The drugs sector is the portion of industry that develops and produces pharmaceuticals. This sector includes both major corporations and small startup companies that research, create and manufacture drugs for therapeutic use. The pharmaceutical industry is characterized by substantial research and development costs and is heavily regulated by world governments. In the United States, the Food and Drug Administration (FDA) is responsible for ensuring that only drugs with beneficial therapeutic use and reasonable side effects are brought to market.

As a result of this regulation, pharmaceutical companies must be able to sustain themselves financially through long periods of investigation and testing before their products may be legally sold. This means companies and industry investors are accustomed to long timetables and thorough and expensive evaluation processes for new products. To remain profitable, these companies must have strong revenue streams from products currently on the market, must partner with larger companies, or must be able to secure generous loans and investor financing.

In this industry, small startup companies account for a substantial portion of new drug development. These companies frequently pursue specific treatments that don't yet exist. A new business may have only one or two key drugs under development in its product pipeline at one time. These new drugs require approximately 10 to 15 years of research and FDA supervision financed by the starting capital of early investors. Many companies soon seek a buyer or merger with a larger company that has the necessary capital and expertise to guide the new product into the marketplace.

Larger drug manufacturers often acquire a substantial amount of their total pipelines using this means. Mergers and acquisitions (M&As) move many new drugs through the regulatory environment and provide a means for major pharmaceutical corporations to obtain new drugs for their product lines. Using this strategy, larger companies can wait for new pharmaceuticals to show potential during testing before risking investment capital. At some point during the testing phases, companies looking for potential new acquisitions begin conversations with the startup's management team. Before reaching a point in research when the company can begin fielding offers, the new company may need one or more rounds of funding.

When a company finally receives approval and begins distributing a new drug, patents protect the product from competition and allow it to find a profitable niche in the market. The legal and exclusive rights to producing a successful drug represent a substantially valuable piece of intellectual property for pharmaceutical companies. Patented drugs are potentially much more profitable than the production of generic drugs. This profitability motivates the development of new treatments and is the bread-and-butter of the pharmaceutical industry. A strategic product line of patented drugs, generics and new potential drugs can generate substantial profits for many companies in the drug industry.

  1. What are the primary risks associated with investing in the drugs sector?

    Learn more about the primary risks facing investors in the pharmaceutical and biotechnology industries. Find out how regulation ... Read Answer >>
  2. How does government regulation impact the drugs sector?

    Learn about how drugs are regulated by the U.S. government as well as the role of the Food and Drug Administration during ... Read Answer >>
  3. How does the profit margin compare for a generic drug versus a brand name drug?

    Learn how the profit margins compare for generic drugs and brand-name drugs. Brand-name drugs cost three to four times more ... Read Answer >>
  4. What are the primary factors that drive share prices in the drugs sector?

    Learn about the primary factors that drive share prices in the drug sector. Creating and manufacturing drugs is a complex ... Read Answer >>
  5. What factors make the drug sector good for value investing?

    Discover what makes the drugs sector good for value investing. The perfect ingredient for value investors is to find undervalued ... Read Answer >>
  6. How does the drug sector benefit from the growth of emerging markets?

    Understand how the pharmaceutical industry benefits from the growth of emerging markets. Benefits are linked to growing economies ... Read Answer >>
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  1. Drug

    A substance that cures, treats, prevents or reduces the symptoms ...
  2. Orphan Drug Credit

    A federal tax credit that provides an incentive for pharmaceutical ...
  3. Abbreviated New Drug Submission (ANDS)

    A written request to Health Canada to obtain marketing approval ...
  4. Orange Book

    A list of drugs that the U.S. Food and Drug Administration has ...
  5. New Drug Application (NDA)

    The final step formally taken by a drug sponsor, wherein it applies ...
  6. Bioequivalence

    A similarity between two drugs meaning that they both have the ...
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