Measuring the efficiency of large pharmaceutical companies: an industry analysis

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.

On strategic choices faced by large pharmaceutical laboratories and their effect on innovation risk under fuzzy conditions

“…Preprint -Article accepted by Artificial Intelligence in Medicine https://doi.org/10. 1016/j.artmed.2019.101703 4 Exploring a sample of 37 pharmaceutical laboratories, Gascón et al (2017) find that most of the large companies in this industry are either fully efficient or close to the efficient frontier. Having said that, there is room to push the frontier forward by taking better-informed strategic decisions about how to configure the portfolio of clinical trials.…”

“…At this point, it should be highlighted that there are several alternative paths for achieving valuable and sustainable innovation. Some innovators at the frontier have a preference for creating knowledge inside the organization while others to look outside in order to push innovation (Lowman et al, 2012;Macher and Boerner 2012;Schuhmacher et al, 2013;Honig and Hirsch, 2016;Schuhmacher et al, 2016;Trusheim et al, 2016;Gascón et al, 2017). Whatever organizational alternatives are selected, there will be innovation risks that need to be quantified and managed.…”

“…We also explain our choice based on our experts knowledge as well as on previous research articles and literature reviews. Some of these variables have previously been employed in Gascón et al (2017); in particular, those variables related with the first FIS of the model. Others are specific to the risk evaluation model that we develop in this paper; those related to the second FIS of the model.…”

“…Larger laboratories are able to diversify more and invest in promising drugs in more varied therapeutic areas or diseases. Thus, we expect large efficient pharmaceutical laboratories to organize their R&D activities in an efficient manner as in Gascón et al (2017). Large laboratories with a greater internal R&D capability have the potential to organize their R&D resources in more varied ways and to draw from experience.…”

“…New promising drugs may be developed based on a combination of internal R&D effort and/or financial transactions (external R&D effort). See Figure 1 in Gascón et al (2017). Our first input (pharmaceutical laboratory internal R&D capability) measures the internal potential of laboratories to be innovative over time and manage their innovation risk while, our second input, announced NFTs, measures the ability to rearrange the portfolio of new drugs by externally acquiring (and/or selling) new knowledge while keeping greater control of the innovation process than in cooperation arrangements.…”