Global Innovation and Economic Value by Vijay Kumar & R. P. Sundarraj

Author:Vijay Kumar & R. P. Sundarraj
Language: eng
Format: epub
Publisher: Springer India, New Delhi

Because they produce stable cash flows over long periods, most pharma companies have good balance sheets, with little debt and abundant cash in hand. This balance sheet solidity allows them to acquire biotechnology and pharmaceutical companies that have a pipeline of promising drug candidates, to counter the loss of revenue from patent expirations. Pharma companies also enjoy extraordinary pricing power, especially in the pricing of drugs that can cure critical illnesses and in the absence of competitive drugs in the market. The high R&D spending and a high failure rate is used as a defense by the industry for higher pricing, although the threat of a backlash from the regulators and insurers always exist. The pharma sector is the quintessential defensive sector that can buttress the ups and downs of the economic cycle and pay a steady healthy dividend to provide a regular stream of income. The average yield of the S&P 500 Pharmaceuticals index was nearly 2.3% as of March 2015 [9]. The dividend yield has remained consistently high and has exceeded not only the broader S&P 500 index, but also other sectors such as Software for the last 20 years (Figure source: Thomson Reuters).

Innovation connected with new drug development provides critical competitive advantage, specifically in life sciences, a vital cog of economic and societal growth. The Pharmaceutical industry sets the overall pace of innovation; there is strong evidence of this. The Pharmaceutical industry is one of the largest bastions of innovation, with R&D spending highest among all sectors (Figure source: PhRMA [13]). In 2001, Pharma R&D formed more than 10% of the total OECD countries’ R&D spending, assessed to be $450 billion across all sectors. In pharma-centric countries, such as the UK or Denmark, the share was even more and exceeded 20% [14].

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