The Impact of Product Innovation on Firm Value: Evidence from the Biopharmaceutical Industry

Abstract

In the current COVID-19 pandemic, we witness sharp fluctuations of biopharmaceutical equity prices as a response to innovation related news. On 23.04.2020, the stock price of Biotech firm Gilead Sciences fell by as much as 9% after rumors suggested that remdesivir, its experimental COVID-19 treatment, showed no benefit. One week later, official clinical trial results suggesting the opposite have led to a rebounce of 11% in equity value. Jumps in equity prices of this amplitude are frequent in the biopharmaceutical industry, yet we lack knowledge about the underlying forces that drive them. In this paper we investigate the impact of product innovation on firm equity value by linking venture specific characteristics to stock market reactions using a large data set of the biopharmaceutical industry. We find that market reactions increase in the portfolio importance of the product under development, measured by product specific net present value data, and diminish in its success probability, estimated by a combination of supervised learning methods. Our results aid corporations and investors to evaluate the financial consequences of innovation related news.

Keywords: Clinical trials, Stock market, Product innovation, Market reaction, Pharmaceutical industry, Event study, Supervised learning

JEL Classification: I11, G10, G14, O30