Drug Developer Stocks Are Risky. Why a Picks-and-Shovels Approach Makes Sense.

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Companies like Danaher and Repligen that make the lab equipment and consumables needed to manufacture drugs can produce long-term, stable earnings in a...

Playing pharmaceutical and biotech stocks these days is a lot like former slugger and Major League Baseball journeyman Dave Kingman swinging a baseball bat—you might hit a home run, but you’ll strike out a lot too. For investors, there’s a better way to play the sector.

The divergent performances exemplify the risk that investors take by betting on drug developers. There are some with recent scientific and commercial wins—like Lily’s upcoming Alzheimer’s treatment Donanemab and its diabetes drug Mounjaro, which may soon be approved in the U.S. as a weight-loss treatment. On the other hand, Pfizer and Moderna have yet to follow their Covid-19 vaccine successes with new blockbusters.

Newsletter Sign-up There’s another way to approach investing in the group—by buying shares in companies that provide laboratory equipment and analytical instruments, as well as the filters, reagents, and chemicals that make them function, thus becoming sources of recurring revenue. “In this golden era of pharmaceuticals, I’d rather own the picks and shovels than take product or biotech risk,” says Pennington Partners Managing Director Sumit Handa.

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