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Investing in pharmaceuticals vs. investing in biotech

The decision to invest in pharmaceutical or biotech stocks is confusing unless you have a thorough understanding of the operations and commodities.

Both pharmaceutical and biotechnology companies produce medicines. Still, a medication made by biotech companies derives from living organisms. Meanwhile, those made by pharmaceutical companies generally have a chemical basis.

Biotech companies

Biotechnology products are common goods like beer and wine, laundry detergent, anything made of plastic. Biotech firms use the processes of living organisms as they manufacture products or solve problems.

Biotech firms tend to be small, with only one or a few compounds in development. Most of these companies operate at a loss because the development time is very long, and the R&D processes are costly. Because of this dynamic, biotech firms tend to find partners for financial support, usually through venture capital, universities, pharmaceutical companies, or the government.

Investors in biotech companies must be willing to tolerate high volatility. 

In recent years, biotech startups have grown alongside computer technology companies in Silicon Valley. Most of them aim to use biotechnology processes to produce breakthrough drugs.

Pharmaceutical companies

While pharmaceutical companies also experience expensive and time-consuming R&D processes, including ups and downs during clinical trials, they are generally better able to withstand volatility. These companies tend to have many more revenue-generating product lines covering the costs of R&D. Therefore, their stocks are more stable and investors deem them to be safer investments.

Pharmaceutical companies research, develop, and market medicines made originally from artificial sources.

When a biotech firm finally has a marketable medicine, it needs sales and marketing. This is accomplished by building one or, in many cases, partnering with a larger biotech or pharmaceutical company. Many pharmaceutical companies have alliances with biotech companies. It adds revenue through the biotech drug’s sale without the costs or time associated with development.

 

Investing and risk tolerance

Pharmaceutical investment

 If you are less risk-tolerant and unwilling to wait for long-term drug development, then an investment in a pharmaceutical company makes more sense. Pharmaceutical stocks are driven by prescription data, new drug lines, strategic alliances, and M&A activities, competition, and reimbursement changes. Since some of these factors are predictable, these stocks tend to be more stable. Additionally, pharmaceutical companies tend to have a more extensive revenue base with multiple product lines, so they trade based on short-term profits. Unforeseen threats include Medicare price changes, which tend to affect prices for many consumers. Long-term unexpected threats include negative medical impacts from taking the drugs, such as death/lawsuits, as well as the loss of patents.

Investing in Biotech

Suppose you are a risk-taker and are willing to wait for drug development while resisting the potential volatility associated with biotech stocks. In that case, an investment in a biotech company may suit your style. Biotech stocks are generally traded based on drug data, including clinical trial failures, competition, or regulatory hurdles. As we mentioned, if drug data loses its expected endpoint, a biotech’s stock can lose most of its value in one day. Conversely, if a drug meets the scheduled endpoint, an action can skyrocket by two and three digits that day. Some companies with solid partners or are financially stable can weather setbacks. However, many companies don’t, and the investment can go out of business.

Valuation

Pharmaceutical stocks generally trade at a significant discount to biotech stocks.

Because many biotech firms are small and operate at a loss, they are valued using the price to sales ratio (P/S) or Enterprise Value-to-Sales (EV/Sales). However, there is no significant relationship between valuation and market capitalization or revenue. As such, the valuation is a bit unreliable and pointless with some of these actions.

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