Pharmaceutical companies make drugs and vaccines from chemical bases.
Post-COVID-19, many Canadian investors are bullish about pharmaceutical companies, especially since around 19% of Canadians are aged 65 years or older.(1) Moreover, pharmaceutical companies accounted for roughly US$1.5 trillion in global sales in 2022,(2) with about half that revenue earned between Canada and the U.S.(3)
Below, we’ll look at the growth opportunities with Canada’s top pharmaceutical stocks and see if they’re right for you.
What are pharmaceutical stocks?
Pharmaceutical stocks are companies that build drugs and vaccines from chemical bases. This distinguishes them from biotech stocks, which make drugs from living organisms.
Pharmaceutical stocks show the most promise when their underlying companies have robust drug pipelines and numerous regulatory-approved drugs.
“Drug pipelines” have various stages of development, from clinical testing to regulatory approval. These stages involve testing new products (or old products but for new purposes) on increasingly larger groups of human subjects. Once the drug passes regulatory review, it leaves the pipeline and becomes a new product.
Drugs can cost billions to develop and take decades to pass through a pipeline. The safest pharmaceutical stocks, then, will already have drug patents and numerous other drugs in their final stages of the pipeline (phase III or regulatory approval).
Top pharmaceutical stocks in Canada
For Canadian investors, here are some of the top pharmaceutical stocks trading in Canada.
|Knight Therapeutics (TSX:GUD)||Develops drugs that treat Alzheimer’s, cancer, and rare diseases|
|Cipher Pharmaceutics (TSX: CPH)||Makes drugs for dermatological purposes|
|HLS Therapeutics (TSX:HLS)||Treats problems in the cardiovascular and central nervous systems|
1. Knight Therapeutics
Based in Montreal, Knight Therapeutics is a multinational company that develops and acquires innovative pharmaceutical products from drugmakers in Canada and Latin America.
Knight’s product profile includes drugs that help with Alzheimer’s, gastrointestinal pains, ocular inflammations, and certain cancers.
The company doesn’t manufacture its own drugs. Instead, it partners with other pharmaceutical companies to produce drugs it believes have potential. It does this through in-licensing – funding drug development, and out-licensing – helping companies market their completed drugs to suitable healthcare facilities. Both licenses allow Knight to earn a portion of the drugs’ sales.
The company has licenses for over 100 products and has strong positive cash flow. It also has lucrative partnerships with big-name pharma companies, like Bristol Myers Squibb and AstraZeneca.
2. Cipher Pharmaceuticals
Cipher is a specialty pharmaceutical company focused on building a portfolio of drugs that fulfill “unmet medical needs.”
The company has 10 patented products and three more in its pipeline – two in phase III and one in pre-clinical trials. Many of its drugs serve dermatological purposes, such as prescriptions for rashes and acne, but it also has products that help with heart disease and severe pain.
Its flagship products include Epuris – oral medication to treat acne – and Ozenoxacin – topic cream to treat the skin infection impetigo. The specialty pharma also produces a slew of products for pain, such as the Beteflam Patch and ConZip.
The company has historically maintained a strong balance sheet with positive cash flow and low debt. It has recently secured a credit line of up to US$35 million from the Bank of Canada to help fund its research.
3. HLS Therapeutics
Headquartered in Toronto, HLS focuses on drugs that treat problems in the cardiovascular and central nervous systems.
Like Knight and Cipher, HLS produces drugs through partnerships with other pharmaceutical companies. The company has several products in its portfolio, including Vascepa (medication for high levels of fat in the blood) and Trepulmix (medication for hypertension).
The company has a small market cap but strong positive cash flow. It also pays a modest dividend to shareholders.
Pros of pharmaceutical stocks
- New patented drugs can lead to sustained growth. Pharmaceuticals with numerous products can grow their revenues significantly.
- Limited competition. It’s not easy to become a pharmaceutical company. Research costs are high, clinical trials can fail, and lab equipment is expensive. The high barrier to entry makes competition less severe.
Cons of pharmaceutical stocks
- Drugs can fail clinical trials. Many pre-clinical and early-phase drugs fail to make it to shelves. Even some phase III drugs – or those in regulatory reviews – will come back ineffective or unsafe under closer scrutiny.
- Liability risks. Consumers can sue pharmaceutical companies and have them remove drugs from their product portfolio. Over the years, lawsuits have been a significant drain on the profits of pharmaceutical companies.
- Expired patents. Once a pharmaceutical company’s patents end, generic drugmakers can make the same drug at a lower price. This threatens a company’s top-line sales and can make marketing efforts more expensive.
Are pharmaceutical stocks right for you?
Since many pharmaceutical companies in Canada are small-cap stocks in their growth stage, they’re well-suited for growth and value stock investors.
For Canadian investors with smaller appetites for risk, however, pharmaceutical stocks may not be the best fit for your investing strategy. These stocks can be highly volatile, especially if clinical trials fail. Federal regulations and political decisions can also delay drugs in a pipeline, and companies with drugs on shelves can face litigation and lawsuits if drugs have adverse effects.
But the payoff for certain pharmaceutical stocks can be sweet, especially for long-term investors who have time and patience to wait for new drug releases. If you’re okay with jumpy price movements, exposing your portfolio to the pharmaceutical industry might benefit you in the long run.