What are drug companies?

Drug companies are companies that develop, manufacture, and market pharmaceutical drugs.

The major drug companies are more speculative than most investors realize. They need a continuing flow of successful new products to maintain their earnings. They face increasing litigation and aggressive competition from generics as drugs come off patent. Unlike tech stocks, they have formidable regulatory burdens, and unlike other manufacturing stocks such as, say, auto companies, they do not benefit from customer loyalty.

The general view on these stocks seems to be that they are can’t-miss investments because the baby boomers are reaching an age when they will need drugs for a number of medical conditions, and are willing to pay for them.

Drug companies need to spend heavily to create new drugs, and spend even more to gain regulatory approval. Even then, they only get to profit for a limited time before patents run out and generic products appear. Then too, their research spending may lead to dead ends, rather than new drugs that fill a need and can overcome the regulatory hurdles.

If you want to invest in drug companies, we think you should focus on those that have high cash holdings and a number of drugs in the pipeline. And all the better if they have access to fast-growing markets, like China, India and Latin America.

Drug companies may have a place in your portfolio, and at TSI Network, we recommend using our three-part Successful Investor philosophy to decide how:

1. Invest mainly in well-established companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

Discover how most investors who successfully build wealth over the long term follow certain investing practices. Find out what they are in our FREE investing guide, The 10 Best Practices of Successful Investors.