Product safety spillovers and market viability for biologic drugs

When a pharmaceutical manufacturer experiences a safety problem, negative impacts on profitability can spread to its competitors. Reduced consumer confidence, product recalls, and litigation are limited to the responsible manufacturer only if that manufacturer can be clearly linked to the safety problem. We analyze the impact of “accountability” for safety problems on manufacturer entry decisions and investments to mitigate risk. Consistent with prior research, we find investment levels increase with accountability in a duopoly market, and that accountability can thus enhance market viability and improve consumer welfare. However, we also analyze the impact of accountability on entry of a competitor, after the originator’s exclusivity has expired. Accountability promotes the development of a robust market by raising expected profits, particularly for an entrant with a relatively low likelihood of a safety problem. Yet entry need not improve consumer welfare, and may benefit the incumbent in our model. In contrast to the traditional entry deterrence mechanism, when accountability is sufficiently low, increased incumbent investment encourages entry. Our analysis has important implications for biologic drugs, insofar as pathways for entry by “biosimilars” have been established in Europe and the United States, and informs pharmacovigilance and other accountability policies for biologics.