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Economic Analysis: Theory and Practice
 

Justifying a methodological approach to value assessment of a pharmaceutical company

Vol. 13, Iss. 43, NOVEMBER 2014

Available online: 4 November 2014

Subject Heading: METHODS OF ANALYSIS

JEL Classification: 

Pages: 2-13

Balashov A.I. National Research University Higher School of Economics, Saint Petersburg Branch, St. Petersburg, Russian Federation
aleksey.i.balashov@gmail.com

Arsent'eva I.E. National Research University Higher School of Economics, Saint Petersburg Branch, St. Petersburg, Russian Federation
Russiafree@mail.ru

The paper proposes a methodological approach to value assessment of a pharmaceutical company on the basis of the economic value added (EVA) concept. The concept enables not only to fix the current values of a company's assets, investment costs and expectations of its investors, but also to take into account the macro-economic situation in the market and the specifics of the pharmaceutical industry. The identified specifics of the global pharmaceutical market, such as high concentration in the industry, a high degree of capital-intensive and science-driven innovation, low price elasticity of demand for major products, the blockbuster and generic business models domination in the market, and highly regulated industry environment enabled to formulate a hypothesis of the research about positive impact of a pharmaceutical company's R&D costs and the cost of the patents and goodwill that are recorded on the balance sheet, on the company's market value. The regression analysis based on the sample of Top-20 largest global pharmaceutical companies of the industry for 2013 enabled to build and evaluate several regression models, where EVA indicator acted as a dependent variable, and the components forming NOPAT, IC and WACC, acted as explanatory variables. The analysis results provided support for the hypothesis at the 5% significance level at the determination factor of 0.7148. Having an effect on the identified key cost factors, a pharmaceutical company's management is able to exercise strategic control over the modern business, to increase investment attractiveness and competitiveness in the global market.

Keywords: pharmaceutical industry, value-based management, economic value added, key value drivers

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