A Predictive Model for Biotech Companies’ Market Value Based on R&D Investment
Open AccessIt is widely accepted that research and development (R&D;) is key to a company’s continued success. However, there are conflicting views whether an increased investment in research and development leads to a better financial performance or market valuation, probably due to the lack of easy to measure parameters which account for R&D; success. This research intends to quantify that relationship, developing a predictive model to assess the right level of R&D; investment that leads to a higher market valuation. To test the hypothesis that there is a cluster of innovation variables that directly impact market value, a clustering analysis was performed on data from companies listed in the Nasdaq Biotechnology Index (NBI), between 2010 and 2019. Results from the clustering analysis show two distinctive clusters that influence the response variable – market valuation, one related to income (cash, cogs, earnings before interest, taxes, depreciation, and amortization (EBITDA), gross profit, and revenue), and one related to R&D; investments and capital (assets, capital expenditure, invested capital, R&D; expense). These results demonstrate that there is a direct effect of R&D; investment on market valuation. After classifying the variables through the cluster analysis, a predictive model was built with the same data using Classification and Regression Tree (CART Regression), and the results show that it can predict market valuation of NBI companies with an accuracy above 90% both for the testing and the training sets (97.15% and 93.72% respectively). The results from the model also show that R&D; expense has a very high relative importance (97.6%) on the dependent variable, market valuation. In summary, the predictive model developed in this research accurately predicts market valuation of NBI companies, using company and economy/market specific variables. Additionally, both the clustering analysis and the predictive model demonstrate and quantify the relationship between R&D; investments and valuation.
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