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Biotech and
Pharmaceuticals
Biotechnology
stocks have soared and dropped a number of times over the
past year. What does this sector do? How are they different
from "pharmaceutical" or "drug" stocks?
(Which are fully interchangeable terms).
The simplest way to differentiate
these companies is to view pharmaceutical companies such as
Johnson & Johnson (JNJ) as being the distribution arm
of the industry, and the biotechnology companies as the discovery
arm. The pharmaceutical companies have the contacts and
contracts with the doctors, pharmacies, hospitals, and clinics
worldwide. The pharmaceutical companies license newly discovered
drugs from biotech companies and then manufacture and distribute
them. The pharmaceutical companies can shop around for
the drugs and treatments they want to bring to market through
their already existing distribution channel. These companies
generally have solid earnings and tend to be less risky. Occasionally
they will get stung with a disaster like the 1980's Tylenol
fiasco, or have to remove an already FDA approved drug from
the market place because of unforeseen side effects or patient's
inability to use a drug in the prescribed manner. The biggest
concerns of an established pharmaceutical company have to
do with selecting the right product mix and watching the calendar
to see when drug patents expire.
Biotechnology companies are out
on the cutting edge of technology. They are pursuing new lines
of research, which can often take 10 years to confirm if they
have a stellar breakthrough or an expensive dud. Terms
such as monoclonal antibodies and human genome sequencing
are the domain of the biotech companies. Only 1 in 10 projects
in the biotech industry ever receives FDA approval and gets
licensed to a pharmaceutical company. A single success can
generate a spectacular revenue stream that can cause the stock
to outperform the market for 10 to 15 years. Biogen has one
success to its name. Amgen has only two products, yet the
revenue from these successful products allows them to pursue
numerous other projects. The goal of the biotech firms is
to make a discovery and get it through the four stages of
FDA testing. An investor who buys a stock based on results
from the early stages of testing needs to view their purchase
as extremely speculative. News releases often tout a testing
success, but are often void of which stage of testing they
are at. Preliminary lab rat successes are a far cry from successful
large scale human tests. Once completing the four stages of
testing the FDA convenes a panel that will either recommend
or not recommend FDA approval. Then a new drug or treatment
has to be licensed by a pharmaceutical company, manufactured,
marketed, distributed and gain a following.
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