Over the past 10 years, leading pharmaceutical companies have had little returns on the expensive process of finding new drugs, with the average return on R&D at 12 of the world’s largest companies falling to 1.9% in 2018. This signifies the lowest level of ROI in the pharmaceutical industry in more than a decade, while the cost of drug discovery has risen dramatically. The low return rate is comfortably below the cost of capital, which is the rate at which companies are able to borrow money. The mostly futile R&D investments have resulted in major drug companies developing smaller numbers of therapies in their pipelines.

With this transforming the pharmaceutical landscape, drugmakers are increasingly looking to acquiring smaller companies. Pharma giants are able to provide larger distribution to smaller companies which, without wide reaching distribution, are unable to capitalize from sales of new therapies as quickly. The most recent acquisitions of smaller drug companies are largely due to the impression that biotechnology companies are not as expensive to acquire. In late 2018, investors focused on stocks that were seen as less risky, which negatively impacted unpredictable smaller companies, such as biotechnology firms, resulting in a 25% decline in the Nasdaq index of biotechnology firms in the fourth quarter of 2018. Come January, biotech companies seem to be trading at a stock market discount, causing pharmaceutical companies to begin the year with a takeover boom, with Bristol Myers Squibb and Eli Lilly purchasing Celgene and Loxo Oncology for $90 billion and $8 billion, respectively.

Source: The Economist