Pharmaceutical Stocks Investment Guide: Master the Core Logic and Stock Selection Strategies for Biotech Stocks

Why are pharmaceutical stocks worth关注？The answer to this question is far more profound than you might imagine. Compared to cyclical industries, pharmaceutical stocks have a unique anti-cyclical characteristic—regardless of economic fluctuations, human demand for healthcare always exists. It is this rigid demand, combined with the driving force of emerging fields such as new drug development and telemedicine, that has made biotech stocks a sought-after investment target in recent years.

Investment Appeal of Pharmaceutical Stocks: From Anti-Cyclical to Imagination Space

Unlike the electronics industry, which needs to adjust capacity according to economic cycles, pharmaceutical stocks are built on a more solid foundation. People need to eat grains, and when they fall ill, they require medical treatment—this basic logic determines the stability of the pharmaceutical industry.

But what truly ignites investment enthusiasm is the imagination space of pharmaceutical stocks. Accelerating global aging, rapid progress in new drug research, and ever-changing medical equipment collectively create continuous growth momentum for biotech stocks. Breakthroughs in new clinical trials, FDA approvals, and new indications being approved—each milestone can trigger sharp stock price fluctuations.

The US biopharmaceutical market size ranks first globally, projected to reach $445 billion by 2027, with a CAGR of 8.5%. This vast market continues to expand, and domestic US companies, leveraging their unique industrial ecosystem, lead global pharmaceutical innovation.

Core Risks of Pharmaceutical Stocks: Uncertainty and Policy Interference

Investing in pharmaceutical stocks requires confronting a reality: risks in this industry are also prominent.

Biotech company stock prices are often dominated by multiple uncertainties—clinical trial success or failure, competitor movements, patent disputes, and even regulatory policy changes. A failed Phase III trial can halve a company’s stock price; a successful FDA approval can cause a surge. During the COVID-19 pandemic in 2020, vaccine concept stocks soared, but as market sentiment shifted, many companies’ stock prices also experienced sharp declines.

Moreover, the pharmaceutical industry is one of the most heavily regulated sectors worldwide. Governments and insurance systems impose strict controls on drug prices and medical services. Taiwan’s National Health Insurance, while providing universal coverage, also suppresses drug prices, leading many new drugs to avoid entering the Taiwanese market. Conversely, the US market offers greater pricing power, with Americans spending a higher proportion of income on healthcare.

How to Assess the True Value of Pharmaceutical Stocks

Traditional financial metrics are ineffective for pharmaceutical stocks.

Most biotech companies in R&D stages lack stable cash flow and may even incur long-term losses. But this does not mean they lack value—value comes from the future. Once a new drug passes clinical trials and gains FDA approval, stock prices often initiate a strong upward trend. Taiwan’s PhytoHealth (藥華藥) doubled its stock price in 2022 amid a market downturn, despite still reporting negative EPS at the time, thanks to orphan drug approval by the US FDA. By 2023, the company completed Phase III clinical trials for a new drug for thrombocytosis, and the next year, its stock soared to a high of NT$388.

This teaches us that valuation of pharmaceutical stocks must focus on future product pipelines. The industry term “blockbusters” refers to drugs with annual sales exceeding $1 billion. Successful large pharmaceutical companies often reinvest 50-60% of revenue into R&D to sustain continuous innovation. Because of this, institutional investors, even when seeing operating margins decline due to R&D investments, tend to raise their valuation and target prices.

US biotech giants follow this model—maintaining stable operating margins, with remaining funds used for in-house R&D or acquiring promising small biotech firms. Although this strategy may suppress short-term profits, it ensures long-term growth.

For R&D-stage biotech companies, institutional investors often use PSR (Price-to-Sales Ratio) rather than traditional P/E multiples for valuation. This reflects the industry’s uniqueness—profits are not yet visible, but revenue potential is enormous.

FDA Approval: The Decisive Factor for Pharmaceutical Stocks

Whether Taiwanese drugmakers or US domestic companies, everyone’s focus is on FDA approval outcomes. The US FDA has the world’s strictest pharmaceutical monitoring standards. Once a drug is approved by the FDA, approval in other countries usually proceeds rapidly. Conversely, FDA rejection or delays can be fatal blows to pharmaceutical stocks.

This also explains why US pharmaceutical stocks have much higher investment value than those in other regions.

Competitive Advantages of the US Pharmaceutical Industry

The US pharmaceutical market is the largest and most active globally. Unlike many countries with government regulation and price controls, the US industry is highly market-oriented. Drugs can be priced high, paid for by insurers and individuals. This high-profit margin incentivizes countless innovative enterprises.

The US biopharmaceutical workforce approaches 1 million, spanning R&D, manufacturing, sales, and other segments. Top scientists and business talents gather here, forming a unique ecosystem. The US capital markets’ enthusiasm for pharma is unparalleled, with venture capital continuously flowing into this sector.

These factors combine to make the US the most favorable environment for pharmaceutical industry development. Global investors recognize this. In contrast, Asian pharmaceutical markets are still developing; even with excellent companies emerging, their stock performance and overall competitiveness are not on par with US-listed biotech firms.

US Stock Pharmaceutical Investment Map

The US healthcare market is divided into four main sectors: Pharmaceuticals, Biotechnology, Medical Devices, and Healthcare Services. Each has leading companies worth关注。

Pharmaceuticals

Eli Lilly (LLY) is currently the world’s largest pharmaceutical company by market cap, reaching $842.05 billion in 2024, ranked 10th globally. Its weight-loss drug line has performed remarkably in recent years, with over 60% market share in North America. The weight-loss market is expected to maintain high growth in the coming years, making LLY a must-watch stock.

Pfizer (PFE) is widely known for its COVID-19 vaccine, but its main revenue still comes from traditional pharmaceuticals. The stock has shown steady growth, and market downturns often present long-term investment opportunities.

Merck (MRK) has centuries of pharmaceutical heritage. Its flagship product, Keytruda, is one of the world’s best-selling anti-cancer drugs. Its stock has been long-term rising, with generous dividends.

Diversified Healthcare

Johnson & Johnson (JNJ) and AbbVie (ABBV) exemplify diversified healthcare companies. J&J’s stock is less volatile, making it ideal for dollar-cost averaging and long-term holding, often called the “King of biotech stocks.” AbbVie’s main profit comes from Humira, a heavyweight immunology drug. Although patent expirations increase competition, the company holds hundreds of patents and earns licensing fees, maintaining its competitive edge.

Healthcare Services

UnitedHealth (UNH) leads in healthcare services, benefiting from US aging populations and increasing medical demand. Its revenue and profits steadily grow, with long-term stock appreciation and stable dividends.

These companies are true leaders in the US healthcare market, with strong competitiveness, innovation, solid financials, and attractive returns.

Investment Opportunities in Taiwanese Pharmaceutical Stocks

Compared to US stocks, Taiwanese pharma stocks are relatively calm. This reflects Taiwan’s overall capital market focus on electronics stocks and also the limitations in the scale and innovation capacity of its pharmaceutical industry.

Sino Biopharmaceutical (1720) is a diversified biotech enterprise involved in Western medicine, health products, and medical devices. Its revenue and net profit growth have been slow recently, but stable dividends make it popular among dividend investors.

Hokuriku Biotech (1783) mainly develops biopharmaceuticals and medical devices. The company turned profitable in 2017, with stable fundamentals, healthy asset-liability structure, and ongoing attention.

Final Advice on Pharmaceutical Stock Investment

Pharmaceutical stocks indeed have imagination space and investment potential, but this potential is most fully realized in the US market. US biotech stocks have accumulated decades of industry experience, gathering the world’s top innovation forces. In comparison, Taiwan’s pharmaceutical industry, while noteworthy, offers fewer opportunities for multi-fold gains like those seen in US stocks.

The Asian pharmaceutical market is still evolving; even with excellent companies, the maturity of capital markets, investor professionalism, and industry technology depth are inferior to those in the US. If you are interested in investing in pharma stocks, it is recommended to focus on the development trends of the US pharmaceutical industry, as US stocks are the top choice for global investors today. Investing in pharma stocks requires industry expertise, which entails higher learning costs but also offers greater potential for excess returns.