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

Abstract

The pharmaceutical industry is highly capital and knowledge-intensive, spending approximately 15% of its total revenue on research and development (R&D). This 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 operating earnings. It is hypothesised 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.