each year. And, that’s a huge market that creates tremendous potential for long-term investors as well as quality-of life advancements for patients. Typically, pharmaceutical stocks are considered a relatively safe domain. As per reports, one in two Americans takes prescription drugs and nearly half of the total US population uses at least one prescription drug in a month. In fact, spending on prescription drugs has increased during the current COVID-19 pandemic, this time with an increased focus on anti-anxiety medications. However, not every pharma company performs well on the stock market. Therefore, choosing companies wisely for your investments is crucial for longterm growth. Investing in pharmaceutical stocks is by no means a guarantee for success and for long-term growth, and it is important to consider several strategies – • Profitability – The profit margin is the initial indicator of a company’s performance. The more net income a business earns per dollar spent, the higher will be the profit margin. When considering the profit www.tradezero.co
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margins of the top-performing drug companies listed in the stock market, their profit margins vary between 15 and 20 percent. When building the portfolio, it is always better to stick with the companies that position themselves between these values. Assessing long-term profitability involves clearly focusing on the price-to-earnings ratio, the price-to-earnings-growth ratio, and the price-to-sales ratio. • Management – Stock price alone is not a good or perfect indicator of a company’s position. By overly focusing on profit margins, chances are that you tend to overlook other important details that speak volumes about the company’s performance. The management aspect becomes significant at this point. Even when a pharmaceutical company remains profitable, poor management can lead to wrong business decisions and missed opportunities that can easily bring down the stock price value. Before investing in pharma stocks, it is important to stay updated about the different aspects of management like - management team, clients and shareholders they have in the pipeline, and their experience in developing pharmaceutical products. • Regulations - Drug development process is lengthy and challenging. In the age of social media, most investors would be tempted to invest in companies whose drugs passed the early stage. It is estimated that about one in ten drugs makes it to the market, so passing the first stage is in no way a guarantee. Before investing in a pharmaceutical company, make sure that the FDA and other regulatory agencies approve its drugs. If not, there is a high chance that the product won’t hit the market and it’d make the stocks plummet. Taking a medical research expert’s opinion will make it easier for investors to make informed decisions.
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• Patents – Before making investments in a pharmaceutical company’s stock, verify whether the company has patented drugs. Having a patented drug means that the company owns intellectual property rights for that drug. Patents account for about 80 percent of the total revenue of pharmaceutical companies. Even when a company takes a long time to obtain a patent, they can provide a high return on investment for all the money that went into research and development. Pharmaceutical companies are more diversified and focus on manufacturing and distribution in addition to the development of drugs. Investors eyeing the pharmaceutical sector for online stock trading should look under the hood before investing and determine whether the type of investment offers good prospects. Having a clear analysis of specific investment goals, devising a unique strategy, and remaining highly organized are crucial to achieve those goals. If you are a risk-averse investor, then a diversified investment strategy that rightly focuses on top but stable pharmaceutical companies can not only help effectively invest your funds in the short-term but also make a better long-range plan for the future.
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