Product types

The main product of the pharmaceutical industry is in-patent prescription drugs. These are high gross margin products that generate the bulk of revenues. However there are many types of pharmaceutical products. There are legal and business differences, technically different drugs and treatments, and so on:

  1. drugs based on tradition chemical entities,
  2. biologics (including vaccines and antibodies),
  3. generic drugs,
  4. over the counter (OTC) drugs,
  5. services.

Generic drugs are less profitable than in-patent drugs because, without the barriers to entry provided by patents, competition makes them much cheaper so both prices and margins are much lower.

Over the counter drugs are less profitable than prescription drugs (which many companies, rather oddly, call “ethical” drugs) because they are less well differentiated and buyers are more price sensitive, this, again, limits margins. Branding is of critical importance: they are a consumer products and should be analysed as such.

Biologics are protected from generic competition by regulatory barriers to entry that result from the difficulties inherent in proving that a generic is clinically equivalent to an already approved product.

The major pharmaceutical companies produce a wide range of products, sometimes all of the above and more. Smaller companies, naturally, tend to specialise more and produce a narrower range of products. Many mid-size companies focus on a single area, either by product type (e.g. antibodies) or target market. Some, especially small companies, as still more specialised.

This does not mean that big pharma are necessarily well diversified: many are heavily dependant on a small number of “blockbuster” drugs. Similarly, some quite small companies may have a wide range of early stage or specialist products. From a portfolio investors point of view, the risks are, in any case, diversifiable.

Copyright © 2005-2016