Biotech - the End of Big Pharma? Given the risks of investments in biotechnology and pharmaceutical stocks, have the returns exceeded what would be predicted by financial asset pricing models?

Abstract

The objective of this thesis is to investigate whether biotech and pharma stocks have exceeded the returns of what would be predicted by financial asset pricing models. More specifically, we examine whether the stocks in these sectors have delivered positive abnormal returns. We study value-weighted biotech portfolios and pharma portfolios with return data from January 2010 to June 2022. We limit the analysis to stocks in developed countries. We apply the Fama-French five-factor model, in which the dependent variable is the excess return over the risk-free rate. The estimated alphas determine the existence of abnormal returns. We study different regions, time periods and comparable sector indices in our main analysis. We also conduct a robustness analysis with results from other multi-factor models, as well as portfolios with annually rebalancing and equally-weighting. We find significantly positive alphas for the value-weighted biotech portfolio in Europe and the equally-weighted biotech portfolio in developed countries, i.e., these portfolios deliver positive abnormal returns. We discuss the potential of R&D as a systematic risk factor that can explain the abnormal return. We do not find any significant abnormal returns for the pharma portfolios. Moreover, we find that both biotech and pharma stocks are positively exposed to the market factor and negatively exposed to the value factor. Additionally, the biotech portfolio is positively exposed to the size factor and negatively exposed to the profitability factor. The pharma portfolio is positively exposed to the investment factor.