Health Care Management Papers

Document Type

Book Chapter

Date of this Version

9-2012

Publication Source

The Oxford Handbook of the Economics of the Biopharmaceutical Industry

Start Page

75

Last Page

99

DOI

10.1093/oxfordhb/9780199742998.013.0004

Abstract

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.

Copyright/Permission Statement

Originally published in print and online in The Oxford Handbook of the Economics of the Biopharmaceutical Industry, edited by Patricia M. Danzon and Sean Nicholson, reproduced with permission of Oxford University Press: http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199238828.001.0001/oxfordhb-9780199238828-e-22?rskey=lxS9Hc&result=1

Keywords

systemic risk, equity capital cost, pharmaceutical industry, biotechnology industry, medical device industry, capital asset pricing model, risk-factor model

Share

COinS
 

Date Posted: 27 November 2017