Pharmaceutical industry–physician interaction compliance guidelines: Analysis of contagion wealth effects on large generic firms

This study examines the contagion effect on shareholders’ wealth of large generic firms to the issuance of guidelines by the Office of Inspector General “to efficiently monitor adherence to applicable statutes, regulations and program requirements” of the branded pharmaceutical companies. These guidelines prod pharmaceutical manufacturers to employ internal controls and self-regulation while marketing to the physicians. We use a standard event-study methodology to measure the effect on the value of nine large generic firms around four events including the final guidance issued by Office of Inspector General. The results show that there is a contagion effect with an overall loss in net wealth of large generic firms’ shareholders. The US government’s policy guidance necessitated pharmaceutical industry to reexamine and refine for the better, its marketing practices. The government achieved this change in pharmaceutical industry’s behaviour without actually introducing any regulation suggesting the efficacy of self-regulation. Our findings suggest that there is a contagion effect of Office of Inspector General guidelines on generic drug industry due to facilitated self-regulation by branded pharmaceutical industry. Thus, the direct implication is that any regulatory event that is meant for one firm or a group of firms in the health sector could adversely impact peer firms in the same industry (pharmaceutical) or related industries such as biotechnology or generic industries. In other words, the study shows that government’s public policy initiatives that effect the value of the targeted firms could change not only the firms’/industry’s behavior but also let government achieve its objectives without contemplating additional regulations. This in turn, may accrue significant cost savings for the government in avoiding the regulation and its related measures. Our results also support an argument that a mechanism that combines industry self-regulation with government monitoring, lends the greatest opportunity for the overall welfare of the society