Even though the large pharmaceutical groups of today dominate the marketplace it is worth remembering that they were once a minnow in a big pond. It would be fair to say it is more difficult to become a “major player” today but there are companies with groundbreaking technology and treatments which have the potential to make it to the top table. So, what do you need to look out for when trading pharmaceutical stocks?
Overbought and oversold
As sure as night becomes day, small pharmaceutical stocks with a good story going forward will on numerous occasions be overbought and oversold. In the event of good news investors will pile on board pushing the price to unsustainable levels and the slightest disappointment might see speculators bailout. This is something which happens with all companies on a regular basis but perhaps more so with pharmaceutical and technology stocks because of their relatively high risk/reward background.
Therefore, if you believe that the long-term story remains intact you should look to buy on weakness and if you believe the shares are perhaps overstretched in the short term, take a profit on strength. However, always remember that the “big announcement” could be just around the corner so disposing of your full holding might prove risky.
Competition is good
In a perfect world you might be forgiven for assuming that a groundbreaking treatment in the world of pharmaceuticals would need to dominate a market. If you dominate that market then you effectively own the market and you can dictate the price going forward. This may work wonders in the short term but in the longer term it is good to have competition because it ensures that all companies “stay on their toes” and the more companies trading in this particular market the greater the combined exposure to investors.
It is also worth noting that the vast majority of “groundbreaking treatments” in the world of pharmaceuticals never make it to the market. As they say, pharmaceutical groups “bury their dead at night” which means they effectively drop failed treatments as quietly as possible.
Partnerships with big pharmaceutical companies
While a $10 million investment by a large pharmaceutical company may be nothing but small change to them it can make or break a relatively small company with a new groundbreaking treatment. When a relatively young pharmaceutical company with a good story to tell announces a tie-up with a major pharmaceutical group this should be a wake-up call for investors. While these pharmaceutical giants may have billions of dollars to invest they are not in the habit of “giving money away”. If they believe the risk reward ratio is in their favour and they decide to invest a few million dollars then it is certainly worth a look.
The only downside is that in the event of a company signing an exclusive partnership with a large pharmaceutical company this could have a material impact upon long-term growth prospects. On the whole exclusive deals are not necessarily the best thing for long-term growth but if a company needs finance, exposure and perhaps a route to market, then sometimes it can be the only option in a very crowded marketplace.
Conclusion
Trading relatively small pharmaceutical groups with potentially groundbreaking treatments can lead to enormous profits in the longer term. The only danger is that the vast majority of “groundbreaking technologies” never actually make it to market therefore you have to time your purchases and your sales to reduce your risk. Even those which do make it to market will likely have a rocky ride in the early years until they are established and have a relatively steady cash flow.