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Finance CompaniesThe Bureau estimates that it will now have authority to supervise about 34 of the largest nonbank auto finance companies and their affiliates that engage in auto financing. The key to this process was the pricing power enjoyed by the drug companies, the result of a well-defended patent system, significant growth in health care spending, splintered health insurance companies and lack of accountability for costs at every level (from patients to hospitals to the government). In this model, not surprisingly, investors rewarded pharmaceutical companies based on the amounts they spent on R&D (secure in their belief that the costs could be passed on to customers) and the fullness and balance of their product pipelines.

The rise in health care costs seems to have slowed down and the pricing power of drug companies has waned for many reasons, with Obamacare being only one of many drivers. First, we have seen more consolidation within the health insurance business , potentially increasing their bargaining power with the pharmaceutical companies on drug prices. The growth in health care costs continued into the last decade, albeit at levels much more moderate than in the 1990s, but the big story was the rise of biotechnology companies in the space.

Consequently, investors have had to become more measured in their judgment of R&D spending at drug companies, rewarding companies for spending more on R&D only if it is productive and punishing them when it is not. The real question is whether the numbers back the story and to answer that question, I looked at key operating metrics for publicly traded drug companies from 1991 to 2014, with the intent of eking out trends in the numbers.

At inception, the distinction between pharmaceutical and biotech companies wass the method by which they produced drugs, with pharmaceutical firms working with chemicals and biotechnology companies using live organisms (bacteria, cells or yeast) to generate their drugs. In 2014, for instance, four of the top ten drug companies in the US, in revenues, were biotechnology companies.

The rest of the differences that people point to between the two, i.e, that biotech companies spend more time on research, tend to lose money and are riskier than pharmaceutical firms have less to do with business differences than life cycle differences. Note that by the last decade, and especially since 2010, almost all of the growth in the drug business has come from the biotech companies, with pharmaceutical companies reporting flat revenues between 2010 and 2014. The generalization that biotech companies tend to be younger and earlier in the life cycle is being put to the test as some biotech companies age.Finance Companies

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