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Biotechnology vs. Pharmaceuticals: An Overview
Many people often conflate biotechnology and pharmaceutical companies and believe that the two are one and the same. Although the two have many similarities, the two are distinct from one another.
Biotechnology and pharmaceutical companies both produce medicines, but the medicines made by companies in the biotech industry are derived from living organisms while those made by pharmaceutical companies generally have a chemical basis.
The coining of the term biopharma further complicates matters. The term describes companies that are using both biotechnology and chemical sources in their medical research and development (R&D) efforts.
Key Takeaways
- Many investors often confuse biotechnology and pharmaceutical companies, which are often distinct from one another.
- Biotechnology companies derive their products from the extraction or manipulation of living organisms.
- Pharmaceutical companies create medicines from chemicals and synthetic processes.
- Biotech and phama startups often try to shake up the industry.
- Both are important industry sectors with very different risk profiles despite their broad similarities.
Biotechnology
Common products such as beer and wine, laundry detergent, and anything made of plastic are all biotechnology products. Humans have employed biotechnology since ancient times to breed animals and improve their crops. Modern biotechnology companies comprise a sector collectively known as biotech. They generally research, develop, and produce a variety of commercial products while most focus on either medical or agricultural applications.
Biotechnology firms use living organisms to manufacture products or solve problems. The identification and sourcing of DNA have helped the industry make great leaps. Companies in this sector have developed pest-resistant crops, created biofuels like ethanol, and developed gene cloning. Biopharma drugs have also led to some major product innovations.
Some of the most frequently used biotechnology medical products recently introduced include the following:
- AbbVie's Humira, which 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 several autoimmune diseases
Investors should keep in mind that the biotech industry is volatile and fast-growing. The global market is expected to reach $3.8 billion by 2030, according to Grand View Research. Biotech startups have sprouted alongside computer technology companies in Silicon Valley. The aim of most is to use biotechnology processes to create breakthrough drugs.
There is a substantial overlap between some biotech and pharmaceutical companies. For instance, Johnson & Johnson, Eli Lilly, and Merck are big forces in both industries and are among the top U.S.-based biotech firms by market capitalization.
Pharmaceuticals
As an industry, pharmaceutical companies research, develop, and market medicines made primarily from artificial sources. The largest companies in this sector provide stable results, but the field continues to grow with new companies appearing regularly.
Some modern pharmaceutical companies have a long history, such as Bayer AG, the German company whose founder trademarked aspirin in 1899. As of 2023, the world's top pharmaceutical company was Johnson & Johnson, followed by Eli Lilly and Novo Nordisk.
Just like the biotech sector, there is also a range of pharma startups that are trying to shake up the industry. These companies often partner up with major firms to get products to market or to gain access to large markets and distribution channels.
Pharmaceutical products can take many years to process through the research and development phases before finally making it to market. Part of the lengthy R&D process includes gaining the approval of the Food and Drug Administration (FDA).
Pfizer's revenue grew 23% between the 2021 and 2022 fiscal years from $81.29 billion to $100.33 billion. Revenue is expected to grow by 7% to 9% in 2023. These figures exclude sales for the company's COVID-19-related vaccines.
Special Considerations
Biotech and pharmaceuticals are very different propositions when you consider them purely from an investor's perspective, An analyst tends to look at the amount a firm spends on R&D as a percentage of sales in order to compare one company to another.
Biotech companies generally have high operating costs because of the research, development, and testing that takes years to complete. The result could be a historic breakthrough or utter failure. The industry may also come across roadblocks to developing new products, especially when research or the end product is controversial. For instance, several countries ban genetically modified plants and products. As such, investors are along for the ride, whether that's up or down.
Biotech has one advantage to make up for the cost disadvantage: While pharmaceuticals generally hold exclusive rights to manufacture and distribute their drugs for five years, biotech can get patent protection for as many as 12 years.
Major pharmaceutical companies have a steady flow of income from current products while maintaining their R&D effort aimed at improving upon existing products or creating new ones. They also keep a steady pipeline of new products in various stages of development. The process to develop a new drug may take up to 15 years to complete.
Before investing in any biotech or pharma company, it's important for investors to know that their success can depend entirely on taking products to market. The FDA requires most new drugs to go through several phases of testing which, in itself, can take up to eight years. Even if a company brings a new medicine to the market, it does not mean it will gain widespread physician approval and use.
What Is the Difference Between the Biotech and Pharma Sectors?
People often confuse biotechnology and pharmaceutical companies. While they may seem similar, they are actually distinct from one another. Biotech companies research, develop, and market products that are generally derived from living organisms. The products of pharma companies tend to be derived from chemicals and artificial sources. Companies in the biotech sector tend to have higher operating costs, which means they can be more volatile than the stocks of pharma companies. Major names in the pharma sector often provide stable results because of their long-standing histories.
What Are Some Examples of Biotechnology Companies?
The following are some examples of major global biotechnology companies: Moderna and Incyte. Novo Nordisk and Johnson & Johnson are both pharmaceutical companies that also have a focus on biotechnology.
What Are Some of the Largest Pharmaceutical Companies?
Roche, Johnson & Johnson, and Eli Lilly are examples of some of the largest global pharmaceutical companies. Because the line is often blurred (due to the type of research and development), the activities of these companies also intersect with the biotechnology sector.
The Bottom Line
Both biotech and pharma stocks face a costly process that can produce highly profitable products—even when they're successful. But the process is extremely unpredictable, which can prove detrimental and even unrecoverable for a smaller biotech firm. Pharmaceutical companies, on the other hand, are typically able to withstand setbacks and failures. That's because of their larger size and diversified revenue base,
Competition is more relevant and costly to pharmaceutical companies, creating a need for strong pipelines and non-organic revenues (such as through mergers and acquisitions or alliances). Considering these issues can provide the basis for making a prudent investment.