Pharmaceuticals

Pharma companies discover new drugs, run massive clinical trials to prove they work and are safe, get them approved by regulators, then sell them.

A successful drug can earn $10+ billion a year. A failed one can erase a decade of investment. It's an industry of huge bets with very long timelines.

A drug idea goes through pre-clinical testing (in labs and animals), then three phases of human trials, then regulator approval (FDA in the US), then manufacturing, then sale through pharmacies and hospitals.

The whole process usually takes 10-15 years. Only about 1 in 10 drugs that start trials make it to market.

When a drug is approved, the company has a patent — typically 20 years from when the patent was filed, often leaving 10-12 years of exclusive sales.

During that window, the drug can charge whatever the market (and insurance) will bear. Once the patent expires, cheap generic copies appear and prices collapse — sometimes 80-90% in a year. This is called the "patent cliff."

A new drug costs about $1-2 billion to develop, mostly because so many candidates fail along the way. The few that succeed pay for all the ones that didn't.

This is why big pharma spends 15-20% of revenue on R&D — the highest of any industry.

"Big pharma" (Pfizer, Johnson & Johnson, Roche) has dozens of approved drugs, steady cash flow, and dividends. They look almost like utilities — predictable, slower-growing.

Biotech start-ups are the opposite. One or two drug candidates, no revenue, lots of risk — but if a Phase 3 trial works, the stock can triple in a day. Most fail.

Clinical trials can fail at any phase. The FDA can reject a drug after years of work. Drug pricing is increasingly politicized, especially in the US. Patent cliffs cost billions overnight.

And lawsuits over side effects can run into the tens of billions (opioids, talc, etc.). Long-tail risk is real in pharma.