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Why one advisor is bullish on Big Pharma in NJ

- Last modified: December 19, 2017 at 11:32 AM

A solid investment opportunity may well be right in your backyard: Big Pharma.

Our state is home to 14 of the 20 largest pharmaceutical companies in the world. Chances are, one of these companies is not too far from your neighborhood.

Consider this: As of 2016, biopharmaceutical and life science employers in our state paid more than $16.5 billion in wages – nearly eight percent of the state’s total wages. Further, more than 125,000 people in New Jersey are employed by companies in the industry – a number that is likely growing. In fact, this past summer, two international pharmaceutical firms announced they were moving to the Somerset Hills area, bringing with them an additional 1,000 jobs.

Clearly, the industry is important to New Jersey’s economy. And while there are undoubtedly many factors drawing companies in this sector to our state, a fairly new policy allowing research and development tax credits up to 100 percent of a company’s corporate tax liability may be among them. The state reports that about 2,200 clinical trials currently are underway – a good sign of future profitability as the drugs or devices slowly develop into products.

In fact, some have referred to our state as “The Medicine Chest of the World.” So what does this mean for investors?

While every individual is different and no one investment is right for everyone, so-called Big Pharma does offer some interesting investment opportunities right now. There are many options to consider – all dependent upon the goals and long-term objectives of the individual.

For those seeking immediate income, for example, consider dividend payers. The major pharmaceutical companies tend to generate significant cash flows that allow them, at least historically, to pay higher dividends than many similar-sized nonpharma corporations. Keep in mind that past performance is no guarantee of future results or dividend payments. Some of our state’s larger drug companies, however, are worthy of further research.

If near-term income is not the objective, consider the potential for capital gains – but don’t count on a windfall from a merger. For the most part, at least for the first half of 2017, there were few significant mergers in this industry. I believe that a far better way to seek potential capital gains is to look at individual companies – their profits, forecasts and, most important in this industry, what medicines or technologies are in the pipeline.

Company reports often tout their pipeline products. Further, some analysts suggest that many companies will reduce operational costs so they can more easily reinvest in internal pipeline development. These may be important factors to consider weighing investment options.

Meanwhile, overall stock price improvement in the pharmaceutical industry seems increasingly likely over time, I believe, based upon White House and congressional interest in reduced regulation. While there remains no true way to predict the government’s firm stance on the issue of drug prices and regulation, it seems reasonable to expect that some level of reduced regulation may benefit pharmaceutical and biotech stocks. Investing with this in mind is only for those whose risk tolerance is sufficient.

Another factor that investors should consider about this industry is the approval process that new drugs and devices must go through before entering the marketplace. Though the U.S. Food and Drug Administration approved 28 new drugs by the second quarter of 2017, more than in all of 2016, there is no telling that the pace will continue.

The pharmaceutical industry is a conglomeration of sub-categories. Some analysts cautiously suggest that one area worth a second look is the specialty pharmaceutical group. Stocks in this group with potential are those, analysts say, that can successfully evolve from seeking growth through merger and increasing prices to a more organic growth strategy, perhaps even by divesting noncore businesses.

True, we typically equate this investment sector with health care: disease-fighting drugs, diagnostic tests, vaccines, medical devices, or prosthetics. But some companies strive to enhance or protect the environment: For instance, drought-resistant crops or biofuels that reduce greenhouse gas emissions and are made of waste products like the nonedible parts of plants, such as cornstalks. And some products simply improve our lifestyle. Think of the enzymes in our detergent that remove stains from clothing; plastics made without petroleum; and even those beautiful blonde highlights from the salon.

The focus of the industry, of course, is medicine; drugs and devices that help ease pain, cure disease and help us stay healthy.

And that is an important reason why I like the pharmaceutical industry: the chance to invest in potential cures for disease and new approaches to helping people. Socially responsible investing is of increasing interest to many. What better way to be socially responsible than to invest in companies that are helping to cure disease?

As with any investment, of course, individuals should discuss the pharmaceutical sector with their financial advisors to maintain a well-balanced, diversified portfolio – one that may just include investments from our own backyard.

Suzanne M. Akian is a financial advisor with the Global Wealth Management Division of Morgan Stanley in New York City. 

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