Investing in innovation: The relationship between R&D spending and financial performance in the European pharmaceutical industry

Abstract

The pharmaceutical sector is a highly capital and knowledge-intensive industry in the world, which spends around 15 % of its total revenue on research and development activities. The study aims to find the relationship between pharmaceutical businesses' financial performance and investments made in drug research and development in Europe. The study employs regression analysis with a time-lag effect of R&D spending on the operating earnings model. It is expected in the hypothesis that the investment expenditure of the previous year’s R&D investment will significantly and concurrently impact the economic-financial performance of the country and the findings show a strong and positive link between the previous year’s R&D expenditure and the current year's operating profit in the European countries, providing convincing evidence that R&D investments will pay off financially in the years ahead for the development of pharmaceuticals. The study also conducted diagnosis tests for the validation of the estimated models.

Keywords

• R&D investment, financial performance, pharmaceutical industry, and Europe.