Investors
will often use biotech and pharmaceutical interchangeably, but in reality these
are two distinct types of companies. What are they, and how should you use them in your portfolio?
Biotech Companies
If you’re
looking for some good old-fashioned speculation, look no further than a biotech
such as Amgen (NASDAQ: AMGN), Biogen Idec (NASDAQ: BIIB) and/or BioMarin (NASDAQ: BMRN). Biotechs are often small startups
that remain in the R&D business.
They’re
generally not interested in manufacturing and marketing a drug; a biotech wants
to invent it, get it as far along in the FDA process as possible, and sell or
license the compound for a large sum of money to a pharmaceutical company.
If you’re
looking for a company with a diversified product portfolio, you don’t want a biotech. The large
cost of R&D keeps a biotech focused on one or maybe a few compounds. These
companies are too small to fund research on multiple projects.
Their
funding usually comes from universities, angel investors, government or
foundation funding, a public stock offering, or a combination of multiple sources.
With all of
its resources tied up in one or a couple of projects, these companies are
highly volatile. If, at any point, the compound fails a drug trial or the
results are disappointing in any way, the company’s stock could lose a large
amount or even most of its value. On the other hand, as the future drug
performs well and moves through the FDA trial process, investors stand to make
a lot of money.
The life of
many biotechs ends when they’re purchased by a pharmaceutical company.
Bottom line:
These are news and product driven companies where traditional financial
research doesn’t always apply. They’re very speculative and shouldn’t be a core
holding in a balanced portfolio.
Pharmaceutical
Companies
While in the
same industry, pharmaceuticals are very different. Some of these companies
engage in heavy R&D but as the industry changes, major pharma companies now
prefer to purchase mid to late stage compounds from biotechs instead of
investing large resources into developing a compound from scratch. Another
strategy routinely used is to partner with a biotech that shows promise in a
certain treatment area. Pharmaceuticals are still in the R&D business but
their strategy and monetary resources allow them to withstand the ups and down
of drug development much easier than the small-cap biotech.
Pharmaceuticals
like Eli Lilly (NYSE: LLY), Pfizer (NYSE: PFE) and Merck (NYSE: MRK) are more interested in the production,
marketing, and distribution of drugs and often have a large portfolio of
products. As one drug loses patent protection, another has to be rolled out to
produce the revenue lost by the previous drug.
Pharmaceutical
companies tend to be stable stocks and suitable for a longer-term portfolio.
Many pay a dividend and the largest companies don’t react severely to economic
downturns and other macro events.
Of course,
it’s important to note that few companies fit this mold perfectly. Before
investing in a biotech or pharmaceutical company, you have to become an expert
in how the business operates.
Read more
Benzinga.com small-cap articles: http://www.benzinga.com/news/small-cap
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article was posted with the permission of a third-party contributor
and the opinions contained therein do not necessarily reflect
those of Smallcappower. Smallcappower does not endorse any investment
advice provided by these third-party contributors. Please consult
your investment advisor before making any investment decisions.
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