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Investing In Pharma Stocks: First Decode The Products
Let's say we are about to start research on a company. What would be a good place to start? Perhaps with the basics of the sector in which the company operates. For a sector like pharmaceuticals though, this initial step itself can be daunting. Pharma products have highly technical names and can seem impossible to decode.
In the article, we will try and categorize the different products within the pharma sector.
Types of pharma products
Pharmaceuticals can be classified on the basis of either form (i.e. stages of value chain) or application (i.e. therapeutic use). The pharma value chain can be broadly broken down into intermediates, active pharmaceutical ingredients (APIs) and formulations.
The starting chemical substance is called ‘intermediate'. It is the raw material that needs to undergo further molecular change or purification before it becomes an API. API (or bulk drug) is the active ingredient in the formulation e.g. ‘Paracetamol' in ‘Crocin'. Formulation is the finished drug which is directly consumed by patients. It is prepared by combining an API with inactive ingredients, called excipients. Formulations come in dosage forms such as tablets, capsules, injections and inhalants.
Types of pharma products
Source: Valuequity Research
Pharma products can also be classified according to their therapeutic applications. Some therapeutic segments are anti-infectives, cardiovascular, gastro-intestinal, respiratory, pain management, vitamins, gynaec-urinary, central nervous system, anti-diabetic and dermatological.
Structure of the pharma industry
Various companies in the pharma industry specialize in different sections of the value chain, i.e. in intermediates, APIs and formulations. Formulation companies can be classified into 2 types:
- Innovator companies: They are involved in drug discovery, development, manufacturing and marketing of patented (always branded) drugs. They are typically found in developed markets like US and Europe.
- Generics companies: They are involved in manufacturing and marketing of off-patent (branded as well as unbranded) drugs. They are typically found in developing markets.
Types of formulation companies
Source: Valuequity Research
Some companies are present in more than one stage of the value chain. They are called ‘integrated' players. Some niche players focus on pure research and development (R&D). They are engaged only in the discovery and development of drugs but not in their manufacturing and marketing. Then there are companies who undertake R&D and manufacturing services on a contract basis for others. They are called contract research and manufacturing services (CRAMS) companies.
Types of pharma markets
The global pharma market can be categorized into two types: regulated and unregulated/semi-regulated. Regulated markets refer to countries like the US. They have stringent government regulations such as intellectual property rights, including product (as opposed to process) patent. These markets offer stability for both volumes and prices as long as a drug is under patent protection.
Unregulated/semi-regulated markets refer to countries like India. They have fewer regulatory requirements. Hence, the entry barrier is low and competition is high. Players primarily compete on the basis of price.
About the Author
Valuequity.com provides value investing research on Indian stocks for individual investors inspired by the methods of Warren Buffett, Ben Graham and Charles Munger.
Question about generic medicine?
Venlafaxine's the one in question but not sure how relevant this is. I've been given the slow release form Effexor XL from a hospital for some months. I'm now getting a prescription from my doctor and picked it up from an independant pharmacy. The stuff i've got is a generic form. Firstly, is this guaranteed to be the same quality? Secondly, the stuff in the XL capsules was made of fine balls which you could hear when shaken. This unbranded stuff consists of two large balls within a capsule. Will this work as effectively from slow realase as the other? Thank you.
Yes all drugs licenced for use in the UK HAVE to, by law, meet regulations so they are safe and effective as the actual brand names. The ingredients will be the same, except there may be different fillers but this won't alter the efficacy of the drug and of course the generic drug still has the same drug action.
I think the main reason that the generic drugs are cheaper than the original medicines for Pharmacy's to buy is because the manufacturers don't incur the fees for the initial development and research of the drug.
