Creating Shareholder Value In The Drug Industry

The major objective of corporate and competitive strategies is todevelop a sustainable competitive advantage, according to Sri Srikanthan, senior lecturer in accounting and finance at the Cranfield School of Management. He told delegates at a UK business conference on creating and sustaining shareholder value in the pharmaceutical industry, at Cranfield University, that this is the only way that a company can achieve this goal.

Mr Srikanthan said that in a perfectly competitive market a company's portfolio of projects achieves exactly the return demanded by shareholders and other sources of finance, which means that no value is created. He said that to create and sustain shareholder value a company needs to give investors a return above the normal level related to their investment. This calls for a coordinated approach to R&D, and premarketing and financial strategies that increase the return more than the risk.

In the drug industry, the source of competitive advantage historically has been a firm's ability in R&D, and the ability to launch new drugs. However, issues in health care, such as drug pricing restraints and the rising costs of getting a product to the market, have eroded a firm's capacity to generate above-normal profit.