O N THE
P HARMACEUTICAL
I NDUSTRY
MIT Sloan School of Management
Cambridge, Massachusetts
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P ROGRAM
O N THE P HARMACEUTICAL I NDUSTRY MIT Sloan School of Management Cambridge, Massachusetts |
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Stan N. Finkelstein, Ernst R. Berndt, Mark Moore, Paul E. Greenberg & Alison Keith, March 1997.
Among the greater management challenges that employers have faced in the last decade have been achieving greater employee productivity and getting a handle on spiraling health care costs. Ideally, both challenges can be addressed with one set of policies that target employee health investments; such targeted policies enhance productivity by reducing the absenteeism and impairment while at work associated with ill health.
Few would question the notion that a healthier workforce is more productive. Losses due to absenteeism, for example, have received considerable attention. Much of that attention has focused on injuries at work or illnesses closely tied to conditions at work. Here we adopt a more inclusive approach in order to capture the costs of absenteeism due to any illness that is prevalent in working-age populations, regardless of whether the "cause" of the illness is associated with work conditions.
However, another aspect of the value of treating illness, better at-work employee performance, has received very little attention. Greater interest on the part of employers and policy-makers could very well follow if a credible set of metrics were available to document that improved at-work productivity resulted from better health. This paper offers the elements of a framework to help identify illnesses that can be targets of opportunity -- targets for incremental additional investments in workplace health that could bring tangible economic returns to employers.
Charles King III, November 1996.
Marketing plays a major role in the promotion of pharmaceuticals, where marketing expenditures can range as high as 10 - 20% of sales. This paper investigates the role of marketing in product differentiation and competition in the ulcer drug market, one of the largest pharmaceutical markets. A variant of the discrete choice model of consumer behavior is developed that incorporates the effects of marketing by the firm and its competitors and that allows marketing to affect the scale of product differentiation. Using a panel of monthly data on four ulcer drugs from 1977 to 1993, the price and marketing elasticities of demand are estimated. These results suggest three primary effects of marketing during this period. First, marketing reduced firms' own price elasticities of demand. Second, total marketing by all firms reduced the degree of product differentiation in the market and raised the cost of entry to potential competitors. Third, marketing initially expanded the market for ulcer drugs but later became an increasingly important means of stealing business from competitors.
Ernst R. Berndt, Iain M. Cockburn & Zvi Griliches, 1996.
The construction and publication of measures of price inflation are important tasks carried out by governmental statistical agencies. In the U.S., the Bureau of Labor Statistics publishes price indexes measured at the point of final consumer demand (the consumer price index, CPI), and at the initial production point, i.e., prices received by producers from whomever makes the first purchase (the producer price index, PPI). These price measurement tasks are difficult ones, particularly since new goods embody scientific discoveries and technological progress, inherent difficulties exist in measuring the output of services that themselves combine goods and time, and dynamic structural and compositional changes occur in the underlying markets for production, distribution and sale.
The health care marketplace contains all these features and presents particularly difficult challenges for price measurement. Health care expenditures represent a significant portion of GDP, and are likely to become increasingly important as the US population ages. The conceptual foundations for a health care-related CPI are clouded by the fact that in the US, many but not all health care products and services are paid for by insurance plans; thus, for example, currently the CPI for prescription pharmaceutical products weights only cash payment transactions from drug stores and mail order outlets, and excludes HMO, Medicaid or other purchases on behalf of an individual.
Charles L. Cooney, 1996.
Scott Stern, December 1996.
This paper estimates a model of product demand within a number of pharmaceutical markets, where each market is composed of a number of substitute therapies (FDA-approved molecules). Each molecule may be sole by the pioneer (the patent holder) and generic competitors. A number of empirical anomalies within these markets motivate this research. In particular, despite very aggressive entry by generic vendors, the prices of pioneer products rose during the 1980s. A model of consumer choice, relying on the institutional details of pharmaceutical decision-making, is developed to derive the regression framework. This framework includes two important features. First, I explicitly parameterize the substitutability among molecules and between pioneer and generic products. Second, the endogeneity of firm-level choice variables (price and advertising) is accounted for by the use of instrumental variables.
There are three principal findings. First, alternative pioneer products are relatively strong substitutes; in contrast, pioneer products often are substantially differentiated from their generic competitors. Second, pioneer firms wield market power, in part because they are multiproduct firms. Not accounting for the economics of multiproduct pricing reduces the degree of measured market power by up to 27%. An important corollary to these first two findings is that competition among pioneer firms provides an important check on pioneer market power. Finally, there is substantial variation among therapeutic markets. In the single market that did not experience new pioneer entry, there is little differentiation between the pioneer and generic sectors and relatively low intermolecular substitutability.
Scott Stern, December 1996.
Since the 1930's, extraordinary (though uneven) advances have been achieved in the chemical, biological and clinical sciences underlying drug discovery. Over this period, pharmaceutical firms have assimilated and exploited this underlying science base in different ways at different times; as well, some firms have been more aggressive than others in attempting novel organizational and/or scientific approaches to drug discovery. For example, starting in the late 1970s, some firms, such as Merck, started to provide strong support and high-powered incentives for collaboration and interaction with university-based scientists, while other firms, such as Bristol-Myers, maintained a more traditional (and less interactive) approach towards university research. Persistent differences in the management of drug discovery are somewhat puzzling, particularly since some strategies (such as openness to university science) have been found to be more "productive" than others. The goal of this paper is to understand the process by which particular practices and tools are adopted more closely. This paper examines the role that experience plays in shaping the underlying incentives and knowledge base that firms possess when contemplating adaptation to environmental change. In so doing, the difficulty inherent in the process of adaptation are highlighted through an examination of the challenges faced by firms in the 1980s as they attempted to respond to radical change in the biological sciences and computing technologies which underly drug discovery.
Iain Cockburn & Rebecca Henderson, 1995.
There is considerable evidence that there are significant and persistent "fixed effects" across firms. The classic production function literature demonstrated that some firms were persistently "inside" the efficiency frontier, and more recent work exploring the determinants of research productivity using panel data has consistently suggested that there are large and persistent differences in firm performance that cannot be ascribed to traditional measures of labor, knowledge or physical capital. Some authors have even suggested that the percentage of variance in profitability across firms that can be attributed to firm effects may be significantly greater than the percentage that can be attributed to industry effects.
These results are consistent with a long stream of work in the traditions of organizational behavior and strategic management which has suggested that organizations change only very slowly, despite the fact that differences across firms have important implications for both profitability and survival. They are also consistent with a vibrant managerial literature that exhorts senior management to adopt the latest techniques in organizational management, and they have given rise to a lively theoretical literature.
Iain Cockburn & Rebecca Henderson, 1995.
Iain Cockburn & Rebecca Henderson, July 1996.
Pharmaceutical companies display large and persistent differences in their innovative capabilities. Using detailed data gathered at the project level from inside the R&D labs of ten major pharmaceutical companies, we examine the roots of differential performance in the development of new drugs. One of the most interesting features of these data is the ability to distinguish between "discovery" and "development" efforts: the processes of identifying potentially valuable new compounds in the lab, and of subsequent testing and fine-tuning these drug candidates in human trials. In previous work, we found substantial advantages to size in drug discovery, stemming as much from economies of scope and the ability to absorb R&D spillovers as from economies of scale per se in performing pharmaceutical research. Here we contrast these results with the factors which determine success in the drug development phase, where the technology of R&D is very different and where larger amounts of money are spent. While we find no evidence of straightforward economies of scale, we again find some evidence that larger firms benefit from the ability to take advantage of economies of scope. In contrast to our previous findings in drug discovery, however, this result is not robust to the inclusion of controls for firm effects. These results have interesting implications for the theory of the firm, as well as for policy-orientated interest in the links between market structure, firm size, and performance in this important industry.
Iain Cockburn & Rebecca Henderson, 1995.
We empirically examine interaction between the public and private sectors in pharmaceutical research using qualitative data on the drug discovery process and quantitative data on the incidence of co authorship between private institutions. We find evidence of significant reciprocal interaction, and reject a simple "linear" dichotomous model in which the public sector performs basic research and the private sector exploits it. Linkages to the public sector differ across firms, reflecting variation in internal incentives and policy choices, and the nature of these linkages correlates with their research performance.
Frank Basa & Thomas J. Allen, 1996.
This questionnaire survey study of 45 drug development teams examines how the locus of decision influence between project leaders and departmental managers affects the performance of drug development projects at the US R&D laboratories of six large, multinational pharmaceutical firms. The study examines a series of relationships among locus of decision making influence, project leader characteristics, organizational support for teams, project phase, leadership structure, and project performance.
In this sample project performance is higher when team members perceive departmental managers to have greater influence over go/no-go decisions during both early and late phases of the development process. Project performance is also higher when project leaders have greater influence over clinical decisions during later phases. The technical knowledge of the project leader is related to project performance in a complex fashion. Technically knowledgeable project leaders are more effective during late phase projects. During early phases, project leaders who are rated as having greater technical knowledge head lower performing teams.
Ernst R. Berndt, Stan N. Finkelstein, Paul E. Greenberg, Robert Howland, Alison Keith, A. John Rush, James Russell & Martin B. Keller, October 1997.
Utilizing data from a clinical trial and an econometric model incorporating the impact of a medical intervention and regression to the mean, we present evidence supporting the hypotheses that for chronically depressed individuals: (i) the level of perceived at-work performance is negatively related to the severity of depressive status; and (ii) a reduction in depressive severity improves the patient's perceived work performance. Improvement in work performance is rapid, with about two-thirds of the change occurring already by week 4. Those patients having the greatest work improvement are those with both relatively low baseline work performance and the least severity of baseline depression.
Stan N. Finkelstein, Ernst R. Berndt, Paul E. Greenberg, Rod A. Parsley, James M. Russell, Martin B. Keller & the Chronic Depression Study Group, 1995.
We analyzed the relationship between depression and patient-assessed or clinician-rated work performance among chronically depressed patients followed for 12 weeks in a large clinical trial.
The data were collected in a double-blind design comparing sertraline, a selective serotonin reuptake inhibitor, with imipramine, a tricyclic antidepressant, in 12 academic centers nationwide. Incorporating work-related questions from a portfolio of rating scales used to assess depression, we constructed several measures of work performance, assessed at baseline and at Week 12 of the clinical investigation, and examined how they changed with improvement in depressive symptoms.
As depressive symptoms subsided following treatment, patients reported substantial improvement in our measures of work performance. Eighty-six percent of the cohort reported some improvement from base-line to Week 12. The extent of improvement in work performance correlates highly with improvement in the depressive symptoms measured on the Hamilton Rating Scale for Depression.
Treatment of depression with antidepressant medications resulted in substantial improvement in subjective work performance among the patients studied.
Bart Clarysse, Koen Debackere & Peter Temin, February 1996.
Organizational ecology is evolving from a collection of rather unrelated concepts towards an integrated model of business failure and founding. Despite this increasing convergence within the ecological boundaries, little integration occurs with other intellectual streams. This paper presents a review of the theoretical models developed during the past five years and an assessment of future research opportunities: can institutional theory, strategic management and industrial economics enrich and stretch the boundaries of the ecological model?
Peter Temin, Stan Finkelstein & Bart Clarysse, February 1996.
Conventional wisdom about the United States pharmaceutical industry is based on the observation that there is market power in the sales of individual drugs. This market power is thought to derive from patent monopolies on new drugs and from economies of scale in pharmaceutical R&D, in shepherding new drugs through the regulatory process and in marketing. Economic analyses of the industry have been concerned largely with measuring and alleviating this power.
But the pharmaceutical industry cannot be seen simply as a collection of monopoly markets. There also are economies of scope within the pharmaceutical industry, and virtually all firms in the industry sell a multiplicity of drugs. Many if not most markets for individual drugs have at least some competition, either because the patent has expired or because there exist closely substitutable drugs. And since patents are only temporary, new drugs have to be introduced continually to maintain market power.
Alison Keith & Ernst R. Berndt, September 1994.
The interest in finding reliable measures of how prices change over time is by no means new. When writing Chronicon Preciosum in 1707, William Fleetwood, the Bishop of Ely, computed a price index for the living costs of an Oxford student 1707 compared to those of an Oxford student of 1460. He added up the costs of five quarters of wheat, four hogsheads of beer, and six yards of cloth and took the 1707 / 1460 total cost ratio as a price index. Several decades later, the Legislature of the Commonwealth of Massachusetts generated its own market basket to index the pay of soldiers fighting in the Revolutionary War. (The need to find a reliable standard for adjusting pay was created by the rapid inflation that had drastically reduced the real value of the fixed nominal pay of the soldiers). According to Willard Fisher, the 1780 legislation decreed that the basket was to consist of five bushels of corn, 68 and 4/7 pounds of beef, ten pounds of sheep's wool and sixteen pounds of sole leather.
Today measures of price change are widely used, by businesses for assessing performance and for business planning, by diverse participants engaged in public policy debates, and by workers involved in labor-management disputes. Certain price measures are required to be disclosed publicly by companies. Specific measures are even incorporated into laws, regulations and contracts. In the U.S., these measures are typically drawn from the standard price index series produced by the government's Bureau of Labor Statistics (BLS), such as the Consumer Price Index (CPI) and the Producer Price Index (PPI).
Nevin M. Summers & Charles C. Cooney, February 1993.
The history of technological advancement shows that innovation is initially often dismissed as impractical -- and ignored. By the time the incumbent technology recognizes the new technology's threat it is too late. The new technology supplants the existing way of doing things and gradually establishes market dominance.
The history of biotechnology is an apt example of this process. As many industry observers have pointed out, if pharmaceutical companies had initially recognized the power of recombinant DNA drugs, there might be no biotechnology industry today. Pharmaceutical companies would have developed the technology internally, maintaining absolute dominion over the health-care industry. Understanding when an emerging technology is on the verge of launching a threat to your business allows you to steer your company in a direction that will take advantage of that change.
Michael Miller & Arnold Barnett, 1994.
Fiona Scott Morton, January 1994.
A Most Favored Nation contract between the buyer and seller of a good requires the seller to give the buyer the lowest price offered to any other buyer. Many theoretical models have shown that a Most Favored Nation clause commits a firm to compete less aggressively in prices. The Federal Government imposed such a rule in 1990 to govern the prices it would pay firms for pharmaceutical products supplied to Medicaid recipients. The firms had to give Medicaid their "best," or lowest, price. I show that average market prices rose after the MFN clause was implemented. Generic firms were not subject to the MFN rule and generic prices did not rise after the regime change. However, markets with three or fewer generic firms and one brand firm show a small rise in the generic price. The strategic externally is more concentrated in this situation. The MFN law was not a good policy choice; the higher prices it caused reduced consumption of pharmaceuticals and lowered national welfare.
Fiona Scott Morton, January 1994.
This paper models the entry decisions of generic pharmaceutical manufacturers into markets opened by patent expiration. In particular, Scott Morton examines the role of pre-expiration brand advertising to see if it deters generic entry. Other market characteristics affect the number of entrants; the most important of these is pre-expiration brand revenue. Drugs with high hospital share and those that treat chronic conditions also attract more entry. The previous literature has assumed advertising is exogenous to the entry decision when analyzing the role of advertising. The results under this hypothesis indicate that brands can deter generic entry very slightly by advertising before patent expiration. When instrumented, the coefficient on advertising more than doubles; however, its deterrent effect is still relatively small. I conclude that brand advertising is a barrier to entry by generic firms, but the effect is not strong enough to be of concern to entrants or policy makers.
POPI Working Paper Abstracts: # 1-92 thru 20-94
POPI Working Paper Abstracts: # 21-94 thru 40-97
POPI Working Paper Abstracts: # 41-97 thru 60-01
POPI Working Paper Abstracts: # 61-01 thru 64-03
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