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.

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.

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).

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.

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.