The year 2014 was a good one for pharmaceutical companies, with drug approvals in the United States hitting their highest in 18 years and recommendations spiking in Europe, all driven by rare diseases and cancer.

Set back by a number of patent losses for important products from two years ago, Big Pharma is recovering, bringing new drugs to the market and improving productivity. This resulted in 41 novel medications being approved by the Center for Drug Evaluation and Research at the U.S. Food and Drug Administration, 14 more than what was approved in 2013. The all-time high, however, remains to be 53 approvals from 1996.

As for the European Medicines Agency, 82 new drugs were recommended in 2014, up from 2013's 79 and 2012's 57.

Investors are more than optimistic about new medicines, most especially when they are able to fetch premium prices on the market. Governments and insurance service providers don't share the same appreciation, though, fighting back whenever possible versus the sky-high costs of some treatment options.

With almost 40 percent of the new drugs that were approved in the U.S. in 2014 for treating rare diseases, it's not unusual for annual costs per patient to reach more than $100,000.

A number of approved immunotherapies too could lead to sales of over $30 billion a year. Specialized products also mean limited competition, so pharmaceutical companies enjoy reduced risks as well.

This kind of outlook fueled enthusiasm for the pharmaceutical industry, boosting public offerings for biotechs to hit record numbers in 2014. The S&P 500 Health Care Index also rose 23 percent as a result, while the Nasdaq Biotechnology Index grew 34 percent despite some fund managers questioning valuations as insurance service providers took a stand on prices.

Pharmaceutical companies seeking the FDA's approval to sell prescription medication in the U.S. must have tested their product in numerous ways, involving animal and laboratory tests as well as human trials to determine safety and efficacy in treating a certain disease.

Companies must then submit a New Drug Application (Biologics License Application if the drug is a biologic), which include test results for the drug; manufacturing information to show the company is capable of properly producing the drug; and the proposed drug label from the company. An approval is given once FDA scientists and physicians deem a drug's benefits more crucial than its risks and that it can be made in a quality-assured manner.