The Effect of FDA Advisories on Branded Pharmaceutical Firms' Valuations and Promotion Efforts
AbstractThe US Food and Drug Administration (FDA) expends considerable efforts in regulating medications approved for use. Yet the impact of medication labeling changes on brand pharmaceutical products, and whether and what firms do to respond to increased information regarding the safety and efficacy of a drug, have not be characterized. We propose a behavioral framework for examining the effects of FDA advisories on branded pharmaceutical firms and their products. We empirically assess the impact of recent FDA advisories on the stock market valuations of a sample of branded pharmaceutical manufacturing firms using event study methods. We examine whether and how branded pharmaceutical manufacturers respond to an advisory by assessing changes in promotion compared to non-affected firms. We find firms targeted by an advisory have average stock price declines of 3% in three days and 11% in five days following the advisory release, and in turn appear to decrease total physician-directed promotion spending, journals ads and detailing visits significantly six months following the advisory release; the provision of free samples is unaffected. We find no changes among therapeutic substitutes unaffected by the advisory. Results of sensitivity analyses suggest firms with market dominant positions experience similar decreases in stock market valuations and physician-directed promotion compared to pooled results. The results are also robust to alternative definitions of the timing of advisory release dates and the severity of advisories’ wording. Theory and empirical results suggest the public release of FDA advisories negatively impacts firm’s short-term market valuations. The results suggest an additional rationale for previously documented declines in prescribing after FDA advisory releases – significant declines in physician-directed promotion following FDA advisory releases; the combined (and likely correlated) effects of the release of the advisory and declines in physician-directed promotion on prescribing behavior are likely larger than the sum of the independent effects.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17528.
Date of creation: Oct 2011
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Find related papers by JEL classification:
- D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
- I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
- K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-22 (All new papers)
- NEP-BEC-2011-10-22 (Business Economics)
- NEP-CIS-2011-10-22 (Confederation of Independent States)
- NEP-COM-2011-10-22 (Industrial Competition)
- NEP-HEA-2011-10-22 (Health Economics)
- NEP-MKT-2011-10-22 (Marketing)
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