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.
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