Scott E. Harrington
This article provides new estimates of systematic risk and the cost of equity capital for the pharmaceutical, biotechnology, and medical device sectors. The main analysis employs data for pharmaceutical, biotechnology, and medical device firms with publicly traded stock on US exchanges (including foreign-owned firms) with at least $100 million of market capitalization during the periods 2001–2005 and 2006–2008. Two frameworks are used for estimating firms' risk and the cost of equity capital: the capital asset pricing model (CAPM) and the empirically driven three risk-factor model of Fama and French (the F-F model). The article is organized as follows. The first section briefly reviews prior work and discusses the likely relation between the cost of equity capital and R&D intensity. The next section outlines the CAPM and F-F models and their empirical implementation. The data and samples are discussed in the third section. The fourth section presents beta and cost of equity capital estimates for equally weighted portfolios formed by sector and by sector and firm size. The fifth section presents results concerning the relationship between individual firm betas and R&D intensity, and it is followed by a final concluding section.
This article examines whether market distortions and failures prevent biopharmaceutical firms from raising the optimal level of R&D funding and, if market failures exist, how markets have adapted to ameliorate their impact. The first section reviews the amount and sources of biomedical R&D spending in the United States over the last ten years and presents limited information on spending in other developed countries. The second section explores how pharmaceutical and biotech firms finance their R&D and whether either type of firm appears to be at risk of not raising enough to finance all projects with positive net present value. The third section discusses the theoretical arguments for why biopharmaceutical firms may spend either more or less on R&D than the socially optimal amount. The fourth section reviews empirical studies of whether firms in general are financially constrained and then, more specifically, whether pharmaceutical and biotech firms are financially constrained. The final section reviews whether venture capital firms and the market for alliances between biotech and pharmaceutical firms are able to address possible underinvestment in R&D due to financial constraints.