Effects of profit‐reducing policies on firm survival, financial performance, and new drug introductions in the research‐based pharmaceutical industry

Abstract

We introduce a computational model of the evolution of a value-maximizing research-based pharmaceutical firm and parameterize it using estimates of R&D costs, profit distributions, and candidate attrition rates. We use the model to estimate how the probability of surviving and covering the costs of R&D depends on R&D scale and the policy regime. In the model, even small reductions in profitability have substantial impacts on firm success and innovation, but the effects may not be visible to consumers for many years. Smaller and newer firms are most vulnerable to reductions in the rewards for innovation. Copyright © 2007 John Wiley & Sons, Ltd.

A Markov‐perfect equilibrium model of the impacts of price controls on the performance of the pharmaceutical industry

“…The unit of time is a six‐year period. This choice is partly based on existing estimates that suggest even extreme changes in industry profitability do not impact the flow of new drugs for over five years (Filson and Masia, 2007). Six years also fits well with two key durations in this industry.…”

“…Although such a structure facilitates interpretation, in most therapeutic classes it seems more plausible to think of branded manufacturers as oligopolists who face consumers who attempt to maximize utility, and that is what I assume here. The model here also goes beyond recent attempts to consider the impacts of adopting price controls in the United States (Abbott and Vernon, 2007; Filson and Masia, 2007) by emphasizing equilibrating forces that influence behavior in the short and long runs.…”

Squeezing the Last Drop Out of Your Suppliers: An Empirical Study of Market‐Based Purchasing Policies for Generic Pharmaceuticals

“…Turning to the empirical literature on rivalry in pharmaceutical markets under regulation, Danzon and Chao (), Ekelund and Persson (), Kyle (), Abbott and Vernon (), Ellison and Wolfram (), Filson and Masia (), Sood et al . (), and Filson () all recognize a tradeoff between low pharmaceutical prices achieved by regulation today, and the potential long‐term risk of having fewer pharmaceutical products with which to treat patients in the future.…”

Pharmaceutical regulation in Europe and its impact on corporate R&D

“…A reduction of profit margins in turn has a direct impact on corporate R&D investment decisions. Theoretical work on this topic has been introduced for instance by Filson and Masia [ 30 ] who present a computational model in which even small reductions in profitability have substantial impacts on firm success and innovation. By means of a Markov model Filson [ 31 ] simulates what happened if the U.S. adopted price controls like those in the rest of the world.…”