IDEAS home Printed from https://ideas.repec.org/a/spr/aphecp/v7y2009i3p155-165.html
   My bibliography  Save this article

Financial risk of the Biotech Industry versus the Pharmaceutical Industry

Author

Listed:
  • Joseph Golec
  • John Vernon

Abstract

The biotech industry now accounts for a substantial and growing proportion of total R&D spending on new medicines. However, compared with the pharmaceutical industry, the biotech industry is financially fragile. This article illustrates the financial fragility of the biotech and pharmaceutical industries in the US and the implications of this fragility for the effects that government regulation could have on biotech firms. Graphical analysis and statistical tests were used to show how the biotech industry differs from the pharmaceutical industry. The two industries’ characteristics were measured and compared, along with various measures of firms’ financial risk and sensitivity to government regulation. Data from firms’ financial statements provided accounting-based measures and firms’ stock returns applied to a multifactor asset pricing model provided financial market measures. The biotech industry was by far the most research-intensive industry in the US, averaging 38% R&D intensity (ratio of R&D spending to total firm assets) over the past 25 years, compared with an average of 25% for the pharmaceutical industry and 3% for all other industries. Biotech firms exhibited lower and more volatile profits and higher market-related and size-related risk, and they suffered more negative stock returns in response to threatened government price regulation. Biotech firms’ financial risks increase their costs of capital and make them more sensitive to government regulations that affect their financial prospects. As biotech products grow to represent a larger share of new medicines, general stock market conditions and government regulations could have a greater impact on the level of innovation of new medicines. Copyright Adis Data Information BV 2009

Suggested Citation

  • Joseph Golec & John Vernon, 2009. "Financial risk of the Biotech Industry versus the Pharmaceutical Industry," Applied Health Economics and Health Policy, Springer, vol. 7(3), pages 155-165, September.
    • Handle: RePEc:spr:aphecp:v:7:y:2009:i:3:p:155-165
    DOI: 10.1007/BF03256149
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/BF03256149
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/BF03256149?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    2. Lerner, Josh & Shane, Hilary & Tsai, Alexander, 2003. "Do equity financing cycles matter? evidence from biotechnology alliances," Journal of Financial Economics, Elsevier, vol. 67(3), pages 411-446, March.
    3. Giaccotto, Carmelo & Santerre, Rexford E & Vernon, John A, 2005. "Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry," Journal of Law and Economics, University of Chicago Press, vol. 48(1), pages 195-214, April.
    4. John A. Vernon, 2005. "Examining the link between price regulation and pharmaceutical R&D investment," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-16, January.
    5. Henry G. Grabowski & John M. Vernon, 1987. "Pioneers, Imitators, and Generics — a Simulation Model of Schumpeterian Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 491-525.
    6. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    7. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Billette de Villemeur, Etienne & Versaevel, Bruno, 2019. "One lab, two firms, many possibilities: On R&D outsourcing in the biopharmaceutical industry," Journal of Health Economics, Elsevier, vol. 65(C), pages 260-283.
    2. Wellman-Labadie, Olivier & Zhou, Youwen, 2010. "The US Orphan Drug Act: Rare disease research stimulator or commercial opportunity?," Health Policy, Elsevier, vol. 95(2-3), pages 216-228, May.
    3. Stephan Eger & Jörg Mahlich, 2014. "Pharmaceutical regulation in Europe and its impact on corporate R&D," Health Economics Review, Springer, vol. 4(1), pages 1-9, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Joseph H. Golec & John A. Vernon, 2007. "Financial Risk in the Biotechnology Industry," NBER Working Papers 13604, National Bureau of Economic Research, Inc.
    2. Giaccotto, Carmelo & Golec, Joseph & Vernon, John, 2011. "New estimates of the cost of capital for pharmaceutical firms," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 526-540, June.
    3. Gregor Dorfleitner & Felix Rößle, 2018. "The financial performance of the health care industry: a global, regional and industry specific empirical investigation," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(4), pages 585-594, May.
    4. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484, National Bureau of Economic Research, Inc.
    5. Katherine Sauer, 2008. "A model of parallel imports of pharmaceuticals with endogenous price controls," Economics Bulletin, AccessEcon, vol. 6(36), pages 1-8.
    6. John Vernon & Joseph Golec & J. Stevens, 2010. "Comparative Effectiveness Regulations and Pharmaceutical Innovation," PharmacoEconomics, Springer, vol. 28(10), pages 877-887, October.
    7. Pierre Dubois & Olivier de Mouzon & Fiona Scott-Morton & Paul Seabright, 2015. "Market size and pharmaceutical innovation," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 844-871, October.
    8. Joseph Golec & John Vernon, 2010. "Financial Effects of Pharmaceutical Price Regulation on R&D Spending by EU versus US Firms," PharmacoEconomics, Springer, vol. 28(8), pages 615-628, August.
    9. Joseph H. Golec & John A. Vernon, 2006. "European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending," NBER Working Papers 12676, National Bureau of Economic Research, Inc.
    10. Stephan Eger & Jörg Mahlich, 2014. "Pharmaceutical regulation in Europe and its impact on corporate R&D," Health Economics Review, Springer, vol. 4(1), pages 1-9, December.
    11. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
    12. Joseph P. Cook & Graeme Hunter & John A. Vernon, 2010. "Generic Utilization Rates, Real Pharmaceutical Prices, and Research and Development Expenditures," NBER Working Papers 15723, National Bureau of Economic Research, Inc.
    13. repec:ebl:ecbull:v:6:y:2008:i:36:p:1-8 is not listed on IDEAS
    14. Frederico Belo & Chen Xue & Lu Zhang, 2010. "Cross-sectional Tobin's Q," NBER Working Papers 16336, National Bureau of Economic Research, Inc.
    15. Arthur, Bruno R. & Katchova, Ani L., 2012. "Accruals Anomaly in Agriculture Financial Economics," 2012 Annual Meeting, February 4-7, 2012, Birmingham, Alabama 119822, Southern Agricultural Economics Association.
    16. David J. Moore & David McMillan, 2016. "A look at the actual cost of capital of US firms," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1233628-123, December.
    17. Fu, Fangjian & Lin, Leming & Officer, Micah S., 2013. "Acquisitions driven by stock overvaluation: Are they good deals?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 24-39.
    18. Dimitrios D. Thomakos & Michail S. Koubouros, 2011. "The Role of Realised Volatility in the Athens Stock Exchange," Multinational Finance Journal, Multinational Finance Journal, vol. 15(1-2), pages 87-124, March - J.
    19. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 36-58.
    20. Moreno Gigi & van Eijndhoven Emma & Benner Jennifer & Sullivan Jeffrey, 2017. "The Long-Term Impact of Price Controls in Medicare Part D," Forum for Health Economics & Policy, De Gruyter, vol. 20(2), pages 1-56, December.
    21. Po-Hsuan Hsu & Dongmei Li & Qin Li & Siew Hong Teoh & Kevin Tseng, 2022. "Valuation of New Trademarks," Management Science, INFORMS, vol. 68(1), pages 257-279, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:aphecp:v:7:y:2009:i:3:p:155-165. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.