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

After studying technical metallurgy for one semester at Universitas Indonesia, Jakarta, Lenny Pattikawa (1973) decided to pursue a master’s degree in economics at the Erasmus University Rotterdam. She specialized in economics and business economics and graduated in May 2000. In September 2000, she became a research assistant at the same university in which she carried out a study on the determinants of new product performance. In October 2002, she joined ERIM as a PhD candidate and started research on the pharmaceutical industry. Lenny has published her work in the European Journal of Marketing, ERIM working paper series, and in several international proceedings. She also presented her research at national and international conferences, including those of Prebem, Marketing Science, the Academy of Management, and the American Marketing Association.

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.

In de afgelopen jaren is de kritiek op de farmaceutische industrie toegenomen. Marketing uitgaven die groter zijn dan R&D uitgaven, de sterke groei van incrementele innovaties gecombineerd met de hoge winstgevendheid in de industrie hebben de publieke opinie over farmaceutische bedrijven sterk beïnvloed. Tegen deze achtergrond voerden wij drie studies uit naar de farmaceutische industrie in de V.S. De eerste studie presenteert een analyse van de industrie vanuit een theoretisch raamwerk dat is gebaseerd op de economische literatuur. We beschrijven factoren die van invloed zijn op de industrie zoals vraag en aanbod condities, marktstructuur en regelgeving vanuit de overheid. Wij laten zien dat farmaceutische bedrijven hierop reageren met bijvoorbeeld juridische en marketingstrategieën. Wij evalueren tevens de prestaties van de industrie in termen van winstgevendheid, productiviteit en innovatie. De tweede studie tracht de winstgevendheid van de farmaceutische bedrijven in de loop van de tijd te verklaren. Onze bevindingen tonen aan dat de bedrijven op succesvolle wijze hun immateriële activa weten te benutten. Wij vonden dat het grootste deel van prestaties wordt verklaard door de marketing activiteiten van bedrijven. De derde studie richt zich op productdifferentiatie strategieën van farmaceutische bedrijven. Gebruik makend van real-option theorie en een repeated events model veronderstellen wij dat bedrijven de levenscyclus van hun product verlengen als antwoord op onzekerheid over situaties binnen en buiten de organisatie. Wij identificeren een aantal variabelen dat de beslissing van productextensies beïnvloedt zoals de volatiliteit van aandelenprijzen, financiële barrières, concurrentiedruk en de groei van marketing uitgaven. Het proefschrift besluit met een reeks implicaties voor industriebeleid, bedrijfsstrategieën en toekomstig onderzoek.