Like Big Oil, Big Pharma has entered a period of consolidation.
There are many factors contributing to this. First, it can be cheaper to buy a company with a promising product rather than undergo the costs of developing a drug.
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Add in low interest rates that make it cheap to borrow money to buy other companies. Finally, Big Pharma has also done well, providing the profit income that allows for corporate deals.
For investors, there are three ways to profit from these drug company deals.
1. Exchange traded funds for the sector offer profits from a broad asset base.
As discussed in a recent article on Benzinga, ETFs covering the sector include iShares US Pharmaceutical (NYSE:IHE), SPDR S&P US Pharmaceuticals (NYSE:XPH), and Market Vectors Pharmaceutical ETF (NYSE:PPH). All have done well in recent market action to the appeal of drug companies.
If consolidation continues, which is should, the ETFs could do even better. Market Vectors Pharmaceuticals ETF is the only one that holds foreign firms.
2. It is always wise to own blue chip Big Pharma.
Companies such as Merck (NYSE:MRK) and Pfizer (NYSE:PFE) are great stocks. Both have done well in the bull market.
3. Big Pharma loves buying appealing small caps like CytoDyn, Inc. (NASDAQ:CYDY).
Owning a target company in a period of consolidation can be profitable. As covered in another article on Benzinga, CytoDyn is a small cap biotech firm with a product developing well that could revolutionize the treatment of HIV patients.
That is a huge market with tremendous cost savings from the "drug holiday" treatment that CytoDyn hopes to bring to market. This is type product that, if approved, makes the host company very tempting.
The drug industry should continue to do well. Populations in major countries are aging, which increases spending for pharmaceutical products. Emerging market countries will also spend more on drugs and related services as health care improves from greater affluence. From that, the ETFs, blue chips, and small caps in the drug industry should continue to do well!
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