Impact of R&D on profitability in the pharma sector: an empirical study from India

The purpose of the current paper is to examine the nature of profit persistence and to estimate the dynamic relationship between research and development (R&D) intensity and firm profitability in the Indian pharmaceutical industry.

A dynamic panel data model with generalized methods of moments (GMMs) technique has been deployed to estimate the relationship between R&D intensity and performance. Arellano and Bond (1991) estimation methodology has been used to generate the estimates. A sample of 55 publicly listed firms operating in the Indian pharmaceutical industry for the period 2005-2014 has been considered.

The study finds moderate to heavy profit persistence in the Indian pharmaceutical industry. The study also finds that there exists a positive relationship between R&D intensity and performance for the Indian pharmaceutical Industry. The results hold even after considering two separate measures of profitability – return on assets and return on sales. The results also hint at a possible non-linear relationship between R&D intensity and profitability.

The results highlight positive profit persistence among pharmaceutical firms. The results also highlight the need for a sustained investment in R&D, as its benefits are driven in the long run. Thus, managers should devise proper policies R&D investments. Also, prospective entrants should properly study the existing entry barriers before deciding upon the mode and timing of entry.

The degree of profit persistence and the dynamic nature of relationship between R&D intensity and firm performance in the Indian pharmaceutical sector has not been studied. Thus, this paper fills this gap and also highlights the impact of certain firm- and industry-specific variables on profitability.