The large pharmaceutical companies each produce a wide range of patented drugs while conducting research on a smaller number. Biotechnology firms engage predominantly in R&D, and usually only have a small number of drugs in the pipeline.
This is the riskiest part of the healthcare sector and companies rely almost solely on investors for cashflow. The process of developing and testing a new drug is expensive and takes a very long time. Most drugs being developed never make it to market, and biotech firms frequently fail.
On the other hand, when a company manages to have a drug approved, they can be all but guaranteed billions in future revenue. Biotech companies trade based on the potential for their drugs to make it to market.
Of the 550 listed US biotech firms, 480 are worth less than $2 billion and 300 are worth less than $300 million. Furthermore, only 50 are profitable and most have no revenue.
It’s advisable to only invest in the smaller biotech firms if you understand the companies very well. However, there are one or two larger biotech companies with a portfolio of drugs in development. Amgen Inc (AMGN) and Gilead Sciences, Inc (GILD) are the most prominent of these companies.