Stock price reaction to the drug development setbacks in the pharmaceutical industry

Background Investments in pharmaceutical companies remain challenging due to the inherent uncertainties of risk assessment. Objectives Our paper aims to assess the impact of the drug development setbacks (DDS) on the stock price of pharmaceutical companies while taking into account the company’s fin...

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Bibliographic Details
Published in:Daru 2021-06, Vol.29 (1), p.1-11
Main Authors: Abramavičius, Silvijus, Stundžienė, Alina, Korsakova, Laura, Venslauskas, Mantas, Stankevičius, Edgaras
Format: Article
Language:English
Subjects:
Biomedical and Life Sciences
Biomedicine
Drug Development
Drug Industry - economics
Europe
Investments
Medicinal Chemistry
Models, Theoretical
Neural Networks, Computer
Pharmaceutical industry
Pharmaceutical Sciences/Technology
Pharmacology
Pharmacology/Toxicology
Research Article
Risk assessment
Stock prices
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Summary:Background Investments in pharmaceutical companies remain challenging due to the inherent uncertainties of risk assessment. Objectives Our paper aims to assess the impact of the drug development setbacks (DDS) on the stock price of pharmaceutical companies while taking into account the company’s financial situation, pipeline size and trend of the stock price before the DDS. Methods The model-based clustering based on finite Gaussian mixture modeling was employed to identify the clusters of pharmaceutical companies with homogenous parameters. An artificial neural network was constructed to aid the prediction of the positive mean rate of return 120 days after the DDS. Results Our results reveal that a higher pipeline size and a lower rate of return before the DDS, as well as a lower ratio of the market value of the equity and the book value of the total liabilities, are associated with a positive mean rate of return 120 days after the DDS. Conclusion In general, the DDS have a negative impact on the company’s stock price, but this risk can be minimized by investors choosing the companies that satisfy certain criteria. Graphical abstract The higher pipeline size(spip) and lower rate of return before (srr) the drug development setback (DDS) and the Market Value of Equity/Book Value of Total Liabilities ratio (sx4) are associated with a positive mean rate of return 120 days after the DDS.
ISSN:2008-2231
1560-8115
2008-2231
DOI:10.1007/s40199-020-00349-6