Assessing the Profitability of Pharmaceutical Manufacturers Using Abnormal, Economic, and Accounting Based Rates of Returns

Abstract

Objectives: The purpose of this study is to assess various measures of profitability within the pharmaceutical sector amount Fortune 500 firms from 1955-2005. The objective of this investigation is to compare accounting based measures of return (Profit as a % of revenue), economic rates of return (Tobin’s Q), and abnormal rates of return (Stock market value via the Single Index Market Model). Methods: This study will be a descriptive retrospective study of Fortune 500 drug company’s abnormal rates of return. Data for this study was collected from the Fortune 500 database beginning in 1955 and continuing through 2005. For each year, pharmaceutical manufactures with a NAICS or SIC code of 325412 or 2834, were included. The accounting metrics examined were total return to investors (TRI), earnings per share (EPS), and profit as a percent of stockholder’s equity, revenue, and assets. Results: The preliminary results of this trial report an average approximate Q from 1955-2005 of 2.77 +/- 1.77. Furthermore, correlation between Q and all accounting values was positive, except for EPS (-0.047). Conclusions: The preliminary results of this study indicate the important role that approximate Q plays in evaluating profitability and the “true” value of selected firms. The overall approximate Q in this study has a significant correlation to the published values of the same sector and illustrates important trends in the pharmaceutical manufacturing market. These results support and also conflict with current literature. Further analysis will be performed and is warranted to validate the findings from this study and describe the relationship between abnormal returns and the profitability proxies used in this preliminary analysis.