Biotechs vs. Pharmaceuticals: An Overview

Biotechnology and pharmaceutical companies both produce medicines, but the medicines made by biotechnology companies are derived from living organisms while those made by pharmaceutical companies generally have a chemical basis.

To complicate matters, the term biopharma has lately been coined to describe companies that are using both biotechnology and chemical sources in their medical research and development efforts.

About Biotechnology

Broadly speaking, such common products as beer and wine, wash detergent, and anything made of plastic are all biotechnology products. Humans have employed biotechnology since ancient times to breed animals and improve their crops.

But in the modern financial world, biotechnology companies comprise an industry sector collectively known as the biotechs. They research, develop, and produce a wide variety of commercial products, though most of them focus on medical or agricultural applications.

Companies in this sector of industry have developed pest-resistant crops, created bio-fuels like ethanol, and developed gene cloning.

There also have been big product introductions in biopharma drugs. Among the most frequently used biotechnology medical products recently introduced:

  • AbbVie's Humira is used to treat arthritis, psoriasis, and Crohn's disease, among other ailments.
  • Roche's Rituxan is used to slow the growth of tumors in several types of cancer.
  • Amgen/Pfizer's Enbrel is used to treat a number of autoimmune diseases.

The top U.S.-based biotechnology firms in terms of market capitalization as of the end of 2018 were Amgen Inc., Gilead Sciences, Celgene Corp., and Biogen Inc.

In recent years, biotechnology startups have sprouted alongside computer technology companies in Silicon Valley. The aim of most is to use biotechnology processes to create breakthrough drugs.

Medical biotechnology alone has become a $150 billion-a-year business.

About Pharmaceuticals

As an industry, pharmaceutical companies research, develop, and market medicines made primarily from artificial sources.

Some modern pharmaceutical companies have a long history, such as Bayer AG, the German company whose founder trademarked aspirin in 1899. As of 2019, the world's top pharmaceutical company was Johnson & Johnson, followed by Novartis and Roche.

The Businesses of Biotechs and Pharmaceuticals

Purely from the investor's perspective, biotechs and pharmaceuticals are very different propositions.

Biotechnology companies generally have very high operating costs as they are involved in research, development, and testing that takes years to complete. The end result could be a historic breakthrough or utter failure. Investors in their stocks are along for the ride, up or down.

The big pharmaceutical companies, by comparison, have a steady flow of income from current products while maintaining a research and development effort aimed at improving upon existing products or creating new ones.

Biotechs have been given one advantage, to make up for their cost disadvantage: While pharmaceuticals generally hold exclusive rights to manufacture and distribute their drugs for five years, biotechs can get patent protection for 12 years.

Key Takeaways:

  • Biotechnology companies derive their products from living organisms.
  • Pharmaceutical companies create medicines from chemicals.
  • In the world of investing, they are important industry sectors with very different risk profiles.