The pharmaceutical sector is an exciting space to invest in as ambitious companies aim to treat a growing number of diseases through the latest innovative drugs.

Unfortunately, the road to success is full of risks that can prevent their hard work from paying off. In this article, we explore some of the key risks that investors need to consider when investing in pharmaceutical firms.

CLINICAL TRIAL FAILURE

One of the biggest risks are clinical trials, which can cause trouble even for global pharmaceutical firms as they need new medicines to replenish their drug pipeline.

If a company cannot prove a drug works, it cannot be approved by the relevant healthcare authorities and generate sales and future profitability.

A prime example of this is drugs titan AstraZeneca (AZN), which plummeted approximately 15% on 27 July after its MYSTIC lung cancer trial failed.

AstraZeneca couldn’t prove that a combination of durvalumab and tremelimumab immunotherapies would help patients in the advanced stages of lung cancer, leading to fears of dividend cuts and takeover bids.

Even treating allergies has proven more difficult than expected after Neil Woodford-backed Circassia (CIR) decided to stop investments in its allergy programmes in April.

The specialty pharma firm changed its strategy after it couldn’t meet its primary endpoint in its Phase IIb field study.

PATENT CLIFFS AND GENERIC COMPETITION

When a company loses their exclusive patent for a drug, its rivals tend to release their own versions, which are generally as effective - and cheaper in a bid to steal market share.

One of the pharma firms that has been hit by competition is Hikma (HIK), which has already had to cut sales forecasts twice this year.

In August, Hikma cuts its sales expectations for its injectables division to approximately $775m in the year to 31 December 2017 due to increased competition in the US. As injectables represents 40% of overall revenues, the downgrade has understandably sparked concern.

WHAT HAPPENS IF RIVALS STRUGGLE TO MAKE A GENERIC DRUG?

While generic competition is a clear threat in the pharmaceutical sector, companies have to be successful in producing their own version of a drug in order to successfully compete.

An example of this are the multiple attempts from rivals to replicate GlaxoSmithKline’s (GSK) asthma medicine Advair Diskus

Earlier this year, the US Food and Drug Administration blocked the launch of US-listed Mylan’s Wixela Inhub in its current form.

Hikma’s launch of the generic VR315 was also delayed, also putting a dent in Vectura’s (VEC) share price as the asthma treatment was based on its dry powder inhaler technology.

While the pharmaceutical sector is risky, investors can be more prepared by researching upcoming clinical trials and comparing pipelines to understand what threats could emerge.

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Issue Date: 22 Sep 2017