Biotech: Core and Explore – Pfizer Inc. (PFE), Merck & Co., Inc. (MRK)

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Giant pharmaceutical companies are looking for the next big drug, and so are much smaller biotech outfits. Because of the methods they use, biotechs are often at the leading edge of research. This, combined with the small size of many of the companies in this space, means the potential for investors to hit home runs. However, it also opens up the possibility for a lot of strike outs. Investors interested in the drug space should consider owning biotechs, but would do well to use a core and explore approach.

Pfizer Inc. (NYSE:PFE)

Biotech Versus Pharmaceutical Company

Drugs are an increasingly important aspect of everyday life. With the aging of the Baby Boomers, drug use is only going to increase. The next big drug, however, isn’t going to show up out of thin air. That means that companies big and small are going to be looking for it.

The major pharmaceutical companies spend hundreds of millions of dollars on this endeavor, focusing on manipulating chemicals into useful compounds. Many of these companies are household names, like Dow-30 members Merck & Co., Inc. (NYSE:MRK) and Pfizer Inc. (NYSE:PFE). These companies are massive entities that have large collections of businesses generating revenue to support their research efforts. These are the companies most investors think of when they consider drugs.

There is another avenue to the creation of drugs, however. The Biotechnology Industry Organization explains that biotechnology “harnesses cellular and biomolecular processes to develop technologies and products that help improve our lives and the health of our planet.” In other words, what biotech companies create comes from living organisms.

It is a unique approach and one that many would suggest we haven’t even begun to fully tap. For example, the rainforests of the world are home to many species of animals and plants that we’ve never even seen. The opportunities to find novel drugs via biotechnology is immense.

The Core

There is really only one truly large biotech company out there, Amgen, Inc. (NASDAQ:AMGN). Luckily for investors, Amgen happens to be a well-run and financially sound company. In an industry known for volatility, Amgen is a relative safe haven. It even initiated a dividend in 2012, lending further credence to its status as the 800-pound gorilla of biotech. That said, some investors may believe that the company’s size and new dividend are evidence that Amgen isn’t a growth company anymore.

While it will likely be hard for the company to grow as quickly as it once did, it hasn’t stopped innovating. In fact, it currently has eight drugs in late stage development, including treatments for postmenopausal osteoporosis, gastric and ovarian cancers, acute lymphoblastic leukemia, and psoriasis.  Some of these ailments are likely to be increasingly common as the baby boomers continue to age, making them great candidates to pick up the slack when biosimilars (the equivalent of generic drugs) of Amgen’s existing blockbusters are allowed on the market.

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