By Catherine Yoshimoto, director, product management
As a pandemic-weary world closely watches the race to develop an effective COVID-19 vaccine, pharmaceutical giants AstraZeneca and Pfizer dominate headlines, and equity markets roar. One might assume this level of media attention for the two vaccine contenders would translate to stellar stock returns for pharma. However, a closer look at performance tells a different story, where smaller biotechnology stocks are largely outpacing large pharmaceutical stocks.
Biotech and pharma companies might appear to be similar, and at broader level classifications under Industry Classification Benchmark (ICB) they’re indeed grouped together. The two types of companies comprise a combined sector on the third classification level—and are further combined with additional sectors to comprise the top-level Health Care industry. However, at the most granular fourth level of ICB, biotech and pharma companies are assigned distinctly different subsector classifications. These differences mean biotech and pharma stock characteristics can vary—often resulting in materially different performance.
As the race to develop a COVID-19 vaccine has put both pharma and biotech companies in the spotlight, it’s shed light on three key differences:
Difference #1: Biotech companies are more R&D focused
If we look at ICB subsector definitions, the primary distinction between biotech and pharma companies is biotechs have a more concentrated focus on research and development. As shown below, to be classified as biotech a company must derive the majority of its revenue from the sale or licensing of drugs or diagnostic tools they’ve developed. By contrast, companies classified as pharma are less focused on R&D, with their primary businesses focused more on the manufacturing of drugs.
This distinction is evident if we take a closer look at two of the contenders in the COVID-19 vaccine development race. Both Moderna and Pfizer have reported preliminary vaccine trial results widely viewed as promising, but Moderna is classified as a biotechnology company while Pfizer is classified as a pharmaceutical company. This is because Moderna’s primary business is to research and develop drugs, while Pfizer’s is manufacturing and selling drugs.
Difference #2: More concentrated R&D generally means smaller (and newer)
Since by definition biotech companies have a narrower focus on R&D, their stocks tend to be smaller in market capitalization than pharma stocks. As of November 30, 2020, biotech stocks had a 11.0% weight in the Russell 2000 Index, while only comprising 1.3% of the Russell 1000 Index. By contrast, pharma stocks represented just 1.4% of the Russell 2000 Index and 5.1% of the Russell 1000 Index.
Biotech stocks also significantly outnumber pharma stocks among newly-listed companies. Of the 30 IPOs added to the Russell 2000 in 2020, 18 were biotechs, while one of the added IPOs were pharma companies.
Difference #3: Biotech and Pharma subsectors can have materially different performance
Different characteristics can mean varying performance outcomes. If we go back to the Moderna and Pfizer example, while both are largely perceived as frontrunners in the vaccine race, Moderna has returned a staggering 680.9% year-to-date through November 30, while Pfizer has returned a relatively modest 7.5%.
We can observe this trend more broadly if we look at year-to-date returns on a subsector level. As shown below, biotech stocks outperformed pharma stocks in both the Russell 1000 and Russell 2000, with the smaller biotech stocks in the Russell 2000 delivering the strongest year-to-date performance.
A closer look at how Russell 2000 constituents have fared this year helps explain the divergence in Biotechnology and Pharmaceutical subsector performance. Of the top 20 year-to-date performers, five of them were biotech stocks, while only one was a pharma stock.
Even the most granular ICB classifications can matter
As COVID-19 cases continue to surge, all eyes turn to the race for an effective vaccine. And while it might appear that contenders for developing a vaccine should all be grouped in the same category, they’re in fact a mix of biotech and pharma companies. By ICB subsector classifications, these two types of companies are distinctly different—and often have differing stock characteristics and performance.
Please subscribe to our blog and see here for more information on ICB classifications.
© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.