Strong Product Pipelines Have Pharmaceutical Companies Poised for Growth

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With the global economy beginning to stabilize, the stock market is looking more attractive than ever. One industry that could stand to make huge gains in the near future is the pharmaceutical industry, though it's worth noting that this sector is a high risk, high reward industry. Still, pharmaceutical stocks offer a great way to diversify your portfolio and add stocks with high potential. Yes, there are risks involved, but having some higher risk stocks in your portfolio can increase long-term growth potential.

This is especially true for start-up companies which offer the highest potential for returns, but also the greatest risk for losses. Some start-ups will make major breakthroughs and produce huge profits, other start ups will simply fail and fold. If start-ups aren't your thing, you can invest in larger, more stable companies, such as Pfizer (NYSE: PFE), which have more diverse product line-ups and revenue streams.

You should also examine mid-sized companies that offer a good mix of reward and risk. Still, if a major lawsuit comes out, or a pivotal drug fails to pass clinical trials, stock prices can swing wildly no matter which company you are invested in.

A young, aggressive start up

One company that has the potential to produce strong future returns is Puma Biotechnology (NYSE: PBYI). The company's stock price has grown nearly 200% in the last year and it currently has a market cap of just over $1 billion. The company has plenty of room to grow, and with its primary product, PB272 (neratinib), now entering phase III of the trial phase, there is a chance that the stock could explode.

This will depend largely on whether PB272, a breast cancer treatment, proves effective, though early tests and research suggests that it will. If you are looking to add a high risk, high reward stock to your portfolio, Puma Biotechnology deserves a close examination.

A diversified multinational with growth potential

If you are looking for a safer company, Pfizer offers a chance to invest in a diversified multi-billion dollar company. With a market cap of just over $200 billion, Pfizer certainly doesn't count as a start-up. Still, with a trailing P/E of 13.45 and a profit margin of nearly 27%, the company appears to be positioned for strong future growth.

Some investors might be wary of the $40 billion worth of debt, but Pfizer maintains $35.41 billion cash-in-hand. Pfizer also has several interesting new products in the market, including Xalkori, which has proven in trials to halt the worsening of lung cancer, and has thus far shown to be more effective than chemotherapy.

A medium size company with sky high growth potential

If you're looking for a good “middle-ground” investment that offers a good mix of risks and rewards, British firm AstraZeneca (NYSE: AZN) is definitely worth a look. With a trailing P/E of only 11.38 and a market cap of just over $60 billion, AstraZeneca has plenty of room to grow. The company enjoys a 21% profit margin on $27 billion in revenue. There is $10.2 billion worth of debt on its balance sheet, but the company maintains some $8 billion in cash.

Best of all, the company has 71 drug candidates in trials and 13 drugs which have already been approved or are in the process of approval. The company also recently poached Pascel Soriot, a widely respected industry expert, to come on board as CEO and restructure the company. AstraZeneca could definitely be a big winner in the years to come.

Evaluating the pharmaceutical industry as a whole

With the population across emerging markets becoming wealthier, millions more customers will soon be able to afford more expensive drugs and medications. And with the increasing enforcement of copyright laws, pharmaceutical companies will be able to benefit from this growth. At the same time markets such as the United States and Japan will continue to age and older populations will require increasing treatments and drugs to maintain their health. These combined shifts in demographics should present ample opportunity for industry growth. Analysts now expect the industry to record 5% CAGR through 2017.

As with any investment, investments in pharmaceuticals will come with their own risks. If you choose to invest in pharmaceutical stocks, you should closely monitor product pipelines, and the performance of current products. AstraZeneca is looking to be in a particularly strong position with 13 products that will soon be entering the market. And if Puma's PB272 proves successful, the stock price could skyrocket.

You will also need to watch out for pending lawsuits or rising medical hazards from drugs. Right now, Pfizer is facing lawsuits over Bextra and Celebrax for cardiovascular risks. So far, a judge has dismissed several claims but is allowing the case to move forward. AstraZeneca, on the other hand, recently won a patent protection lawsuit for Crestor, its top-selling drug. Now, the drug will be protected until 2016.

The risk of drugs failing in clinical trails, or lawsuits emerging over various issues, does make the pharmaceutical industry a high-risk, high reward industry. Still, for investors who make the right picks, returns can be substantial. 

While looking at 2012 performance is useful, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Colin Tweel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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