Investing in Pharmaceutical Stocks

The global pharmaceutical market totals close to $1.6 trillion and continues to grow. This huge sector improves the quality of life for many people while creating attractive opportunities for long-term investors.

Before you invest in pharmaceutical companies, find out some top picks and learn how to choose the best stocks in the pharmaceutical sector.

Four stocks to buy right now

Four great pharmaceutical stocks to buy right now

Here are some top pharmaceutical stocks for investors to consider:

1. AbbVie

1. AbbVie

The top-selling blockbuster drug -- defined as one that generates more than $1 billion in annual sales -- for AbbVie (ABBV -0.16%) is Humira, which is approved for treating rheumatoid arthritis and several other autoimmune diseases. However, Humira's sales are sinking as it faces competition after losing patent exclusivity in 2023.

The good news is that AbbVie prepared in advance for the challenges it would face once Humira went off-patent. The company has two successors to Humira on the market -- Skyrizi and Rinvoq. These drugs already generate combined sales that are greater than Humira's and should eclipse Humira's peak annual sales within the next few years.

Meanwhile, AbbVie's lineup features other big winners. Sales for cancer drug Venclexta and antipsychotic medication Vraylar continue to climb. The company's migraine drugs, Qulipta and Ubrelvy, also are enjoying strong market momentum.

Investors also have a lot to like about AbbVie's dividend. The company belongs to the elite group of stocks called Dividend Kings, which have increased their dividends for at least 50 consecutive years. In just the past five years, AbbVie has increased its dividend by 45%.

2. Eli Lilly

2. Eli Lilly

Eli Lilly (LLY -1.3%) ranks as the largest healthcare company in the world based on market cap. Lilly vaulted to the top primarily because of soaring sales for its type 2 diabetes drug Mounjaro and obesity drug Zepbound.

These two products (which share the same active ingredient) could be on track to become among the most successful drugs of all time, according to some analysts. Lilly hopes to expand its Mounjaro/Zepbound franchise into other indications as well, including obstructive sleep apnea and heart failure with preserved ejection fraction.

Perhaps the greatest threats to Mounjaro and Zepbound come from Lilly's own pipeline. The company is evaluating two other drugs -- orforglipron and retatrutide -- in late-stage clinical trials targeting diabetes and obesity.

Lilly's lineup includes other successful products, too. Sales continue to soar for cancer drug Verzenio, diabetes drug Jardiance, and autoimmune disease drug Taltz.

3. Johnson & Johnson

3. Johnson & Johnson

Johnson & Johnson (JNJ 0.17%) is a healthcare giant that derives the majority of its growth from its pharmaceutical business. J&J boasts a large product lineup that includes immunology drugs Stelara and Tremfya and cancer drugs Darzalex and Erleada.

The company's pipeline features more than 40 late-stage clinical testing programs. These clinical trials are testing new drug candidates and seeking additional approvals for drugs such as Darzalex and Imbruvica, which treat cancer.

Johnson & Johnson spun off its consumer health unit into a standalone entity in 2023. This left the company with its two fastest-growing segments -- pharmaceutical and medical devices.

Like AbbVie, J&J is a Dividend King, having raised its annual dividend for 62 consecutive years. The company is also highly resilient, surviving and thriving since beginning operations in 1886.

4. Pfizer

4. Pfizer

Pfizer (PFE -0.74%) markets several blockbuster products. These include cancer drugs Ibrance and Xtandi, blood thinner Eliquis (which Pfizer co-markets with Bristol Myers Squibb), Prevnar pneumococcal vaccines, and COVID-19 products Comirnaty and Paxlovid.

The big drugmaker faces some challenges. Its COVID-19 vaccine sales have declined sharply. Several of Pfizer's top-selling products lose patent exclusivity over the next few years.

However, Pfizer has invested heavily in research and development. The company has also made several key acquisitions, including the purchase of Seagen in 2023. These moves have put Pfizer in a solid position to deliver long-term growth.

The drugmaker's pipeline includes 113 candidates. More than one-third of these programs are either in late-stage testing or awaiting approval. The company also has promising drugs in earlier-stage development, with experimental obesity drug danuglipron especially standing out.

Pfizer has long been a favorite among income-seeking investors. Its forward dividend yield is among the highest in the pharmaceutical industry.

Choosing the best stocks

Choosing the best pharmaceutical stocks

The top pharma companies have a few key characteristics in common. Knowing what to look for can help you identify the best investments.

The leading pharmaceutical companies generally increase their revenue and earnings on a consistent basis. Pharma companies must always contend with expiring patents and increasing competition, but the best companies have robust drug pipelines that more than offset any decreases in existing revenue streams.

The strength of a drug company's pipeline is perhaps the most important factor. Although pharmaceutical companies have many drugs in various stages of development, most companies only publicize the development of a drug when it advances to clinical testing in humans or is awaiting regulatory approval.

Some clinical trials test new drugs, while others test existing drugs for new uses. The best pharmaceutical companies are adept at both developing new therapies and using existing drugs for new purposes.

The average cost for major companies to develop a new drug is around $2.3 billion, according to Deloitte. The average elapsed time between drug discovery and regulatory approval is 10 to 15 years. But the payoff for developing an effective treatment, especially for a common ailment, can be massive. Owning an important patent can generate significant profits for a pharmaceutical company for many years, with little or no competition from other drugmakers.

Risks

Risks of owning pharmaceutical stocks

The significant cost and long elapsed time between drug discovery and approval (assuming the drug development process succeeds and regulatory approval is granted) makes investing in pharmaceutical stocks relatively risky.

Consider these risk factors before investing in any pharmaceutical companies:

1. Potential for clinical failure: Early-stage drug candidates are especially likely to fail, meaning they are proven to be unsafe or ineffective in clinical trials. Even drug candidates in phase 3 testing can ultimately fail.
2. Potential failure to win regulatory approval: Even drug candidates that successfully complete clinical testing may fail to win approval from the relevant regulatory agencies.
3. Non-reimbursement risks: To achieve commercial success for approved drugs, pharma companies must convince institutional payers, such as public and private health insurers, to reimburse patients for the costs of their drugs. Pharmaceutical companies must also contend with pressure from these payers to set drug prices lower than their targets.
4. Product liability and litigation potential: The medical risks associated with pharmaceutical drugs expose drugmakers to liability issues. Companies can be forced to recall drugs from the market due to safety concerns, and lawsuits against pharma companies are common.

As in any industry, pharmaceutical companies face competition from other drugmakers. But competition in this sector can be especially fierce because when patents expire, generic drugmakers are able to produce the same drugs much more cheaply.

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Should you invest?

Should you invest in pharmaceutical companies?

Since many pharmaceutical companies pay attractive dividends, these types of stocks are well-suited for income-focused investors. Another great reason to consider buying pharmaceutical stocks is that the U.S. population is aging. With the baby boom generation growing older, many more people in the coming years are likely to need prescription medications.