Academic journal article International Journal of Business

Regulatory Changes in the Pharmaceutical Industry

Academic journal article International Journal of Business

Regulatory Changes in the Pharmaceutical Industry

Article excerpt

ABSTRACT

In August of 1997, the Food and Drug Administration (FDA) set new less restrictive guidelines for direct-to-consumer (DTC) advertisements by pharmaceutical companies. I examine the common stock price reaction of pharmaceutical companies following the announcement of new FDA guidelines on advertising. Positive announcement effects are found for the pharmaceutical industry following the FDA announcement. Evidence suggests that innovative firms emphasizing research and development (R&D) are more likely to capitalize on DTC advertising and benefit the most from the less restrictive guidelines of the FDA regarding DTC advertisements.

JEL: G18, L50, L65

Keywords: Pharmaceutical; Advertising; R&D; Regulatory changes

I. INTRODUCTION

In August of 1997, the Food and Drug Administration's (FDA) approved less restrictive guidelines regarding direct-to-consumer (DTC) advertising for pharmaceutical companies. This change in regulation resulted in a flood of pharmaceutical products requiring prescriptions to enter a new era of advertising directly to the consumer. A heated debate continues regarding the impact of the less restrictive advertisements. Physicians and insurance companies criticized the pharmaceutical industry for its increased advertisement expenditures targeted directly to the consumer. Critics are concerned about the level of spending on advertising versus spending on research and development, as well as ethical implications of interfering with the doctor-patient relationship. They raised several questions related to the ethical implications of DTC. Are patients capable of discerning the costs and benefits of new drugs? Would patients seek out the best prescription drug or the best advertised prescription drug? Would patients seek out drugs that are truly necessary or that are only perceived as being beneficial to them? In addition, concerns of rising health care costs continue to draw increased political attention on the pharmaceutical industry.

While the impact of the decreased regulation has generated much attention from physicians, insurance institutions and marketing, it is unclear how the market reacted to the decreased regulation. One issue addressed by politicians is whether or not increasing expenditures on advertising expenses result in rising prescription drug costs and fewer resources being allocated to research and development of potential medical breakthroughs. This study examines the market reaction to the announcement for firms that emphasize advertising and research and development after controlling for the size of the firm.

II. HISTORY OF DTC ADVERTISING

In August of 1997, the FDA set new less restrictive guidelines of DTC advertisements by pharmaceutical companies. Prior to August of 1997, any advertisement promoting a drug's benefits was required to list all of the medicine's side effects. This information was technical and virtually impossible to list on a short television advertisement. To get around this requirement the benefits of a prescription drug could be mentioned or the name of the drug could be mentioned in the advertisement but not both. Therefore, prior to this change in legislation it was very difficult to gain brand recognition.

Calfee (2002) suggests DTC advertising is beneficial citing surveys of consumers conducted by the FDA and others. Survey results suggest DTC advertising benefits consumers by providing valuable information on alternative treatments that can be discussed with their physicians. Lexchin and Mintzes (2002) summarize some of the criticism of DTC advertising. Their major objection to DTC is based on surveys of physicians who feel uncomfortable with prescribing drugs requested by patients. Williams and Hensel (1995) suggest that older individuals are particularly susceptible to the influences of DTC advertising, because they may seek prescriptions that are unnecessary. …

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