Timing New Drug Introductions: The Roles of Regulatory Rules and Firms' Complementary Assets

Abstract

We demonstrate the dual affects that regulatory rules and firms' complementary assets have on the timing of new product introductions in the pharmaceutical industry. We develop theory and evidence to explain how incumbent firms respond with new product introductions to a change in their competitive environment-namely, the increasing use by generic entrants of Paragraph IV Challenges under the U.S. Hatch-Waxman Act. Noting that such challenges increase the likelihood of earlier generic competition, we theorize incumbent firms' branded-product revenue streams are being compressed and that, in turn, incumbents are responding to the Hatch-Waxman milestones by marketing new products. We also uncover the important role that complementary assets play, both in enabling and constraining the firm's ability to respond. Using a novel set of product-level data, we explore the determinants of firms' new product introductions, uncovering the importance of internal research capabilities and strategic patenting. Extending this analysis, we examine the factors that increase the tendency of firms to target the Hatch-Waxman milestones with new product launches. We also investigate the types of new products being launched, and find a dependence on reformulations and next-generation products, but also emphasize the critical role of novel drug development.