Just How Good an Investment is the Biopharmaceutical Sector?

Nature Biotechnology 35 (12), 1149-1157 (2017)

Posted: 22 May 2018

See all articles by Richard T. Thakor

Richard T. Thakor

University of Minnesota - Carlson School of Management; Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Nicholas Anaya

Independent

Yuwei Zhang

Independent

Christian Vilanilam

Independent

Kien Wei Siah

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Chi Heem Wong

Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); Massachusetts Institute of Technology (MIT); Massachusetts Institute of Technology (MIT) - Sloan School of Management

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

Date Written: December 8, 2017

Abstract

Uncertainty surrounding the risk and reward of investments in biopharmaceutical companies poses a challenge to those interested in funding such enterprises. Using data on publicly traded stocks, we track the performance of 1,066 biopharmaceutical companies from 1930 to 2015—the most comprehensive financial analysis of this sector to date. Our systematic exploration of methods for distinguishing biotech and pharmaceutical companies yields a dynamic, more accurate classification method. We find that the performance of the biotech sector is exquisitely sensitive to the presence of a few outlier companies, and confirm that nearly all biotech companies are loss-making enterprises, exhibiting high stock volatility. In contrast, since 2000, pharmaceutical companies have become increasingly profitable, with risk-adjusted returns consistently outperforming the market. The performance of all biopharmaceutical companies is subject not only to factors arising from their drug pipelines (idiosyncratic risk), but also from general economic conditions (systematic risk). The risk associated with returns has profound implications both for patterns of investment and for funding innovation in biomedical R&D.

Keywords: Biotechnology, Pharmaceuticals, Drug Development, Health Care Economics, Business Strategy in Drug Development, Risk

JEL Classification: G11, G12, G32, L65, O31, O32

Suggested Citation

Thakor, Richard T. and Anaya, Nicholas and Zhang, Yuwei and Vilanilam, Christian and Siah, Kien Wei and Wong, Chi Heem and Lo, Andrew W., Just How Good an Investment is the Biopharmaceutical Sector? (December 8, 2017). Nature Biotechnology 35 (12), 1149-1157 (2017), Available at SSRN: https://ssrn.com/abstract=3175894

Richard T. Thakor (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

Nicholas Anaya

Independent ( email )

Yuwei Zhang

Independent ( email )

Christian Vilanilam

Independent ( email )

Kien Wei Siah

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

Cambridge, MA
United States

Chi Heem Wong

Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL) ( email )

Stata Center
Cambridge, MA 02142
United States

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Santa Fe Institute

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