What makes the pharma industry different
The pharmaceutical industry functions just like any other industry. It has raw materials manufacturers, finished goods manufacturers, R&D (research and development) companies, marketing companies, and consumers. Yet, it is far more regulated and capital-intensive than other industries.
Drugmakers include API (active pharmaceutical ingredients) and formulations manufacturers. These companies make the following types of drugs:
- APIs. These are the raw materials used to manufacture drugs. Generally, large setups make APIs because these capital-intensive materials require special environmental conditions.
- Generic drugs. Companies sell these off-patented, cost-effective drugs at low prices using no specific brand name in order to serve the public. Abbott Laboratories (ABT), Actavis plc (ACT), and many other pharma companies make generics.
- Patented drugs. Companies develop these drugs through in-house research or licenses from other firms and then manufacture the drugs under licenses from patent holders. Patented drugs have high profit margins. Pfizer Inc., Merck & Co. (MRK), Sanofi, GlaxoSmithKline, Teva Pharmaceutials (TEVA), and many others make patented drugs.
- CRAMS (contract research and manufacturing services). Companies that provide these contract services conduct research and manufacture drugs under licenses from other companies.
Marketing companies in the pharma industry help increase the market reach of drugs. At times, a manufacturing company cannot sell its product in a specific region because the company lacks a license or marketing network to do so. This is where drug marketing companies come in to facilitate sales.
Biotechnology and R&D
Pharmaceutical companies are either dependent on their in-house R&D centers, or they rely on biotechnology companies to provide them with licenses to manufacture patented products.
Holdings of the PowerShares Dynamic Pharmaceuticals ETF (PJP) include drug manufacturers and biotechnology companies.
There is a web of regulations in the research-intensive, highly dynamic pharmaceutical sector. In fact, the industry regulates the entire drug life cycle.
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