Waqar I. Ghani

Wealth Effects of the Pharmaceutical Industry-Physician Interaction Compliance Guidelines on Large Pharmaceutical Companies

The purpose of this paper is to investigate the wealth effects of the issuance of guidelines by the Office of Inspector General (OIG) to encourage pharmaceutical manufacturers to use internal controls or self-regulation “to efficiently monitor adherence to applicable statutes, regulations, and program requirements” in their marketing to the physicians. The authors employ a standard event-study methodology to examine the impact on shareholders of 12 large pharmaceutical firms around four events leading up to the final guidance issued by the OIG. The overall results indicate a net wealth loss for the sample firms. Interpretation of results warrants caution since the sample is biased toward large multinational pharmaceutical firms that are listed on the USA stock exchanges. The issuance of high-level government policy initiative triggers a pharmaceutical industry response that in turn mitigated firms’ questionable marketing practices. The government accomplishes this without instituting regulation but by taking the dialogue to a wide-ranging and highly public forum. The empirical results suggest that a public policy initiative that impacts shareholder wealth could alter firm (industry) behavior thereby sparing government from enacting regulation and potentially saving exorbitant regulatory enactment, enforcement, and policing costs. The results also provide credence to the argument that the hybrid systems, ones that combine industry rule making with government oversight, provide the greatest potential for overall benefits to society.

DIFFERENTIAL REACTION TO BOND DOWNGRADES FOR SMALL VERSUS LARGE FIRMS: EVIDENCE FROM ANALYSTS" FORECAST REVISIONS

ings forecast revisions. Inasmuch as empirical results of investigations of the information relevance of bond rating changes have been mixed, we believe this approach provides du-ect insight into, and represencs a sipficant contribution to, thus area of financial research. We focus on revisions in financial analysts’ expectations of short-term earnings a:; a signal of change in the riskiness of a firm. Because firms are generally known to differ in their &closure environments because of size hfferences, we expected to find dfferential analysts’ reactions to bond downgrades for small versus large firms. Our research findlngs confirm this expectation. We extend earlier research on thl: information effect of bond rating changes by examining financial analysts’ reactions rather than the market reaction. Another contribution to the research is in our use of statistical methodology. Consistent with Brous [1992], we examine not only changes in raw monthly analysts’ forecast revisions of earnings per share, but also the ubnormul hrecast revisions of earnings per share. T refined method of measuring the expected earn-

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

Background 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. Methods 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. Results 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. Conclusions 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.