
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
Recommended Citation
Harrington, S.E. (2012). Cost of Capital for Pharmaceutical, Biotechnology, and Medical Device Firms. In Danzon, P.M. & Nicholson, S. (Eds.), The Oxford Handbook of the Economics of the Biopharmaceutical Industry, (pp. 75-99). New York: Oxford University Press.
Included in
Biotechnology Commons, Corporate Finance Commons, Equipment and Supplies Commons, Health and Medical Administration Commons, Pharmacoeconomics and Pharmaceutical Economics Commons, Technology and Innovation Commons
Date Posted: 27 November 2017