Drug Discovery and Development: Does the maturity of biotech companies affect their stock return volatility?

Sammanfattning: Stock return volatility is very high in the biotech industry opposed to other industries and there is limited explanation as to why. Biotech companies invest large amounts of money on research and development to move drugs forward in the clinical trial phases, to get market approval by the regulatory agency FDA. The drug discovery and development process is long and expensive, taking on average 12 years and costing around 2.5 billion USD per new approved drug. In addition, the investments made into moving drugs forward in the trial phases pose great uncertainty due to the unknown outcome and the low success rate of around 6% among the drug candidates. Still it has been suggested that when investing in biotech stocks one should look into the clinical trial data. This raises questions of how great an impact the clinical trials have on the stock return volatility. This study develops a new measure of maturity, from clinical trial data, and is the first study to investigate how the measure affects volatility. To do so, a panel data model with data from 128 biotech companies between 2009-2017 is used. Results show evidence that maturity is positively related to stock return volatility.