Characteristics of R&D expenditures in Japan's pharmaceutical industry

Abstract

Characterized by a high level of R&D expenditure, pharmaceutical firms are also subject to specific risks that are reflected in their financial policies. In contrast to other firms, whose investments are directly related to internal cash flows, Japanese pharmaceutical companies do not appear to rely on this source of funds to undertake R&D investments. Our analysis reveals that R&D expenses largely depend on the firm's size and the strength of its balance sheet. More precisely, high levels of debt appear to hold back R&D expenditure, especially when debt has a short-term maturity. These results highlight the importance of funding risky investments with the adequate type of capital to avoid putting firms in financial distress. Despite the risk, R&D investments seem to be justified by the fact that they are generally associated with higher sales growth. However, the difficult conditions prevailing in Japan's pharmaceutical industry make these benefits less visible.

Keywords:

• financing
• Japan
• pharmaceutical firms
• R&D expenditure
• risk
• sales growth

Acknowledgements

We would like to thank the three anonymous referees for many helpful suggestions. Profesor Malcolm Warner, the APBR Co-editor, has also provided considerable advice that has greatly contributed to improve the paper.

Notes

1. Science, Technology and Competitiveness key figures report 2008/2009, European Commission. Available at http://ec.europa.eu/research/era/publication_en.cfm

2. Report on the survey of research and development, Statistics Bureau, MEXT, 2006. Available from http://www.mext.go.jp/english/news/2008/03/08021921/002/001.pdf

3. Ministry of Health, Labour and Welfare, and JETRO, Japan Economic Monthly, August 2005.

4. Trends in the pharmaceutical industry, Japan Economic Monthly, August 2005

5. In a similar vein, Hoshi et al. (1991) show that liquidity plays a lesser role in the financing of keiretsu affiliates.

6. Situation and perspectives of the pharmaceutical industry and biotechnologies, A.D. Little (Paris 2009)

7. These factors include the time lag between an investment and its final outcome, the duration of the investment cycle, and the profit margin strategy of the firm.

8. These factors include the time lag between an investment and its final outcome, the duration of the investment cycle, and the profit margin strategy of the firm.