When Viagra surged into consumers' bedrooms, Pfizer's stock enjoyed a sudden rise - satisfying investors and consumers alike. Although Pfizer was far from an unknown company at the time, most of us did not hold stock. There are many reasons why an investor may not feel comfortable investing in pharmaceutical companies, but if you do want to get in on the next little blue pill there is still the obstacle of how to evaluate the industry. This article will explore some of the issues involved in pharmaceutical investing.

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What's the Pipeline and Why Does It Take So Long?
The pipeline is a term that refers to how many products - vaccines, steroids, immune system suppressants, aphrodisiacs (all under the general heading of drugs) - are in various stages of research and development (R&D). It takes between 10 to 15 years for an average drug to make it to pharmacy counters from a scientist's notebook.


An investor or someone suffering from a fatal disease may bemoan that the FDA is an extra hindrance on an already complicated process. But, as consumers, we should appreciate the fact that it is because of the FDA that we can take an aspirin without having to worry about growing a third arm. (To continue reading on the subject, see The Ups And Downs Of Biotechnology.)

Choosing Between New and Old


Performing a Check-Up
A cursory glance at the pharmaceutical industry, mainly the smaller drug makers, will show that the firms trade at a higher price-earnings ratio than those in other industries. This is because most of the expenses incurred by pharmaceuticals are of the research and development variety, and usually are expensed immediately. This means that the company pays the cost of developing a drug years before the drug starts to produce revenue. Companies with price-earnings ratios in the 20s and 30s are commonplace even if the rest of the market is in the teens. Another figure that will seem out of place is the return on equity. These companies have a noticeably higher return on equity when compared to other industries. (To learn more about the price-earnings ratio, see Understanding The P/E Ratio, Move Over P/E, Make Way For The PEG and Analyze Investments Quickly With Ratios.)

The Importance of a Good Digestive System


A Healthy Diet Beats Gorging
A word of caution: sometimes having too many drugs in development is as dangerous as having too few drugs in the works. Just as eating too much messes up your digestion and is dangerous to your health, drug companies can gorge and neglect to give each product the proper attention. Many drugs are born and die in the corridors of R&D, and not all of them are useless. The cholesterol-lowering drug, Lipitor, would have died in the labs if not for the determination of the scientists who designed it. It became a successful product after being brought to the consumers via a joint venture between Warner-Lambert, the company whose people developed it, and Pfizer.

The Long-Term Prognosis
In order to filter the large companies with huge pipelines, we have to look at the types of drugs that are coming up. Investing in a company that has a successful product is usually a safe practice, but with the patent limit in the pharmaceutical industry, it is like betting on a horse that has already won a race earlier in the day - it may come out ahead again, or it may be too tired.


A Troubling Symptom
It is difficult to tell whether a certain drug will become financially successful even if it is chemically sound. Many people think that specific arthritis medications would be redundant in the face of aspirin and Tylenol, but they have increased in sales as the baby boomers age. The attention of the FDA, however, is the equivalent of coughing up blood for a drug company. When a company is forced to pull a drug from market, or even if it does so voluntarily, it is very difficult to bring that drug back - not because it won't be effective, but because the medical field will have already found a substitute drug to fill that niche. A quick look at the FDA's website will tell you what products are being scrutinized.


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