The U.S. pharmaceutical sector is the largest in the world, valued at around $446 billion in 2016. While pharma and biopharma are significant for the U.S. economy, companies and their stocks can often be a roller coaster ride full of ups, downs, twists, and turns as dynamics and drug innovations comprehensively influence the pharma sector. Every day, news wires are full of press releases from these companies outlining the results of clinical trials conducted on new and experimental drugs and compounds. Pharma has also been a target of politicians in the United States, specifically in the Trump Administration as regulators seek to lower the cost of drugs and cap unfair revenues.

For a patient, understanding the phases of a drug can help to better understand the possibilities for fighting diseases. As an investor a breakthrough in a new drug can be one of the most popular buy signals for a drug company. Overall, while several factors influence the drug sector, the phases of drug development generally continue to remain steadily the same and can heavily impact the success of a pharma company.

Drug Development Phases

Across the drug industry there are several mandated processes that must be undergone before the final sale of a drug can begin on the market. One of the most important phases for a drug overall is its Food and Drug Administration (FDA) approval. As such this article looks at the five comprehensive phases the FDA outlines for a successful drug development process with the fourth phase being the FDA’s review.

Phase 1: Discovery and Development

Each drug begins with discovery and development in a lab. Pharma companies spend millions of dollars on research and development that includes scientific study and development of drugs for new innovation. Funding can come from several areas including government, grants, and revenues. In 2016, global drug discovery was valued at approximately $35.2 billion worldwide with a growth estimate of up to $71 billion dollars by 2025.

Phase 2: Preclinical Research

Once a drug discovery has been made it must go through both preclinical and clinical research with supporting reports tied to its review process. Preclinical research is a basic preliminary phase that involves testing the drug on animals and basic testing for safety flags.

Phase 3: Clinical Research

Clinical research can be one of the most important steps in a drug’s development. If a drug is cleared from preclinical trials, it moves on to clinical testing which involves human trials. Drug companies and the FDA have specific standards for clinical trials which include the professionals involved in the scientific testing, the selection criteria of the humans being tested, the setting in which the clinical tests take place, and more. Clinical trial registration is also required and heavily followed by pharma professionals across the sector. Through August 2018, there were over 281,000 registered clinical drug trials worldwide.

Phase 4: FDA Review

The Food and Drug Administration is one of the primary regulators involved in all aspects of the drug market. (See also: How does government regulation impact the drugs sector?) The high standards for drug approval in the U.S. often lead drug development testing in the first three phases to last for approximately 10 to 15 years before approval. In phase four, companies submit fully documented research and findings to the FDA for review. If a submission is accepted, the FDA will provide a response within six to 10 months.

Phase 5: FDA Post-Market Safety Monitoring

There are several aspects of post-approval safety monitoring for a marketed drug. The FDA monitors all types of drug advertising for accuracy. It also monitors complaints and problems associated with a drug. As such it has the power to limit drug sales and/or offer warnings. In general, the FDA also does routine manufacturing inspections. Furthermore, the FDA is involved in the patent protections and generic drug transitions of all drugs.

Investing in Drug Companies

The complexities of the drug sector and its developmental phases can make investment analyses challenging. The overlap between pharmaceuticals and biotech also adds an additional element. In general, pharmaceutical companies are focused on producing drugs for the health care market. In biotech a small subset of the market exists for biopharma. Therefore when looking for drug companies, the pharmaceutical sector is the best universe on aggregate while it will also include several subsectors like biopharma. (See also: Biotech vs. Pharmaceuticals: What's the Difference?)

In the S&P 100, the largest public companies by revenue in millions of U.S. dollars through the first quarter of 2019 include the following:

  • Johnson & Johnson (JNJ) $81,593M
  • Pfizer (PFE) $53,647M
  • Merck (MRK) $42,294M
  • AbbVie (ABBV) $32,647M
  • Eli Lilly (LLY) $24,684M
  • Amgen (AMGN) $23,750M
  • Bristol-Myers Squibb (BMY) $23,288M
  • Gilead Sciences (GILD) $22,127M
  • Allergan (AGN) $15,787M
  • Celgene (CELG) $15,768M
  • Biogen (BIIB) $13,812M

For more on pharmaceuticals, see also: Evaluating Pharmaceutical Companies.