How can pharmaceutical and biotechnology companies maintain a high profitability?

Abstract

Biotechnology investors are increasingly concerned about taking the risk of investing in the development of innovative drugs, and pharmaceutical companies are worried about maintaining their high profitability in the future. The question is how to build a portfolio of research and development (R&D) projects that fulfils the financial expectations of investors and shareholders. State-of-the-art net present value algorithms are applied to different types of projects at entry into development in order to evaluate their financial attractiveness and their ability to generate adequate returns. Based on the currently applied cost of capital for pharmaceutical and biotechnology companies the attractiveness of the so-called blockbuster model is clearly supported. The increasingly favoured specialty model, however, will only provide sufficient returns to biotechnology investors if significant sales volumes are reached. Complementing a company's development portfolio with risk-reduced projects could be an attractive way to ensure sustained growth for both biotechnology and pharmaceutical companies.