Investing in Big Pharma: Facts and Figures on Major Pharma

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The term “big pharma” refers to the global pharmaceutical industry, which includes giant corporations that bring in billions of dollars in annual profits. The modern pharmaceutical industry has roots that date back to the 19th century, when research in fields such as chemistry and physiology led to the discovery of new drugs with medicinal qualities.

As the pharmaceutical industry developed and grew, the need for strict regulation arose. Federal drug regulation began as early as 1848, but the United States Food and Drug Administration (FDA) did not receive its name until 1930. It was not until 1938 that a law was enacted that required that new drugs undergo a safety assessment before they could be sold to the public. This requirement exists to date in the form of clinical trials.

Today, the global pharmaceutical market is a very big business, with annual revenues expected to exceed $1.5 trillion in 2023, according to the International Federation of Pharmaceutical Manufacturers and Associations. Many of the major companies are involved in hundreds of clinical trials at a time and are always on the hunt for the next big drug breakthrough.

Quick facts about the world’s largest pharmaceutical companies:

  • Nearly half (48.6%) of Americans have used at least one prescription medication in the past 30 days, according to data from the Centers for Disease Control and Prevention, which measured this from 2015 to 2018.
  • 24% of Americans have used at least 3 prescription medications in the past 30 days, according to the same CDC data.
  • Global pharmaceutical research and development spending is expected to exceed $200 billion in 2022, according to IFPMA.
  • Total U.S. advertising spending by pharmaceutical companies was about $6.6 billion in 2020, according to media research firm Kantar.
  • From 2009 to 2018, the average net price of brand name prescription drugs rose from $149 to $353 in Medicare Part D and from $147 to $218 in Medicaid, according to a study by the Congressional Budget Office.
  • Generic drugs, which are cheaper than brand name drugs, accounted for 90% of U.S. prescriptions in 2018, up from 75% in 2009, according to the CBO report.
Company Stock symbol Headquarter Market capitalization* Turnover (2021)
Johnson & Johnson JNJ New Jersey $471 billion $93.8 billion
Pfizer DFP New York 300 billion dollars $81.3 billion
rock RHBY Swiss $299 billion $68.7 billion
AbbVie ABBV Illinois $262 billion $56.2 billion
Merck M.K.R. New Jersey $234 billion $48.7 billion
Astra Zeneca AZN UK $206 billion $37.4 billion
Novartis NVS Swiss $201 billion $51.6 billion
Bristol Myers Squibb BMY New York $160 billion $46.4 billion
Sanofi SNY France $134 billion $44.7 billion
GlaxoSmithKline GSK England $112 billion $43.6 billion

*Note: Market cap data as of May 2022.

Big Pharma stocks and return on investment

The pharmaceutical industry has been a solid place to invest money over time. Larger companies are profitable and typically share some of their cash flow with shareholders in the form of dividends and share buybacks. These dividend payments make the pharmaceutical industry an option for those looking for passive income ideas.

Investing in individual companies always involves additional risks and the pharmaceutical industry is no exception. With ever-changing pharmaceutical company drug pipelines and successful and failing clinical drug trials, you are taking significant risks by owning the stock of a single pharmaceutical company.

But the industry as a whole has provided steady returns over time. The iShares US Pharmaceutical ETF (IHE), which tracks the performance of the US pharmaceutical industry, has returned nearly 11% annually over the past decade and has generated positive returns 8 out of 10 years.

Pharmaceutical R&D expenditure

Pharmaceutical companies spend huge sums on research and development (R&D) to discover new drugs that will propel them into the future. Global R&D spending by pharmaceutical companies reached $200 billion in 2020, according to Statista. Johnson & Johnson alone spent $14.7 billion on R&D in 2021, while Pfizer spent $13.8 billion.

When a company discovers a new drug, it is granted exclusive marketing rights for a certain period of time as a reward for its R&D efforts. Once the drug is off patent, generic drug manufacturers are able to produce and sell the drug at a significant discount, impacting the business of the company that originally discovered the drug.

High profit margins

When analyzing companies for potential investment, profit margin is one of the most important financial ratios to look at, and the pharmaceutical industry is impressive in this area. Profit margins measure the profit a company makes for every dollar of revenue it takes in.

Johnson & Johnson, Pfizer and AbbVie have all achieved operating profit margins well over 20% in each of the past 5 years. According to January 2022 data from New York University, pharmaceutical companies made about 25 cents in operating profit for every dollar of revenue they collected, compared to about 12 cents for the overall market.

The high profit margins enjoyed by pharmaceutical companies are partly due to the legal monopoly they enjoy over the new drugs they develop, which allows them to price the product well above their costs.

Record mega mergers

In recent years, the pharmaceutical giants have gone on a shopping spree, allowing some of the biggest players to go even bigger. In 2019 alone, Bristol Myers Squibb agreed to buy Celgene for around $74 billion, while AbbVie bought Allergan for around $63 billion. AstraZeneca has announced its $39 billion deal for Alexion Pharmaceuticals in 2020.

These types of deals can allow companies to expand into new areas and protect themselves when key drugs are about to go off-patent, creating new competition. Because companies are so profitable, they often have strong balance sheets that can support big acquisitions.

Big pharma, big pipelines

Pharmaceutical companies are constantly looking for new drugs that can treat diseases or improve existing treatments. R&D expenditures support this research at every stage of the process, from initial research to clinical trials.

The success of a drug and its approval are unpredictable and the process takes years. For this reason, some pharmaceutical companies have hundreds of drugs in their pipelines at various stages of the approval process. Novartis and Roche each had about 150 drugs in their pipelines in 2022, according to investor presentations.

Investing in Big Pharma

Investing in the pharmaceutical industry has been and should continue to be largely profitable for investors. The industry enjoys high profit margins and generates significant cash flow for investors. If you’re buying individual stocks, make sure you understand which drugs contribute the most to the company’s profits and when those drugs are about to go off-patent. You will also want to get an idea of ​​the relative strength of the pipeline.

Buying an ETF or mutual fund that tracks the pharmaceutical industry can be a great way to invest in pharmaceutical companies without having to meddle with individual products and companies. These funds hold companies from all sectors, allowing you to take advantage of their strong economy. Here are some popular options.

iShares US Pharmaceuticals ETF (IHE)

The iShares US Pharmaceuticals ETF seeks to track the investment performance of an index that tracks US pharmaceutical stocks. You will be exposed to companies that manufacture prescription and over-the-counter drugs or vaccines.

Annualized return over 10 years: 10.7%

Dividend yield: 1.6%

Spending rate: 0.42 percent

VanEck Pharma ETF (PPH)

The VanEck Pharmaceutical ETF seeks to track the performance of the MVIS US Listed Pharmaceutical 25 Index, which is used to track the overall performance of the pharmaceutical industry.

Annualized return over 10 years: 10.3%

Dividend yield: 1.6%

Spending rate: 0.35 percent

SPDR S&P Pharmaceuticals ETF (XPH)

The SPDR S&P Pharmaceuticals ETF seeks to track the investment performance of the S&P Pharmaceuticals Select Industry Index. The fund aims to provide diversified exposure to the pharmaceutical industry.

Annualized return over 10 years: 6.4%

Dividend yield: 1.3%

Spending rate: 0.35 percent

Note: Data back as of May 31, 2022

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past performance of investment products does not guarantee future price appreciation.

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