Innovation in the Pharmaceutical Industry Evidence from Drug Introductions in the U.S.



Society benefits the most when pharmaceutical industries supply drug products at competitive prices and when they simultaneously maintain optimal innovation rates. Nowadays, however, the U.S. pharmaceutical industry has been under thorough scrutiny. The increasing cost of healthcare, intensive marketing activities, the strong rise of me-too drugs, and, despite all, the high industry profitability have contributed to public skepticism. On the other hand, developing a new drug is a high-risk activity that can only be compensated by market protection schemes and attractive rates of returns. High profitability is needed to fund R&D that can, in turn, advance innovation. Against this background we present three studies on the U.S. pharmaceutical industry.

The first part performs an industry analysis by using theoretical frameworks from economics. We describe several forces that have shaped the industry, including supply and demand conditions, market structure, and government regulations. We show how firms respond to these by implementing various conducts such as legal and marketing strategies. Thereafter, we assess performance of the industry in terms of profitability, productivity, and innovativeness.

The second part explains the industry’s profitability over time as a function of their intangible assets by using a market valuation model. Our results show that firms have successfully utilized their intangible resources to sustain high market performance. Additionally, we found an increasing contribution of advertising on firms’ performance.

Part three focuses on product differentiation strategies. We use a real option framework that perceives a line extension as a firm’s response to uncertainty. Using a repeated events duration model, we identify several determinants that affect firm decisions concerning line extensions. These include uncertainty regarding stock volatility, financial constraints, competitive pressure, and advertising growth. We conclude with implications for public policies, firms’ strategies, and future research.
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Olga Novikova