The market valuations for pharmaceutical companies are based on theexpectation that they will sustain the high rates of growth that they have delivered in recent years, says a study published by CMR International entitled The Dual Challenge: Satisfying Patients and Sustaining Shareholder Growth. Since 1990, drugmakers' earnings per share increased an average of 12%, and this has created a high level of shareholder expectation of pharmaceutical firms, "putting considerable pressures on these companies as they attempt to create innovative new products and deal with imminent patent expiries," notes the report.
The ability to invest substantially in R&D is critical to a company's future growth potential, and a number of the major pharmaceutical firms have been increasing their R&D expenditure considerably in order to boost their pipelines and keep pace with their rivals in a race for scale. The study notes that the average percentage ratio of R&D to sales is 16.7%.
This increasing investment in R&D is consistent with the view that, to satisfy shareholder expectations, it is unlikely to be enough for pharmaceutical companies to continue with the status quo. Indeed, it was estimated in 1999 that to maintain an industry growth rate of 8%, drugmakers would need to triple the number of New Molecular Entities launched annually. However, the average cost of bringing a NME to market, most recently estimated at $600 million, "illustrates the scale of this challenge," notes CMR.
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