As you sow, so shall you reap: evidence of innovation and drug portfolio diversification from the stock market

As you sow, so shall you reap: evidence of innovation and drug portfolio diversification from the stock market
Document type
Bensal, Anushri
Towers Watson
Date of publication
1 April 2010
Trends: economic, social and technology trends affecting business, Management & leadership: including strategy, public sector management, operations and production
Business and management
Material type

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This article looks at returns for innovation for 66 companies in the biopharmaceutical industry. To measure the market rewards to innovation, the study uses patent issue and FDA approval as proxies for success. Patent application occurs at the beginning of the R&D process, and a patent grant gives the firm a first-mover advantage against its competitors. A patent can thus be considered an incentive to innovate. An FDA approval, on the other hand, gives a firm licence to market the drug and thus marks the culmination of its R&D efforts. The research measures abnormal returns following announcements of a patent grant and FDA approval and then examines abnormal returns generated by different kinds of drugs (standard, orphan, priority, new molecular entity, or NME, and new chemical formulation) developed by pharmaceutical companies. Given that the length of time required to develop a drug increases the risks attendant to drug discovery, we also analyze the factors that affect the interval between a patent grant and FDA approval. The research suggests that while the stock market does not react to a patent grant, it rewards an FDA approval. Moreover, the rewards of this approval persist for several days after the announcement. The market discounts the value of most patents, given the high risks and uncertainty involved in the development and application process. But FDA approval heralds the introduction of a successful drug, which increases the parent company’s valuation.

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