Investors have been hyped up about tech lately, what with artificial intelligence’s newfound popularity and Nvidia becoming the world’s first trillion-dollar chipmaker. But meanwhile, the pharma industry seems to have found a new flagbearer of its own. Eli Lilly has overtaken Johnson & Johnson (J&J) to become the world’s most valuable drugmaker after years on the sidelines, mainly thanks to the company’s two recent major announcements of drugs with rocketship potential. The first, a diabetes drug shown to work effectively on obesity. And the second, an experimental Alzheimer’s drug that’s proved solid in late-stage trials. Now, that’s two health issues that are very prevalent in today’s society, which could mean mega sales. Analysts have forecast that the first, for example, could be the highest-selling drug of all time if approved to treat obesity, with estimates of annual sales hitting as high as $50 billion.
Eli Lilly’s hardly going unnoticed though. Investors are certainly backing the firm’s chances: its price-to-earnings-multiple – a key valuation metric – currently stands around 68x, more than double J&J’s, reflecting the high growth rate that investors are pricing in. But while Eli Lilly does have a lot going for it, you need to be careful in pharma. Companies in the fickle sector can be knocked back to square one by a single rejection from authorities – and the other big dogs aren’t exactly biding time in the race to develop more effective rival drugs. So rather than piling into Eli, checking out an index tracking the sector could be a less risky option. That way, you’re more likely to benefit from whichever drugmaker comes out on top. And anyway, pharma can play a defensive role in your portfolio during these recession-riddled times too: it’s a so-called “non-cyclical” industry, as folks need to follow doctor’s orders no matter what the economy looks like.
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