The global pharmaceutical industry was valued at USD$1.25T in 2019 and is forecasted to grow to about $1.5T in 2021.
Then, Covid-19 happened and threw us a curveball that will likely impact all existing forecasts.
Since the outbreak, retail of over-the-counter drugs spiked before lockdowns in March 2020 as consumers stockpiled these drugs.
Conversely, hospitals are expected to experience lower growth rates in 2020 as they shift their focus and resources to the Covid-19 battle, reducing their capabilities to keep up with regular patient care.
Although the situation in Singapore has more or less stabilised, the world at large is still struggling to manage the pandemic outbreak. It may be prudent to approach all forecasts with a wider range of variance.
That said, global healthcare spending is likely to remain stable.
The pandemic has forced the pharmaceutical industry to evolve quickly in the past few months, and this shift has caught the attention of investors like Buffett (Berkshire Hathaway bought $5.7B of shares in four pharma companies).
If you are bullish about its prospects, this article may help kickstart your research into pharmaceutical stocks.
Mostly, by selling drugs.
There are two main drug distribution channels – prescription and over the counter (OTC).
Prescription drugs are sold through doctors who’ll prescribe them to patients, while OTC drugs do not require a prescription, i.e those that we can buy directly from the pharmacy or even 7-11.
Due to the direct sales channel, branding plays a stronger role in the sales of OTC drugs. Think Panadol, the trade name for paracetamol currently owned by GlaxoSmithKline (GSK). Most consumers prefer to purchase Panadol over the counter even though they are receptive to other brands of paracetamol when these are prescribed to them.
Incumbents maintain their market share by ensuring an efficient supply chain that allows them to manufacture and deliver their drugs.
It is often difficult for smaller (or even new) players to encroach on existing market shares of known drugs. These new players would have to either develop their own drugs or identify a new market in order to survive.
We identified 3 key trends that’s likely to move the needle in pharmaceutics going forward.
Pharmaceutical companies are racing for approval to release their vaccines. The company (or companies) that’s able to get first approval to release its vaccine commercially may do well in the short term.
With potentially immense financial rewards in the horizon, it’s little wonder why so many pharmaceutical companies are joining in the race for a Covid-19 vaccine.
Traditionally, clinical trials take an average of 6 years. However, in the case of Covid-19, the vaccines have entered the final stages of clinical trials at rocket speeds thanks to several factors:
Some companies that are involved in the Covid-19 vaccine race include:
Locally, Duke-NUS Medical School is working with Arcturus Therapeutics (NASDAQ:ARCT) to develop a mRNA vaccine. It is currently in a combined Phase1/2 trial. The Singapore government has already chope $175M worth of their vaccine.
At the point of writing, many companies are still racing to get their vaccines out, the 2 most prominent ones being:
1 – Pfizer and BioNTech
Pfizer and BioNTech have announced that they have concluded Phase 3 studies and that the data indicates a vaccine efficacy rate of 95%. As of 7 Dec, Pfizer and BioNTech’s vaccine are being distributed to the UK and will be rolled out within the week with Queen Elizabeth being one of the first few to be vaccinated.
They plan to distribute 50 million doses of the vaccine by the end of the year. However, this is 50% lesser than their previous expectation. Pfizer’s stock price fell slightly upon the release of this update on 4th Dec:
2 – Moderna
Moderna has also announced that their vaccine is about 94.5% effective in preventing Covid. Their vaccine has a longer shelf life and can be stored in standard home or medical refrigerators (2 – 8°C).
Their stock price have surged since the news of the shelf life of their vaccine:
Moderna is working with the Health Sciences Authority (HSA) to get the vaccine approved for distribution in Singapore.
The Covid vaccine race remains pretty volatile as pharmaceutical companies are still striving to work their way around manufacture, distribution and legal approval processes.
What is it?
Gene therapy is the field of treating and preventing diseases through the manipulation of genes.
In simple terms, if we can identify genes that cause certain diseases, we can then correct or replace the gene to prevent them. Some diseases we hope to cure with gene therapy include cancer and HIV.
Sounds like a lofty task? Well, it is. The field is still pretty much in its infancy.
Within gene therapy, there are 2 main niches:
In 2003, the full DNA sequence of the human genome was determined through the efforts of people behind the Human Genome Project. The project has given us an open database of the human genome.
Since then, scientists have been working to understand how each gene affects us and hopefully to determine which gene (and the mutation of which) is responsible for specific diseases.
Why is this a field to watch?
Because of Moore’s Law.
Previously, it would cost anywhere from $5,000 for a full genome sequencing, reducing potential access to such medical therapies. However, the cost of gene sequencing has dropped significantly over the years:
This means that gene therapy will gradually become more accessible to the masses.
Where are we today?
Genetic testing has been around for years, the Bioethics Advisory Committee Singapore (BACS) even published a Genetic Testing and Genetic Research report back in 2005.
Although we have not fully mapped the human genome to all diseases, you can already test for hundreds of genetic diseases, with more being discovered frequently.
We’ve also seen an increase in non-clinical genetic testing kits being marketed digitally (at the point of writing, MOH has yet to release guidelines):
Who to watch?
(this is NOT investment advice. Please do your own research)
There are two types of service providers in this field:
Illumina (NASDAQ:ILMN) is said to be involved in 90% of all DNA sequenced, its NovaSeq 6000 and Global Screening Microarray technologies are used by majority of non-clinical genetic testing kits from 23andMe, AncestryDNA, 3billion, CircleDNA and more.
Other DNA sequencing providers include:
Data privacy has been a major bane for genetic testing. Major concerns include discrimination as well as inflated premiums from insurance companies based on personal gene data. It’s beyond the context of this article to delve into this topic. If you’re interested, here’s a good read on “how much your DNA is worth“.
Genetic testing companies and DNA sequencing providers alike, have access to a large database of individual DNA sequences which continues to grow.
As such services are still considered novel, structured guidelines have not been developed yet.
Although several techniques have been explored over the years, none allowed easy and accurate gene editing and inaccuracies could lead to devastating consequences.
That was until the discovery of:
Since its ‘discovery’ in 2012, scientists have found countless uses for CRISPR in the development of antibiotics and antivirals, cancer treatment and more. Such a powerful technique does not come without controversy, but CRISPR may pave the path of the pharmaceutical industry in the coming decades.
Growth may be stunted by patent wars
Although the prospects for the CRISPR technology are bright, various parties are fighting to own and patent the technology. There’re great financial prospects in it for the eventual winners. On the flip side, patents could block access of the technology to small private firms or individual researchers, reducing potential innovations in the short term.
“Each of Doudna, Charpentier, Zhang and their respective backing institutions have formed spin out companies to commercialise the CRISPR-Cas system, partnering variously with big pharma, venture capitalists and fellow disruptive biotech start-ups in a complex series of exclusive licensing deals, joint ventures and strategic collaborations.
Caribou Biosciences and Intellia Therapeutics are associated with the Doudna camp; CRISPR Therapeutics, ERS Genomics and Casebia Therapeutics are associated with Charpentier, and Editas Medicine is associated with Zhang (although notably, Doudna was a co-founder before falling out with Zhang).”
Moving on, here are some listed companies involved in the development and application of CRISPR therapy:
For more investment ideas, ARK Invest has an entire ETF dedicated to this niche – ARK Genomic Revolution ETF (ARKG). Alvin wrote about ARK Invest’s ETFs previously.
In the long run. we can’t talk about upcoming trends without mentioning the adoption of technology and global digital shift.
Pharmaceutical companies have access to a wealth of data. If used wisely, this could allow them to develop better forms of treatment and the promised personalised medicines.
Needless to say, expect greater adoption of artificial intelligence, machine learning and deep learning in the pharmaceutical space. The use of these tool could lead to breakthrough treatments as well as novel processes in the pharmaceutical industry. (eg. Clinical trials, delivery of medicines, etc)
For insights into how the pharmaceutical industry may evolve, here’s a quick breakdown by a16z:
The leaders in the pharmaceutical industry by market cap are:
If you don’t like to pick stocks but are bullish on the growth of the pharmaceutical sector, consider ETFs that track related pharmaceutical indices.
Here are three of the biggest by AUM:
We’ve listed the top 10 pharmaceutical companies in 2020 above, however, all of them are listed overseas.
Back home, SG’s healthcare sector has done well this year mostly thanks to Covid:
Here’re three pharmaceutical companies that are listed in Singapore:
For more investing ideas, here’s a complete list of healthcare stocks listed on SGX.
Drug development is a long and expensive process. From lab to market, it can take about 10 years and at least US$350 million.
There are many checkpoints along the way, at which the drug could fail and never make it to market. This could mean that pharmaceutical companies would be burning money until they develop something that could actually be sold.
In order to incentivise companies to innovate and develop new drugs, drug developers are granted a drug patent on new drugs. A drug patent can last for about 20 years, of which the company is guaranteed five years of patent exclusivity.
In an oversimplified summary, drug patents grant the bearer rights to dominate the sales of the drug in question.
However, once the drug patent expires, competitors are allowed to manufacture and sell the drug. Although this keeps drug prices competitive for the consumers, it also means that pharmaceutical companies generally lose market share for a drug, once its patent expires. The increase in competition leads to lower revenues on said drug.
It is essential for pharmaceutical companies to constantly be developing new drugs, in order to stay competitive.
That said, new drug sales are only one source of revenue for pharmaceutical companies. Their business is way more complex involving M&A, developing drug pipelines, sales of generic drugs, etc. If you’re interested, PWC released a summary on the pharmaceutical industry and its business models, as part of their Pharma 2020 series.
Globally the Food and Drug Administration (FDA) and the European Medicines Agency (EMA) have independently announced measures to better regulate the safety of medicines.
Drugs deemed to have adverse effects are at risk of being pulled off the markets around the world as regulators are collaborating more closely.
If you’re an ETF investor, you’ll probably not have to worry about this as much.
One of the most high profile frauds in healthcare has got to be Theranos – a healthy technology company that claimed to be able to process blood tests with very small amounts of blood. Not exactly a pharmaceutical company, however the results of its diagnosis would then be used to prescribe suitable medicine for individuals. It managed to blindside even the smartest in the field, and only made headlines after it grew to a valuation of $9B despite being unable to show proof of its claims. Thankfully, the fraud was uncovered before the company went public.
The pharmaceutical industry is a hyper competitive industry. We have seen (and waited in anticipation) as companies raced to develop and test viable Covid-19 vaccines. Such races to develop, manufacture and deliver pharmaceutical drugs takes place on a regular basis. Under such pressure, it’s not surprising that some individuals may turn to fraud.
For more, Baum Hedlund Law has an overview on the types of fraud you should look out for in the pharmaceutical industry.
As mentioned above, Covid-19 has been the curveball of 2020. Within the pharmaceutical industry, the pandemic has thrown off all previous outlook and trends. This paper offers a comprehensive overview of the potential short and long term impacts of Covid-19 in the pharmaceutical industry.
Key impacts include:
Due to social distancing measures taken across the globe, medical consultations are going digital. This will affect how drugs are being marketed, prescribed and distributed both in the short and long term.
China and India are major suppliers of Active Pharmaceutical Ingredients (APIs) for the manufacturing of drugs. Border restrictions and export bans had resulted in a shortage of such ingredients.
Governments may impose new regulations to prevent such shortages in the future. Such regulations may affect the cost of drug manufacturing in the future.
As efforts shift towards the fight against Covid-19, less attention and urgency is left for the development of non-Covid related drugs.
This could lead to a delay in clinical trials and new trial starts, ultimately disrupting product launches and the future revenues of pharmaceutical companies.
Pharmaceutical has been a huge industry pre-Covid, forecasted to hit $1.5T in 2021. The pandemic has led to a shift in the industry which may slow down its growth.
You may want to note 3 up and coming pharmaceutical trends:
I’ve also listed the top 10 pharmaceutical companies by market cap, 3 ETFs and 3 SGX-listed stocks in this article. Hopefully you’ll find some investing ideas to start your stock research in the pharmaceutical industry.
Else, you can start here: Healthcare stocks listed on SGX.