Biotechnology Vs. Pharmaceuticals — Yelian Garcia Explains What Investors Should Know Before Buying Stock
Biotechnology and pharmaceuticals are often confused to mean the same thing, especially at an investor level, because both seem to do the same thing — deliver drugs to the market. This outlook is deceptive. Biotechnology and pharmaceuticals may be related industries that fall under the life sciences umbrella, but they are markedly different from each other. Understanding this distinction is part of knowing how to invest in each stock. Before jumping into the finer details, here is a broad definition of each.
Biotechnology: Biotech is primarily interested in the discovery of new drugs. Biotech companies are, therefore, research and development intensive.
Pharmaceuticals: Pharma companies are sales and marketing oriented. They are majorly concerned with selling drugs that have already been approved for consumer use.
To bring this conversation to life, Yelian Garcia discusses the differences between biotech and pharmaceutical companies. Yelian has a Chartered Investment Management designation from the Canadian Securities Institute and is currently enrolled in the International MBA program at the Schulich School of Business. He is also a Derivative Market Strategist with a CFA Level II candidature.
Research vs. Sales
Biotech companies are research focused, explains Yelian Garcia. Because of this, they usually have little to no sales staff or sales forecasts. Of course, there are hybrid biotech companies that have both R&D and sales functions, but these are increasingly becoming rare. From an investment perspective, looking at biotech companies means understanding what research they are undertaking and whether they have had any past successes. If a biotech company has a strong research track record, this could point to a viable investment.
Pharma companies are sales oriented. Their success is measured by looking at the sales and revenue they have. Companies like Roche and Merck have strong sales from a stable of blockbuster drugs. When considering such companies for investment purposes, looking at their sales forecasts and new drugs, they are bringing on board offers an indication of how they will fare. This sales orientation also makes pharma company shares volatile and susceptible to market forces.
Share Price vs. Dividends
Yelian Garcia says that when investing in biotech, you should probably forget about earning any annual dividends on your stock. That is because most biotech companies have a long investment horizon with no revenue to bolster dividend payments. As such, investing in a biotech company is done more for share price appreciation and possible acquisition. For example, when a biotech company’s blockbuster drug is approved by the FDA, its share price can easily double or triple within a day.
Pharma companies operate like traditional enterprises — their shares appreciate very slowly, and investors benefit from dividend payouts. For instance, the pharma company Roche share price over the last five years has a 34% deviation from the average share price over this period. Celgene, a biotech company, over the same period has undergone an 83% deviation from the average share price. This shows investors in pharma companies can expect the share price to only move modestly over time.
FDA vs. Market Forces
Biotech companies must contend with the FDA with approvals or refusals from the agency deciding the fate of its efforts. For investors, following clinical trials closely reveals how well a biotech company is doing. If its drugs have passed through the first stage of FDA approvals for human trials, there is a good chance the drug could make it to market. Refusals or major issues with a drug could signal a poor outcome for the company’s efforts and its share price.
Pharma companies are subject to market forces which drive their share prices up and down. Another market force that is currently threatening pharma share prices are expiries of blockbuster drugs. When drugs patents expire, they pave the way for generic drugs to enter the market, signaling the end of market domination for the original drug. Following market news closely, says Yelian Garcia, will, therefore, give a good indication of how to invest in a pharma company.
Long-term vs. Near-term
Most biotech companies have an R&D horizon of ten years. That is, the company expects to create a viable drug within ten years. For investors, this means waiting for this horizon to lapse and hopefully, have a blockbuster drug released. Although sometimes this horizon can be interrupted by an acquisition, which unlocks value for investors, in many cases, investors must wait and hope to see significant share price gains once a new drug is released.
Pharma companies rely on quarterly sales forecasts, so they often see share price movement in the short term. Investors in pharma companies can either trade their shares and benefit from price movements or hold and reap dividends. One challenge with investing in pharma companies is these gains are typically small — only single-digit movements or single digit dividends. Biotech companies, on the other hand, can have massive double-digit share price movements, especially when favorable news is released.
Pipeline vs. Portfolio
Biotech companies are judged by the number and quality of drugs they have in their pipeline (drugs under development or undergoing review by the FDA). Often, you will hear investors talking about a company’s pipeline — this indicates whether the company is on the up and up or has stagnated. For example, explains Yelian Garcia, before its acquisition by Bristol-Myers Squibb, Celgene was under pressure from investors to find a successor to its blockbuster drug Revlimid — so much so that its share price depreciated 40% in the run-up to the acquisition.
Pharma companies are judged by their drug portfolio — and more recently, by the age of that portfolio. Typically, a pharma company will have a portfolio of blockbuster drugs that bring in the bulk of its revenue. For example, Bristol-Myers Squibb gets 63% of its revenue from blockbuster drugs. If drug patents on this portfolio expire with no successors, this could severely impact the company’s revenues, driving down its share price. As such, investors scrutinize a pharma company’s drug portfolio before investing in it.
Investing in either type of company requires a different investment methodology for each. In some cases, the information needed is also vastly different. To buy shares successfully, look out for stocks that you can easily track through a clear understanding of the fundamentals involved. If you are looking for general investments with short term gains, then pharma stocks are your best bet. If you want riskier and possibly more rewarding stocks, biotech companies are the better option.
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