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Pharma, biotech and medical devices
Lesson 1 of 3 Math checked Last reviewed 16 June 2026 14 min

How pharma, biotech and medtech work

The customers (patient, prescriber and payer), the products, the value chain from lab to patient, the odds of success, and patents.

Industry brief, with a one-minute summary: Pharma, biotech and medtech

Key takeaways

  • A new medicine takes many years and many failures to reach patients; patents then give its maker a limited time to earn back that cost before cheaper copies arrive.
  • Pharmaceutical companies (pharma) discover, develop, make and sell medicines.
  • Biotechnology companies (biotech) are often smaller companies built on one area of science, such as antibodies, gene therapy or cell therapy.
  • Generic and biosimilar makers copy medicines whose protection has ended.

Key idea

A new medicine takes many years and many failures to reach patients; patents then give its maker a limited time to earn back that cost before cheaper copies arrive.

Four kinds of company

  • Pharmaceutical companies (pharma) discover, develop, make and sell medicines. The large research-based companies sell patented medicines around the world.
  • Biotechnology companies (biotech) are often smaller companies built on one area of science, such as antibodies, gene therapy or cell therapy. Many have no product on sale yet. They pay for research by raising money from investors or by licensing their drugs to larger companies.
  • Generic and biosimilar makers copy medicines whose protection has ended. A generic is a copy of a chemical drug (a "small molecule", such as most tablets). A biosimilar is a close copy of a biologic (a large molecule made in living cells, such as an antibody).
  • Medical technology (medtech) companies make devices, equipment and diagnostic tests: from syringes and heart stents to MRI scanners, insulin pumps and blood tests.

Who is the customer? Usually three different people

In most industries the person who uses a product also chooses it and pays for it. In healthcare these are usually different people, and many cases turn on this.

  • The patient uses the medicine or device.
  • The prescriber chooses it: a doctor, or a hospital committee that decides which products are on the hospital's approved list (the formulary).
  • The payer pays for it: a government health system (such as the NHS in the UK), a social or private insurer, an employer, or the patient out of pocket. In India, households paid 39.4 percent of total health spending out of pocket in 2021-22, according to India's National Health Accounts, so price matters much more to patients there than in the UK.
  • For devices, add the hospital buyer (procurement) and, in the US, group purchasing organizations that negotiate prices for many hospitals at once.
From lab to patient: the value chain of a new medicine
  • Value chain of a new medicine
    • DiscoveryFind a target (for example a protein linked to a disease) and a molecule that acts on it
    • Preclinical testingLab and animal studies of safety
    • Clinical trials in people
      • Phase IA small group, often healthy volunteers: is it safe, and at what dose?
      • Phase IIPatients: does it work, and what are the side effects?
      • Phase IIILarge trials, often thousands of patients: is it better than current treatment?
    • Regulatory approvalFor example the FDA (US), EMA (EU), MHRA (UK), CDSCO (India), SFDA (Saudi Arabia), HSA (Singapore), NMPA (China)
    • Key: Pricing and reimbursement (market access)Payers decide whether to cover it and at what price, often after a health technology assessment (HTA) of its value
    • ManufacturingActive ingredient (API), then the finished dose (tablets, injections), then packaging
    • DistributionWholesalers and distributors, then pharmacies and hospitals
    • Patient use and follow-upPrescribing, adherence (taking it as prescribed), safety monitoring

Each step has its own specialist companies: contract research organizations (CROs) run trials, and contract manufacturers (CDMOs) make drugs for others.

Chance of moving to the next phase, all drugs, 2011 to 2020(percent)

Bar chart: Chance of moving to the next phase, all drugs, 2011 to 2020. Values in percent. Phase I to Phase II: 52; Phase II to Phase III: 28.9; Phase III to filing for approval: 57.8; Filing to approval: 90.6.

Source: BIO, Informa Pharma Intelligence and QLS Advisors, Clinical Development Success Rates 2011 to 2020. Rates differ a lot by disease area.

So-what

Phase II is the hardest step. Multiplied together, only about 8 in 100 drugs entering Phase I reach approval.

Worked case

What are the odds for a drug entering trials?

The prompt

Using the phase success rates in the chart above, what is the chance that a drug entering Phase I is approved, and the chance for a drug entering Phase II?

Open this case to practice it with a partner

The structure

  • Chance of approval = product of the chances at each remaining step
    • From Phase I: all four steps
    • From Phase II: the last three steps

Working it through

  1. 1. From Phase I

    Multiply all four rates.

    Chance of approval from Phase I (percent):0.52 × 0.289 × 0.578 × 0.906 × 100 = 7.87

  2. 2. From Phase II

    Multiply the last three rates.

    Chance of approval from Phase II (percent):0.289 × 0.578 × 0.906 × 100 = 15.13

The recommendation

The company should value every drug in development as a bet, because only about 8 percent of drugs entering Phase I are approved (7.87 percent on these rates), and about 15 percent of those entering Phase II. This means any value placed on a drug must be multiplied by its chance of success, and a pipeline is a set of bets, not a list of future products. The risk is that these averages hide large differences by disease area. As a next step, check the success rates for the drug's own therapy area.

Failure is expensive. The Tufts Center for the Study of Drug Development estimated in 2016 that the average cost to develop one approved drug, including the cost of the failures and of money tied up over the years, was about USD 2.6 billion (in 2013 dollars). Other studies give lower figures, and the number varies a lot by disease area, so treat it as an order of magnitude, not a precise fact. Development usually takes a decade or more.

Patents and exclusivity

A patent gives its owner the right to stop others from making the invention, usually for 20 years from the date the patent application was filed (this is the minimum under the WTO's TRIPS agreement). Because a drug is often patented early, during discovery, many of those years are used up by trials and approval. Many countries add other protection, such as regulatory data protection: for a period, other companies cannot rely on the original company's trial data to win approval for a copy. When protection ends, generics or biosimilars enter and the price often falls sharply. This moment is called loss of exclusivity (LOE). When several big products lose exclusivity close together, analysts call it a patent cliff.

Medical devices work differently

Devices are regulated by risk class. Low-risk devices, such as bandages, face light rules. High-risk devices, such as heart valves and implants, need clinical evidence. Devices are improved in small steps every few years, so patents matter less than in pharma, and relationships with surgeons, training, service and the installed base (the machines already in hospitals) matter more. Many device makers earn money like a razor-and-blade business: a machine or system is sold or placed in a hospital, and the company then earns on the consumables, disposables and service contracts used with it.

Timed math drill

A biotech has 10 drugs entering Phase I. Using a 7.9 percent chance of approval from Phase I, how many approvals should it expect?

Timed math drill

A drug's main patent was filed in 2012 and the drug was approved in 2021. The patent lasts 20 years from filing. How many years of patent protection remain after approval, ignoring any extensions?

Structuring drill

In a US hospital, a surgeon prefers heart stent A, but the hospital buyer prefers stent B because it is cheaper. Whom must a stent maker win?

Check your understanding

What is a biosimilar?

Check your understanding

Why does a new drug earn a high price for only a limited time?

Check your understanding

Which step in development fails most often, according to the BIO data?

Terms in this lesson
Value chainBarriers to entryNet present value (NPV)Market shareLoss of exclusivity (LOE)Biosimilar
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