Moving through the clinical pipeline

Sammanfattning: Biotech companies on the stock market follow a rigorous clinical process for their product development. The implications of this for investors is an alternative approach to stock valuation that incorporates the uncertainty to the potential future cash flows will be realized. The 3- step clinical process prior to regulatory approval each increase the probability of having drug candidates approved. As Biotech companies announce clinical results, implying they will move on to subsequent clinical phases, stock prices should according to the Efficient Market Hypothesis react instantly and completely in parity to the stock being fairly valued. This thesis evaluated the Cumulative Abnormal Stock Returns for Biotech stocks around a 20- day period prior and following the announcements. The method used for this event study was a statistical Z-test to determine if the event period reported any statistically significant Abnormal Returns. Theories assessed in this study was Efficient Market Hypothesis and Discounted Cash Flow modeling for security valuation. Additionally, previous literature covering Post Earnings Announcement Drift, Risk- Adjusted Net Present Value for biotech valuation as well as News trading were also assessed in the light of EMH. The results showed that there was no statistical significance to prove Cumulative Abnormal Returns during the event window observed. Furthermore, average stock prices increased in line with the increased probability of receiving market approval at later clinical stages. Although not statistically significant, the results indicated tendencies for News Trading strategies to hold.