While biotechnology and pharmaceutical companies both produce medicine, biotechnology companies' drugs have a biological basis, while those of pharmaceutical companies have a chemical basis. Biotechnology companies use live organisms or their products, such as bacteria or enzymes, to manufacture their medicines. Conversely, pharmaceutical companies use generally artificial materials to create drugs.
Biotechnology firms also have more applications than pharmaceutical companies. For example, biotechnology companies have developed versions of crops without specific food allergens, crops that require fewer pesticides and crops with a more complete nutrient profile. While there is some overlap between biotechnology and pharmaceutical companies in terms of research, manufacturing and distributing drugs, biotechnology's scope is much greater.
There is also a substantial difference in operating costs, especially the cost of research and development. Biotechnology companies have much higher costs due to their focus on research and development (as opposed to manufacturing with pharmaceutical companies) and the length of time and difficulty in testing and creating new products.
The discrepancy in the cost and length of time required to manufacture a new product has led to biotechnology products holding their patents for much longer than pharmaceutical companies. Where pharmaceutical companies generally hold the exclusive rights to manufacture and distribute their drugs for five years, biotechnology companies have their patents for 12 years.
All of this leads to very volatile profits for biotechnology companies. Many operate at a loss for many years until a highly profitable substance is manufactured – but when it does, their earnings can be even greater than those of pharmaceutical companies. Conversely, pharmaceutical firms' profits, and therefore their stock prices, tend to fluctuate less.