Demographic Change and Pharmaceuticals' Stock Returns

28 Pages Posted: 6 Jul 2009

See all articles by Manuel Ammann

Manuel Ammann

University of St. Gallen - School of Finance

Rachel Berchtold

University of St. Gallen - Swiss Institute of Banking and Finance

Ralf Seiz

University of St. Gallen - Swiss Institute of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 24, 2009

Abstract

We analyze how demographic change affected profits and returns across pharmaceutical industries over the last twenty years. Fluctuations in different age group sizes influence the estimated demand changes for age-sensitive drugs, such as antibacterials for young, antidepressants for middle-aged, and antithrombotics for old people. These demand changes are predictable as soon as a specific age group is born. We use consumption and demographic data to forecast future consumption demand growth for drugs caused by demographic changes in the age structure. We find that long-term forecasted demand changes predict abnormal annual pharmaceutical stock returns for more than 60 firms over the time period from 1986 to 2008. An increase by one percentage point of annual demand growth due to demographic changes predicts an increase in abnormal yearly stock returns in the size of 3-5 percentage points. Short-term forecasted demand changes does predict negative abnormal stock returns for a time horizon below 5 years. A trading strategy taking advantage of the demographic information earns a significant abnormal return between 6 and 8 percentage points per year. Our results are consistent with the model by DellaVigna and Pollet (2007), where investors are inattentive with extrapolation in the distant future and overreact to information in the near future.

Keywords: Demographic Change, Demand Growth, Abnormal Stock Returns, Pharmaceutical Companies

JEL Classification: C23, J10, J11

Suggested Citation

Ammann, Manuel and Berchtold, Rachel and Seiz, Ralf, Demographic Change and Pharmaceuticals' Stock Returns (June 24, 2009). Available at SSRN: https://ssrn.com/abstract=1428373 or http://dx.doi.org/10.2139/ssrn.1428373

Manuel Ammann

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Rachel Berchtold (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstr. 52
St. Gallen, 9000
Switzerland

Ralf Seiz

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

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