The core logic of investing in pharmaceutical stocks: from industry fundamentals to valuation systems

The global pharmaceutical market is currently in a rapid growth phase. According to industry data, the U.S. biopharmaceutical market is projected to reach $445 billion by 2027, with a compound annual growth rate of 8.5%. Against this backdrop of continuous expansion, pharmaceutical stocks, due to their relatively counter-cyclical nature, are gradually becoming an indispensable sector in investment portfolios.

Industry Characteristics of Pharmaceutical Stocks

The biopharmaceutical industry has distinct features. First is its resilience—regardless of economic conditions, humans need medical treatment and medication, making pharmaceutical stocks more stable compared to cyclical industries like electronics.

Second is the coexistence of high risk and high reward. The stock prices of biotech companies often fluctuate dramatically due to uncertainties such as clinical trial results, patent disputes, and policy changes. Investors must have sufficient risk awareness and patience to gain returns in this field.

Additionally, regulatory factors profoundly influence industry development. Governments strictly control the approval, pricing, and advertising of medical supplies. For example, Taiwan’s National Health Insurance system’s regulation of drug prices has made it difficult for many new drugs to enter the domestic market, whereas the U.S. adopts a more market-oriented strategy, allowing drug prices to be more flexible.

How News Events Drive Stock Prices

Pharmaceutical stock volatility often stems from major news. The surge in vaccine concept stocks during the pandemic is a typical example. A more recent case is when a pharmaceutical company receives orphan drug certification or passes clinical trials, its stock price often rises immediately, even if the company has not yet turned a profit.

In Taiwan, PharmaDrug doubled its stock price against the market downturn in 2022, mainly because its drug received orphan drug designation in the U.S. At that time, the company’s EPS was still negative, but it was highly sought after due to future prospects. By 2024, its stock price had risen to a high of NT$388, mainly based on optimistic expectations for a treatment for primary thrombocythemia.

Rethinking the Valuation System for Pharmaceutical Stocks

Traditional financial indicators often fail when evaluating biotech companies. Most early-stage biotech firms lack stable cash flow and profitability, with core assets often being drugs in development—assets that may be worth little on financial statements.

However, once a drug passes clinical trials and gains FDA approval, the situation fundamentally changes. Therefore, professional investment institutions often use PSR (Price-to-Sales Ratio) instead of traditional P/E ratios to evaluate emerging biotech companies.

For mature pharmaceutical companies, the approach differs. Large pharmaceutical firms may have their operating margins diluted by R&D investments, but institutional investors tend to raise their target prices and valuation multiples because they see a continuous pipeline of innovation. This logic is similar to TSMC versus UMC—companies that continuously invest in advanced processes command higher premiums.

The Decisive Role of FDA Approval

Whether domestic or American companies, FDA approval is of utmost importance. The FDA has the strictest drug monitoring standards globally. Once a drug is approved by the FDA, approval in other countries is often very rapid. This makes FDA approval a key turning point in the industry and an important indicator for predicting stock price movements.

Competitive Advantages of the U.S. Pharmaceutical Ecosystem

The U.S. has become the global center of the pharmaceutical industry due to its unique ecosystem advantages.

Market Size and Pricing Mechanism: The U.S. is the largest pharmaceutical market in the world. Unlike Taiwan, where long-term low drug prices are maintained under the national health insurance system, the U.S. adopts a more capitalist pricing model—high-priced drugs are paid through commercial insurance, creating ample profit margins to support R&D investments.

Talent and Industry Clustering: Over one million professionals work in the biopharmaceutical sector in the U.S., covering R&D, manufacturing, and sales. Top talent congregates here, and graduates in related fields enjoy a high-quality employment environment.

Capital Support and a Virtuous Cycle: The U.S. capital market is highly enthusiastic about investing in this industry, forming a complete ecosystem from research institutions to startups to large pharmaceutical companies. This ecosystem reinforces itself and attracts global investors to compete for entry.

Major Participants in the U.S. Pharmaceutical Market

The U.S. healthcare market is divided into four major sectors: pharmaceuticals, biotechnology, medical devices, and healthcare services, each led by key companies.

Eli Lilly (LLY) ranks tenth in global market capitalization, reaching $842 billion in 2024, making it the largest pharmaceutical company in the world. Its weight loss drug market accounts for 60% of the U.S. market, with huge growth potential.

Pfizer (PFE) is known for its COVID-19 oral medication and other product lines, with long-term stable stock price growth and steady dividend income. Market corrections often present opportunities for long-term investors to enter.

Johnson & Johnson (JNJ) is widely recognized as the “King of Biotech Stocks,” with relatively moderate stock price fluctuations, making it suitable for dollar-cost averaging or long-term buy-and-hold strategies.

AbbVie (ABBV) mainly profits from Humira (a treatment for rheumatoid arthritis). Despite patent expiration risks, the company holds hundreds of patents as a moat and shares revenue through licensing agreements with other major firms, while continuously developing next-generation blockbuster drugs.

Merck (MRK)’s Keytruda is one of the best-selling cancer treatments worldwide. The company has a long history, solid finances, and relatively high dividend levels.

UnitedHealth (UNH) belongs to the healthcare services sector, benefiting from the aging U.S. population, with continuous growth in revenue and profit, and a clear long-term upward trend in stock price.

The Current State and Opportunities of Taiwanese Pharmaceutical Stocks

Taiwan’s pharmaceutical industry is relatively small, and the overall capital market is still dominated by electronics stocks. Even high-quality biotech companies rarely achieve tenfold or hundredfold gains like in the U.S. stock market.

Sundar Chemical & Pharmaceutical (1720) is a diversified pharmaceutical enterprise involved in Western medicine, health supplements, medical devices, and more. The company’s assets are steadily growing, with a healthy debt ratio, and it is favored by dividend investors for stable payouts, but its growth momentum is relatively limited.

Hekang Biotech (1783) is involved in consumer products (facial cleansers, skincare) and biomedical products (bone repair materials, ophthalmic drugs). Its fundamentals have been stable in recent years, with a healthy asset-liability structure, making it worth continuous attention.

Objective Evaluation of Global Pharmaceutical Stock Investment

Compared to Asian peers, U.S. pharmaceutical stocks far surpass them in scale, innovation, and competitiveness. This is partly due to differences in capital markets and also reflects generational gaps in drug R&D technology. Even outstanding Asian pharmaceutical companies often underperform compared to their U.S. listed counterparts.

Investing in pharmaceutical stocks requires a relatively professional understanding of the industry. For investors aspiring to enter this field, continuously tracking developments in the U.S. pharmaceutical industry and clinical trial progress is essential to improve judgment. In the current global investment landscape, U.S. pharmaceutical stocks remain the most representative investment targets in this sector.