Investing in pharmaceutical and biotech stocks can sometimes feel like swinging a baseball bat, hoping for a home run but often striking out too. This year, health-care stocks have fallen out of favor, with the 65 health-care companies in the S&P 500 losing an average of 1%, while the broader index has gained 18%. Within this sector, pharmaceutical and biotech stocks have been particularly unpredictable. Notable winners include Eli Lilly (+50%), Zoetis (+32%), and Vertex Pharmaceuticals (+21%). However, for every success story, there are disappointments: Moderna (-35%), Pfizer (-30%), and Organon (-20%).
These diverging performances illustrate the inherent risk involved in investing in drug developers. Some companies have achieved remarkable scientific and commercial milestones recently. For instance, Eli Lilly has high hopes for its Alzheimer’s treatment, Donanemab, and its diabetes drug, Mounjaro, which is on track for U.S. approval as a weight-loss treatment. On the flip side, Pfizer and Moderna have struggled to replicate the blockbuster success of their Covid-19 vaccines.
For the average investor, parsing through clinical trial results and understanding the intricacies of under-development drugs can be overwhelming. While the iShares Biotechnology exchange-traded fund (IBB) offers exposure to over 50 companies in the industry, its short-term performance tends to be driven more by shifts in risk-on/risk-off sentiment than by company-specific factors.
Investing in the Pharmaceutical Industry: The Picks and Shovels Approach
In the ever-expanding world of pharmaceuticals, investing can be a tricky game. However, some experts suggest an alternative strategy that focuses on companies providing the essential tools and materials that fuel the industry. By purchasing shares in these “picks and shovels” companies, investors can benefit from their recurring revenue streams without directly taking on the inherent risks of product development and biotech innovation.
Sumit Handa, Managing Director of Pennington Partners, advocates for this approach, highlighting the success stories of companies such as Danaher (DHR) and Thermo Fisher Scientific (TMO), both of which have market caps exceeding $200 billion. As biotech continues to revolutionize the industry, Handa believes these companies are poised for further growth. Notably, Danaher is aggressively expanding its life-sciences division through its recent acquisition of Abcam (ABCM), a thriving consumables business specializing in proteins and antibodies reagents. This move allows Danaher to bolster its existing presence in the field where Thermo Fisher already operates. Additionally, Danaher plans to spin out its non-life sciences water business, which will enhance its focus on bioproducts and solidify its position as a key player in the industry.
For investors looking beyond large-cap stocks, Randy Gwirtzman, co-portfolio manager of the Baron Discovery fund (BDFFX), recommends considering Repligen (RGEN). With a market cap of $9.7 billion, Repligen manufactures equipment used in drug manufacturing, along with the necessary consumables that generate a substantial portion of its revenue. Gwirtzman anticipates significant earning growth for Repligen in the coming years, especially as more companies utilize its bioreactors and testing equipment to bring new treatments to market. According to Gwirtzman, once Repligen’s equipment is integrated into the drug development process, it is rare to witness a change. This stability makes Repligen a reliable choice for investors seeking consistent earnings.
With options like Repligen and Danaher available, investors no longer need to swing and miss in their quest for profitable opportunities within the pharmaceutical industry.