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Investing in pharmaceutical stocks

The market is massive but competition between brand-name and generic drugmakers is fierce.

The pharmaceutical industry is sizable, with the US commanding the largest slice of the market. But competition within the sector is cutthroat and regulatory approval is an ongoing hurdle. Read on to find out what you need to know before investing in pharmaceutical stocks from Australia.

What are pharmaceutical stocks?

Pharmaceutical stocks are stocks from companies that research and produce pharmaceutical drugs and medical equipment.

The industry is dominated by big names like Pfizer, Johnson & Johnson and GlaxoSmithKline — famous for blockbuster drugs netting over $US 1 billion in annual sales, like Advair, Lipitor and Zoloft.

But there are numerous up-and-comers in the industry offering a spectrum of entry points for Australian investors, like livestock medicine manufacturer Zoetis or Neoleukin Therapeutics, a biopharmaceutical company that targets immunological disorders.

Why invest in pharmaceutical stocks?

The global pharmaceutical industry is massive — and the US holds the largest slice of the market. In 2018, worldwide pharmaceutical revenue sat at $US 1.2 trillion, with the US commanding a 40.4% share of the market with pharmaceutical sales of $US 484.5 billion.

According to Statista, the US also happens to have some of the highest prescription drug prices in the world — bad news for the general public but profitable for well-established drug companies like Pfizer and its shareholders.

Pharma stocks also have the potential to outperform the broader market. For example, the SPDR S&P Pharmaceuticals ETF has outperformed the S&P 500 since its 2006 inception.

And if the potential for profit isn’t incentive enough, investors also have the opportunity to back potentially groundbreaking, life-saving medicine — medicine that they or a loved one may one day rely on.

Risks of investing in pharmaceuticals

Pharmaceutical stocks present a potentially lucrative investment opportunity but carry significant risks, including competition from generic drugmakers, product patent expirations and the substantial cost of research and development (R&D).

It’s estimated that pharmaceutical companies spend approximately 20% of their revenue on research and development. In fact, in 2018, US companies spent a collective $US 80 billion on R&D, according to Statista. What makes this expense especially unpalatable is the risk drug companies face in having their products rejected by regulatory authorities like the US Food and Drug Association (FDA). A company could spend millions researching and developing a product, only to have it rejected by the FDA.

Pharma companies also face steep competition from generic drugmakers attempting to undercut brand-name products with cheaper alternatives — especially for drugs with patent expirations on the horizon.

The industry is far from foolproof, and while pharma stocks could be a potentially profitable addition to your portfolio, make sure you understand the risks involved before you invest.

How has COVID-19 affected pharmaceutical stocks?

In the wake of the coronavirus pandemic, pharmaceutical companies have been thrust into the global spotlight as over 155 vaccine candidates scramble for regulatory clearance. Many of the big-name drug manufacturers with COVID-19 vaccines in trials have seen their stock prices rise alongside press releases of potential efficacy rates, including Pfizer, Moderna and AstraZeneca. These so-called COVID stocks may continue to see market growth, but the gains related to the pandemic may be short-lived.

There’s money to be made from selling a COVID-19 vaccine, but analysts warn that as more drug companies enter late-stage trials, the number of viable vaccine candidates will grow and no single manufacturer will be able to monopolize vaccine sales.

Investing in the pharmaceuticals industry

These pharmaceutical stocks hail from companies headquartered in Australia and around the globe.

Another way to invest in the pharmaceuticals industry is through ETFs. Pharmaceutical ETFs contain baskets of stocks from a range of businesses within the industry, including pharmaceutical companies, medical device manufacturers and more.

  • BetaShares Global Healthcare ETF (DRUG)

Compare trading platforms

To invest, you’ll need a brokerage account in Australia. Explore your options below.

Name Product Price per trade Inactivity fee Asset class International
eToro
Finder AwardExclusive
eToro
$0
US$10 per month if there’s been no log-in for 12 months
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: Get 12 months of investment tracking app Delta PRO for free when you fund your eToro account (T&Cs apply).
CFD service. Capital at risk.
Join the world's biggest social trading network when you trade stocks, commodities and currencies from the one account.
CMC Invest
Finder Award
CMC Invest
$0
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
$0 brokerage on US, UK, Canadian and Japanese markets (FX spreads apply).
Trade over 45,000 shares and ETFs from Australia and 15 major global markets. Plus, buy Aussie shares or ETFs for $0 brokerage up to $1,000 (First buy order of each security, each day - excludes margin loan settled trades).
Moomoo Share Trading
US$0.99
$0
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: Get an additional 30 days on top of the regular brokerage-free period for new accounts. T&Cs apply.
Trade shares on the ASX, the US markets and buy ETFs with Moomoo. Plus join a community over 20 million investors.
Spaceship US Investing
US$0
$0
US shares, ETFs
Yes
Dive into US markets with $0 brokerage, starting with just a $10 investment.
Unlock US stocks and ETFs with minimal entry barriers, offering straightforward, low-cost options for new and seasoned investors.
Tiger Brokers
US$2
$0
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: 10 no-brokerage US or ASX market trades in the first 180 days + 7% p.a. on uninvested cash with first deposit of any amount, plus US$30 TSLA + US$30 NVDA shares with deposits up to AU$2000. T&Cs apply.
Trade Australian, US and Asian stocks with no minimum deposit on Tiger Broker’s feature-packed platform.
Webull
US$0.25
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
Sign up & deposit $200 to get $100 of rewards value, or deposit $1,000 to get $200 worth. Up to $5,450 value available. T&Cs apply.
Trade ASX and US stocks and US options, plus gain access to inbuilt news platforms and educational resources. You can also start trading for less with fractional shares.
Saxo Invested
US$1
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
Access 22,000+ stocks on 50+ exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Bottom line

Pharma stocks offer Australian investors the opportunity to back groundbreaking drug research, but competition in this industry has the potential to threaten profits.

To invest in pharmaceutical companies, you’ll need a brokerage account. Compare your platform options to find the brokerage that fits your budget and investment goals needs.

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