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CoC in Pharma

The document discusses the critical role of the cost of capital (CoC) in the pharmaceutical industry, emphasizing its importance in guiding investment decisions, project valuation, and funding strategies. CoC serves as a benchmark for evaluating R&D initiatives and ensures that capital is allocated efficiently to maximize returns while managing risks. Companies like Roche and AstraZeneca illustrate how CoC informs strategic planning and decision-making to enhance long-term value and investor confidence.

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4 views11 pages

CoC in Pharma

The document discusses the critical role of the cost of capital (CoC) in the pharmaceutical industry, emphasizing its importance in guiding investment decisions, project valuation, and funding strategies. CoC serves as a benchmark for evaluating R&D initiatives and ensures that capital is allocated efficiently to maximize returns while managing risks. Companies like Roche and AstraZeneca illustrate how CoC informs strategic planning and decision-making to enhance long-term value and investor confidence.

Uploaded by

vivekraghuvanshi2k2
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Application of Cost of

Capital in the
Pharmaceutical Industry SUBMITTED TO:
SUBMITTED BY :
Yash
Arshiya Mam
Yash Pal
Yoginder Saini
Daniyal Naeem
Vivek Raghuvanshi
INTRODUCTION
The cost of capital to a firm is the minimum return, which the suppliers of capital
require.
For a firm it is a price of obtaining cash.
Or, is the minimum return a company must earn on its investments to satisfy its
stakeholders. It reflects the opportunity cost of using capital elsewhere and is often
used as a benchmark for evaluating new projects
Each source of funds has different cost, such as cost of equity share capital, cost of
preference share capital, cost of debt, cost of retained earning.
Need of Cost of Capital in the Pharmaceutical Industry

The pharmaceutical industry operates under high uncertainty, long development timelines, and substantial upfront
investment—making the cost of capital a critical financial tool. With billions of dollars invested in drug discovery and
clinical trials, companies must ensure that every dollar is directed toward initiatives likely to generate a return above their
capital costs.
Why It’s Essential:
•High-Risk Environment: Pharma companies face significant risk due to regulatory hurdles, R&D failures, and market
unpredictability. CoC helps quantify acceptable risk thresholds.
•Capital Prioritization: It guides firms in comparing diverse investment opportunities across therapeutic areas and
development stages.
•Strategic Planning: Whether in R&D portfolio management, global expansion, or mergers and acquisitions, CoC ensures
decisions are rooted in long-term value creation.
•Shareholder Assurance: Investors expect returns that justify the risk they bear. CoC aligns corporate actions with these
expectations to maintain market confidence
Pharmaceutical
Applications
Investment Decisions
In the pharmaceutical sector, capital is limited and must be
allocated wisely. Cost of capital serves as a key metric to
evaluate whether a potential R&D initiative or market
expansion justifies the financial risk. If the anticipated return
on a project falls below the firm’s required rate of return (CoC),
it is often shelved in favour of higher-potential investments.
This financial discipline ensures that only strategically sound
projects move forward.
Valuation of Projects
Evaluating drug development opportunities requires precise
forecasting. Companies use valuation tools like Net Present
Value (NPV) and Internal Rate of Return (IRR), but what anchors
these models is the cost of capital. A higher CoC results in
heavier discounting of future cash flows, making accurate
project selection essential. This ensures that resources go into
candidates likely to deliver long-term financial value.
Funding Strategies

Pharmaceutical firms fund their operations through a


mix of debt, equity, and hybrid instruments. The cost
of capital affects how they balance these sources. A
lower CoC allows access to cheaper funding, which
can support innovation pipelines. Conversely, a high
CoC may push companies to minimize capital
spending or seek partnerships to share development
costs, especially in high-risk therapeutic areas.
Pharmaceutical Examples

Roche – Targeted R&D Investment in Oncology and Personalized Medicine

Roche has strategically focused its R&D on oncology and personalized healthcare, using biomarker-based
approaches. The company has developed a strong reputation in precision medicine with breakthrough
therapies such as Herceptin and Tecentriq. These innovations reflect a strategic commitment to areas
with strong clinical differentiation and high market demand.
Role of CoC:
•Roche applies cost of capital as a benchmark to determine which early-stage assets advance to full
development.
•Programs with marginal or uncertain returns are either partnered externally or discontinued to avoid
misallocation of capital.
•CoC also informs decision-making around acquisitions and licensing deals, helping the company avoid
overpaying for external assets that don’t meet return thresholds.
AstraZeneca – Refocusing Pipeline for Value-Driven Growth

In response to declining revenues from patent expiries in the early 2010s, AstraZeneca restructured
its R&D pipeline to focus on high-value areas like oncology, cardiovascular, and respiratory diseases.
The company’s turnaround was driven by an intentional shift in capital strategy
Role of CoC:
•AstraZeneca uses cost of capital as a financial gatekeeper, ensuring projects must deliver returns
that justify the risks, especially in volatile therapeutic markets.
•It helped the company abandon low-performing segments such as antibiotics and invest in next-
generation therapies like immuno-oncology (Tagrisso, Imfinzi).
•CoC is integrated into AstraZeneca’s business development decisions, guiding partnerships and
acquisitions where synergies can enhance return on invested capital (ROIC)
CONCLUSION
Cost of Capital is not just a financial metric—it is a strategic compass for
pharmaceutical companies. In an industry where development cycles are
long, risks are high, and resources are limited, CoC helps ensure that
capital is used efficiently and wisely.
It supports:
• Sound Investment Decisions: Ensures funding goes to projects with the
best risk-adjusted returns.
• Optimal Capital Structure: Guides choices between debt, equity, and
hybrid instruments.
• Value-Based Strategy: Aligns financial planning with long-term growth
and innovation goals.
• Investor Confidence: Demonstrates disciplined financial management,
boosting trust and credibility.
By embedding CoC into every major decision—from R&D to acquisitions
—pharma companies can not only manage risk more effectively but also
build a more sustainable and profitable future.

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