If you want an industry where high-stakes conflicts over regulatory approvals, pricing and marketing are the norm, look no further than the pharmaceuticals industry. If everyday commerce is like a boxing match (and politics is like professional wrestling), then Big Pharma is like a UFC octagon cage match. The tricky part is identifying the best pharma stocks.
Mining for the Best Pharma Stocks
There’s so much money involved that it sloshes over into the halls of Congress, doctors’ offices and even your television. (How much do you think it costs to keep that couple with separate bathtubs on your screen, week after week?)
Every January, I write about the top-performing stocks of the previous year, and in a typical year, the top percentage gainers are small pharmaceutical companies who hit the jackpot with good clinical trial results or an FDA approval. Eight of the top gainers in 2014 were in the medical–biomedical/biotech sector! And of the 42 stocks that managed to top 100% price appreciation for the year, 20 were in that same sector.
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In 2015, an unusual year because the major indexes actually finished the year with losses, six of the nine stocks that led the pack were pharmaceuticals of some sort.
(2016 pitched an unusual shutout of pharmaceuticals, with not a single one attaining the 200% gains that it took to qualify for the top 14, a group that was dominated by rebounding energy and tech companies.)
Where there are big profits on the line, unbridled capitalism (let’s face it: greed) will produce controversial behavior, and at the center of one 2015 scandal is Martin Shkreli, who is currently facing a jury in the Federal District Court in Brooklyn.
Shkreli is the one who decided in September 2015 that Turing Pharmaceuticals would increase the price for Daraprim—a treatment for malaria, AIDS with toxoplasmosis and related encephalitis—from $13.50 per pill to $750. This 5,000% price increase for an existing drug made headlines and made Shkreli, who is on trial for unrelated securities and wire fraud, one of the most unpopular men in the world. His distinctive face is so widely familiar that many jurors were dismissed because of their expressed loathing.
Shkreli’s Daraprim move was controversial, but not unique. Insurers and patients are frequently shocked by the price tag on medicines, including Vertex Pharmaceutical’s (VRTX) $300,000 per year for its cystic fibrosis drug Kalydeco, Celgene’s (CELG) $150,000 per year for Revlimid, its blockbuster cancer drug, and Gilead Sciences’ (GILD) $84,000 for a course of its Hepatitis C drug Sovaldi.
How have investors responded to these sensational numbers?
Investors Torn on Big Pharma
Well, let’s just say that the results are mixed. The pharmaceutical sector has been bouncing back from a huge correction in the second half of 2015, with a little extra interest based on the possibility that the Trump administration might prove more accommodating in its regulatory stance toward the industry. Here’s a weekly chart of SPRD S&P Biotech ETF (XBI) that shows both the gradual recovery that started in February 2016, the November 2016 bounce and the 14-week consolidation under resistance that preceded last week’s breakout.
But for the individual companies at the center of pricing controversies, investors have paid more attention to actual results than to the headlines.
Gilead Sciences has had a tough time of it until just a few weeks ago. Here’s what the weekly chart has to say.
Vertex Pharmaceuticals was under huge pressure in 2016, but has enjoyed enthusiastic buying since January.
As always, the headlines scream, but the chart will tell you the quiet truth.
My takeaway from this review of pharmaceutical controversy is pretty much the standard approach of all growth investors. You have more control over your portfolio’s results when you buy individual stocks rather than ETFs. It takes more time to find the best pharma stocks rather than investing in the group, but it can be well worth it.
And if you want to express your approval or disapproval of one company’s pricing policies over another’s, individual stocks are definitely the way to go.
If you want a trustworthy advisor on the best pharma stocks of all stripes, from growth to value and small caps to dividend payers, Cabot has an advisory that will put you on the right track. To see which one is right for you, click here.
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