Unpacking the effects of adverse regulatory events: Evidence from pharmaceutical relabeling

• Authors: Matthew J. Higgins, The University of Utah; Xin Yan, Emory University; Chirantan Chatterjee, Indian Institute of Management Ahmedabad
• Journal Title: Research Policy
• Volume: Volume 50, Number 1
• Publisher: Elsevier Science Ltd. | 2021-01-01
• Type of Work: Article | Final Publisher PDF
• Publisher DOI: http://doi.org/10.1016/j.respol.2020.104126
• Subjects: Health Sciences, Pharmacology; Chemistry, Pharmaceutical; Business Administration, General
• Keywords: Pharmacology & Pharmacy; Labeling; Regulatory shocks; Drug safety label changes; Pharmaceutical innovation; Aggregate demand

Abstract

We provide causal evidence that regulation induced product shocks significantly impact aggregate demand and firm performance in pharmaceutical markets. Event study results suggest an average loss between $569 million and $882 million. Affected products lose, on average, $186 million over their remaining effective patent life. This leaves a loss of between $383 million and $696 million attributable to declines in future innovation. Our findings complement research that shows drugs receiving expedited review are more likely to suffer from regulation induced product shocks. Thus, it appears we may be trading off quicker access to drugs today for less innovation tomorrow. Results remain robust to variation across types of relabeling, market sizes, and levels of competition.