Novel insights into stock returns of the US pharmaceutical industry - An exploration of factors predicting success

Abstract: The pharmaceutical industry comprises companies researching, developing and producing pharmaceutical drugs. The industry differs in many aspects from other sectors due to high reliability on investments in research and development (R&D). Innovation is thus a key feature of the industry and the driving force of success and determinant of growth. However, new trends shape the industry; R&D expenses continue to increase whereas the number of newly approved drugs remains more or less constant. In the light of the changing industry environment and scarcity of previous studies, the aim of this study was to investigate factors that could predict stock return in the pharmaceutical industry, among them R&D expenses and financial parameters. Panel data of 379 pharmaceutical firms in US were analyzed using regressions with both fixed and random effects models. In line with the changing industry environment we found that R&D expenses were in fact negatively correlated with cumulative stock returns for the analyzed companies. Moreover, financial parameters such as advertisement and selling- and general administrative expenses, also negatively correlated with stock return. By contrast, the variable operational leverage displayed a positive correlation. Taken together, these results shed further light on the pharmaceutical industry and provide valuable information for investors.