The Market Return To Pharmaceutical Product Approval




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Does the public announcement of approval of New Drugs affect the market valuation of the sponsoring pharmaceutical company? This study will try to find out the technically and intuitively acceptable answer of this question using event study methodology. Relatively smaller number of previous studies on this issue found the mixed answers of this question using well-tested methodology of event study. Basing on the notion that the Efficient Market Hypothesis (EMH) is in effect in the pharmaceutical industry, stock and securities market should ideally react quickly (i.e., efficiently) in response to the public announcement of approval of new drug by the Food and Drug Administration (FDA) and the positive abnormal return may be expected for the sponsoring pharmaceutical company on and around the event date i.e., the day of the public announcement of the new drug approval for marketing. Using the OLS and the 2SLS to carry-out the event study for four-hundred events of eleven pharmaceutical companies ranging twenty-three years, this study has found the mixed outcomes similar to some of the previous studies on this issue. Briefly, the findings of the present study are: (a) Existence of statistically significant positive abnormal returns (AR) for the day following the events. (b) The cumulative abnormal return (CAR) is statistically insignificant for the estimates of the pooled regressions and for some of the individual pharmaceutical companies. (c) No sign of information leakage ahead of the events. (d) Some individual pharmaceutical companies show the existence of statistically significant positive abnormal returns (AR) and the cumulative abnormal return (CAR) for event day and the day after (e.g. Novartis, Abbott). The technical reasons and the intuitive explanations behind these findings will be revealed in the analysis of empirical results and in the concluding remarks of this study.