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Longitudinal Study on the Performance of U.S. Pharmaceutical Firms: The Increasing Role of Marketing

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Author Info
Pattikawa, L.H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
Abstract

Nowadays, the U.S. pharmaceutical industry has been under thorough scrutiny. Popular press claims of intensive marketing activities that go beyond R&D, the strong increase of me-too drugs, and, at the same time, the high industry profitability have contributed to public skepticism. Despite this increasing role of marketing, studies on the profitability of pharmaceutical firms mainly focus on the role of R&D. In this paper, we investigate the impact of advertising and product differentiation on pharmaceutical firms’ market value over the period 1971-2005. Especially, we examine whether there has been a change in the pattern of returns in these variables over this period. Our results show that, nowadays, pharmaceutical firms’ performance is not only closely linked to their R&D activities but also to marketing activities such as advertising and product differentiation. Since the 1990s, the return of advertising has become three times larger than that of R&D. In addition, we found that the impact of product differentiation came largely from the introduction of the so called incrementally modified drugs (IMD). The vast increase of the number of IMDs since the 1990s is likely to contribute to this development. Our results emphasize the role of advertising and product differentiation in the virtuous rent-seeking behavior in the pharmaceutical industry.

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Publisher Info
Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2007-020-STR Revision_Date: 2008-04-17.

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Date of creation: 28 Mar 2007
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Handle: RePEc:dgr:eureri:300010401

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Related research
Keywords: Advertising; Product differentiation; Marketing; Market value; Panel data; Pharmaceutical industry;

This paper has been announced in the following NEP Reports:

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