The Effect of FDA Advisories on Branded Pharmaceutical Firms' Valuations and Promotion Efforts

Rena Conti, Haiden A. Huskamp and Ernst R. Berndt

No 17528, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The 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.

JEL-codes: D22 D43 I11 I18 K23 L1 L11 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-bec, nep-cis, nep-com, nep-hea and nep-mkt
Note: EH LE
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.nber.org/papers/w17528.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:17528

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w17528

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().