Smaller companies carry higher risk, but they may give larger returns. But be careful, says Gregg Gilbert, Deutsche Bank managing director and pharmaceutical research analyst. If you choose a small company that has a large breakthrough, the return on investment could be huge, but the risk will be high, he says – the stock price will likely dive should the drug not make it to the market.
Companies with even greater upside – and downside – can be found by sifting through the database of thousands of drugs in clinical trials to find a low-priced gem with a lot of promise in phase 1 or phase 2. Some experts say there is only a 10 percent chance that a drug will make it through clinical trials. "Predicting how a drug is going to perform in a clinical trials is a high-risk exercise," Gilbert says.