{"id":3667,"date":"2007-12-01T10:15:29","date_gmt":"2007-12-01T14:15:29","guid":{"rendered":"https:\/\/biznews.fiu.edu\/?p=3667"},"modified":"2014-11-14T16:01:54","modified_gmt":"2014-11-14T21:01:54","slug":"accounting-regulations-challenge-would-be-pharmaceutical-investors","status":"publish","type":"post","link":"https:\/\/biznews.fiu.edu\/2007\/12\/accounting-regulations-challenge-would-be-pharmaceutical-investors\/","title":{"rendered":"Accounting regulations challenge would-be pharmaceutical investors."},"content":{"rendered":"\n\n\n
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\nStephen Lin<\/strong><\/em><\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The successful production of a new drug benefits people with medical needs and investors alike. Yet, the time from R&D to product launch spans years, many drugs never make it very far along in the process, and the cost\u2014beginning with R&D through clinical trials to market\u2014runs in the billions of dollars. How can investors\u2014absolutely critical to pharmaceutical companies\u2014make prudent decisions about where and when to invest their money for a good return?<\/p>\n

As with any investment, relevant and reliable accounting information helps, but in this sector, such information does not come easily. That\u2019s in part because the future economic benefit of R&D costs is highly uncertain. Also, to comply with the conservatism principle in accounting, in which managers assume no economic benefit, companies must expense R&D costs, where the bulk of the outlay occurs.<\/p>\n

\u201cRegulations in the United States and in the United Kingdom, which are where we focused our study, dictate that companies treat R&D expenditures as expenses and deduct those costs from earnings, rather than treating them as capital expenditures,\u201d said Stephen Lin<\/strong>, associate professor, School of Accounting, College of Business Administration. \u201cThis accounting practice has significantly reduced quality of earnings, since many pharmaceutical or biotech companies literally never make any profit.\u201d<\/p>\n

Study tracks announcement timing and market response.<\/em><\/p>\n\n\n\n
\n
\"Arun
\nArun Prakash<\/strong><\/em><\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Over a two-year period, Lin and three colleagues, including two members of the college\u2019s Department of Finance and Real Estate\u2014Arun Prakash<\/strong>, Knight Ridder Center Research Professor; and Chun-Hao Chang<\/strong>, associate professor\u2014studied data collected between 1990 and 1998 on voluntary disclosure practices in the UK\u2019s pharmaceutical industry. They wanted to identify the market reactions to the release of drug development information\u2014the key way investors can find out about a company\u2019s prospects.<\/p>\n

\n

\u201cInvestors have to depend on managers within the drug companies for drug development information, but what managers provide is not always accurate.\u201d<\/span><\/p>\n

\u2014Stephen Lin<\/strong>, associate professor, School of Accounting, College of Business Administration<\/p>\n

\n\n\n\n
\n
\"Chun-Hao
\nChun-Hao Chang<\/strong><\/em><\/div>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u201cSuch releases are discretionary, and that poses problems,\u201d Lin said. \u201cInvestors have to depend on managers within the drug companies for drug development information, but what managers provide is not always accurate. In addition, we learned that details tend to come late in the developmental lifecycle, when the news is more likely to be positive, but when the timing for investment isn\u2019t as favorable.\u201d<\/p>\n

What\u2019s an investor to do?<\/em><\/p>\n

Given the nature of the pharmaceutical\/biotech industry\u2014high risk, lack of accounting information, and generally upbeat news from the drug companies themselves\u2014can people make a profit from their investments in this sector?\u00a0 Lin said it\u2019s very difficult, but not impossible.<\/p>\n

\u201cPotential investors need to research the industry thoroughly, since it has rather unique characteristics, and interpret company announcements carefully,\u201d he said. \u201cDoing so may improve their chances for a long-term reward.\u201d<\/p>\n

\u201cVoluntary Disclosure and Its Impact on Share Prices: Evidence from the UK Biotechnology Sector,\u201d published in Journal of Accounting and Public Policy<\/em>, one of the leading accounting journals, captures the explorations and conclusions of the cross-disciplinary researchers.<\/p>\n

\u201cThis is a unique and highly appropriate publication because it focuses on how accounting affects public interest,\u201d said Lin, who expects to collaborate with colleagues in the area of finance again.<\/p>\n","protected":false},"excerpt":{"rendered":"

Stephen Lin The successful production of a new drug benefits people with medical needs and investors alike. Yet, the time from R&D to product launch spans years, many drugs never make it very far along in the process, and the cost\u2014beginning with R&D through clinical trials to market\u2014runs in the billions of dollars. How can […]<\/p>\n","protected":false},"author":71,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_links_to":"","_links_to_target":""},"categories":[4],"tags":[188,434,619,1516,2388,2484],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/posts\/3667"}],"collection":[{"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/users\/71"}],"replies":[{"embeddable":true,"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/comments?post=3667"}],"version-history":[{"count":1,"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/posts\/3667\/revisions"}],"predecessor-version":[{"id":24204,"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/posts\/3667\/revisions\/24204"}],"wp:attachment":[{"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/media?parent=3667"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/categories?post=3667"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/biznews.fiu.edu\/wp-json\/wp\/v2\/tags?post=3667"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}