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The European Journal of Health Economics
Published in: The European Journal of Health Economics 5/2017

01-06-2017 | Original Paper

Measuring the efficiency of large pharmaceutical companies: an industry analysis

Authors: Fernando Gascón, Jesús Lozano, Borja Ponte, David de la Fuente

Published in: The European Journal of Health Economics | Issue 5/2017

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Abstract

This paper evaluates the relative efficiency of a sample of 37 large pharmaceutical laboratories in the period 2008–2013 using a data envelopment analysis (DEA) approach. We describe in detail the procedure followed to select and construct relevant inputs and outputs that characterize the production and innovation activity of these pharmaceutical firms. Models are estimated with financial information from Datastream, including R&D investment, and the number of new drugs authorized by the European Medicines Agency (EMA) and the US Food and Drug Administration (FDA) considering the time effect. The relative performances of these firms—taking into consideration the strategic importance of R&D—suggest that the pharmaceutical industry is a highly competitive sector given that there are many laboratories at the efficient frontier and many inefficient laboratories close to this border. Additionally, we use data from S&P Capital IQ to analyze 2071 financial transactions announced by our sample of laboratories as an alternative way to gain access to new drugs, and we link these transactions with R&D investment and DEA efficiency. We find that efficient laboratories make on average more financial transactions, and the relative size of each transaction is larger. However, pharmaceutical companies that simultaneously are more efficient and invest more internally in R&D announce smaller transactions relative to total assets.
Appendix
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Footnotes
1
Large pharmaceutical companies operate globally, so they market their innovative drugs in more markets than Europe and the USA. Thus, our measure for innovative drugs that have been authorized by the EMA and the FDA for a given laboratory is a proxy for the expected authorization of the same innovative drug for other markets. Europe and USA are two key markets, and an innovative drug can be expected to be innovative in all the relevant markets. Given that laboratories operate globally, we consider our proxy to be a good one.
 
2
Market capitalization is the result of a consensus in the market about current cash flows and expected future cash flows. In the case of pharmaceutical labs, it takes into account innovative drugs that are in the pipeline but have not yet been authorized because they are in the different phases of clinical research (Phase I, Phase II, Phase III), as well as some innovative drugs that have been authorized but are still in postmarketing surveillance (Phase IV).
 
3
We thank one reviewer for this insight and suggestion.
 
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Metadata
Title
Measuring the efficiency of large pharmaceutical companies: an industry analysis
Authors
Fernando Gascón
Jesús Lozano
Borja Ponte
David de la Fuente
Publication date
01-06-2017
Publisher
Springer Berlin Heidelberg
Published in
The European Journal of Health Economics / Issue 5/2017
Print ISSN: 1618-7598
Electronic ISSN: 1618-7601
DOI
https://doi.org/10.1007/s10198-016-0812-3

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