CFA Institute Industry Guides: The Pharmaceutical Industry

Among the most distinctive features of the pharmaceutical industry are the complexity and length of the product development cycle and the independence of a pharmaceutical company’s operating performance from overall industry trends. The earnings outlook of an individual company is determined, first and foremost, by the products it develops and markets. Consequently, the industry is characterized by exceptional heterogeneity, which notably complicates peer group analyses and often entails divergent share price performance. Top-down analytical approaches based on overall market growth rates and market share development, often a good starting point in other industries, add limited value at best and may often be misleading. The quality of bottom-up analyses that take into account the clinical utility, cost-effectiveness, competitive landscape, intellectual property, and economics of individual drugs is typically the main success factor in selecting pharmaceutical and biotechnology stocks. In this comprehensive examination of the industry, the author delineates the determinants of success in drug development and marketing and then reviews portfolio considerations and the implications for financial statement analysis, forecasting, and valuation.