The impact of bioequivalence regulation on pharmaceutical firm outcomes: Evidence from China

China's pharmaceutical market is dominated by generic drugs, accounting for 95 % of its market share. However, prior to 2016, these drugs were not required to undergo bioequivalence testing against their innovator drugs, raising concerns about the effectiveness of generic drugs. To address this issue, China implemented mandatory bioequivalence testing in 2016. This study investigates the impact of this policy change on generic drug firms' R&D investments and their success in passing bioequivalence tests. Employing a difference-in-differences approach, we analyze R&D investment data from 2012 to 2022 and bioequivalence approval data from 2012 to 2024 for 122 publicly listed pharmaceutical firms in China. Our findings reveal that firms responded to the new regulations by significantly increasing their R&D investments by 20.7 %. In addition, the quality regulation has led to an average of 2.5 approval per firm annually. Hetergeneity analysis reveals that firms in wealthier provinces, larger firms, and those with prior higher R&D capacities were more likely to increase their R&D investments and pass bioequivalence tests compared to those that are not. In addition, pharmaceutical firms prioritize bioequivalence testing compliance for drugs facing stricter regulatory deadlines or those with potentially higher economic returns. These results suggest that the implementation of mandatory bioequivalence testing has spurred positive responses from the industry, and it is likely to have a positive impact on drug quality compared to the pre-regulation period. However, more comprehensive strategies are needed to ensure full compliance and further improve the quality of generic drugs in China.