U.S. is the largest single market for pharmaceuticals in the world with a 45% market share consuming more than 400-billion-dollar worth of pharmaceutical products in 2016 (Statista, 2017). In 2015, more than a quarter of pharmaceutical products that U.S. consumers purchased came from abroad, mainly Ireland, Germany, Switzerland, Israel, and India (ITA, 2016). Pharmaceutical companies around the world enter the U.S. financial market for two main purposes: raise capital, and market its products. It is imperative for pharmaceutical companies to raise large sum of funds because the upfront costs of Research and Development (R&D) to develop drugs are very high (Espinosa, Gietzmann, and Raonic, 2009). Foreign pharmaceutical companies use U.S. bourses to raise capital through issuance of American Depository Receipts.
Previous research has compared the returns of American Depository Receipts (ADRs) and stock indices (e.g., NASDAQ, S&P500), but did not compare the compounded year-to-year buy-and-hold returns of ADRs at the individual stock level within a specific industry (Schaub 2012; Schaub & Lacewell, 2016). For portfolio diversification purposes, it is possible that investors buy-and-hold certain ADRs for a period longer than three years. As such, it is important for both institutional and individual investors to evaluate the returns of ADRs in more details, so they can make informed investment decisions. Filling this gap of knowledge, the current research selected eleven pharmaceutical ADRs from eight countries that are listed in New York Stock Exchange from 2000 to 2016 and compared them against five major U.S. pharmaceutical companies during the same period. Results from the non-parametric hypothesis test performed in the current research work has confirmed that the returns of ADRs and U.S. pharmaceuticals are not the same, and ADRs overall had higher returns than U.S. pharmaceuticals and S&P 500. The findings have important managerial implications for portfolio managers.