As an investor, I tend to take a Buffet approach to investing in most situations. If I can't fully understand the industry that a stock is involved in, why pricing and valuation make sense and where that stock will be in the next year or so, I usually stay hands off. I have never invested in a pharmaceutical company and I might never do it, but I admit, it is an interesting industry, mostly because it is SO different from everything else.
For the most part, I'm at a complete loss when it comes to pharmaceuticals, but I have been watching from a distance for a while to learn how it works. I have the following impressions about pharmaceutical stocks. For those who buy a lot in this sector, please feel free to comment on these observations.
I don't focus on large cap stocks, so my observations are purely in the small cap space.
1) There are many more failing drug companies than successful ones.
2) One drug can make or break the stock price of the entire company.
3) The most successful companies have multiple drugs in the pipeline, even after they have one successful drug that has gone to market.
4) Competition is fierce, and the success of one drug company often means the failure of several others who were competing to be the first to get a drug to market in a certain sector.
How does one work their way through this sector? Do you make multiple small plays on different companies working on a drug in the same area, knowing that a success means a 10X increase that would offset the losses by the others? What is the magic formula?