Pharmaceuticals' Strategic Interactions

118 Pages·2013·0.77 MB·English

by  Per Personal

Ekonomi och samhälle
Economics and Society
Skrifter utgivna vid Svenska handelshögskolan
Publications of the Hanken School of Economics
Nr 257
Lilia Hyttinen
Pharmaceuticals’ Strategic Interactions
Three Essays in Corporate Finance
Helsinki 2013
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Pharmaceuticals’ Strategic Interactions: Three Essays in Corporate Finance
Key words: pharmaceuticals, drug development parnerships, contracts, settlements of
pharmaceuticals patents disputes, bargaining, biologics and biosimilar drugs
competition, signaling
© Hanken School of Economics & Lilia Hyttinen, 2013
Lilia Hyttinen
Hanken School of Economics
Department of Finance and Statistics
P.O.Box 479, 00101 Helsinki, Finland

Hanken School of Economics

ISBN 978-952-232-198-5 (printed)
ISBN 978-952-232-199-2 (PDF)
ISSN-L 0424-7256
ISSN 0424-7256 (printed)
ISSN 2242-699X (PDF)

Edita Prima Ltd, Helsinki 2013
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To Nick and Henri
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ACKNOWLEDGEMENT
Writing the doctoral thesis has been challenging, sometimes even agonizing, but also
very rewarding quest. The outcome of this at times seemingly never-ending process has
involves many individuals to whom I would like to express my sincere gratitude.
First and foremost, I was privileged to work with Professor Mahmud Hassan from
Rutgers Business School and Professor TuomoTakalo from Aalto University School of
Economics as pre-examiners of my dissertation. Knowing how much time reading and
giving comments takes and how precious this time is, I truly appreciate this
contribution. It will be a great honor to have Professor Hassan who is long time scholar
and expert in the Pharmaceuticals studies as the opponent during my doctoral defense
and I look forward to the stimulating discussion.
I am incredibly grateful to Professor Eva Liljeblom, the Rector of Hanken for accepting
me to PhD Program and acting as my degree and thesis supervisor at the early stages of
my dissertation. I am also deeply indebted to Professor Anders Loflund the Head of
Finance and Statistics Department, who later became my degree and thesis supervisor
and who has supported me throughout my journey, and Professor Timo Korkeamaki
who was my second thesis supervisor for the generous help and contribution to this
thesis.
I also would like to extend my thanks to the professors and staff at the Finance and
Statistics Department, the department’s secretary Kajsa Fagerholm, and my PhD class
mates, especially Peter Nyberg and Hanna Westman among others, from the Hanken
publishing team: Barbara Cavonius and, especially, Staffan Dellringer for very
professional and patient help and Anna Therman from IT Services for kind and
generous support with the statistical software.
I have conducted my research outside of the premises of Hanken and through this
process I have been blessed with help and guidance from numerous people some of
whom did not have any obligation whatsoever to read and comment on my papers and I
want to thank them all from the bottom of my heart.
I have been very fortunate to spend two years at Columbia University Business School
as a Visiting Student. For this I would like to thank the Jerome A. Chazen Institute of
International Business staff and my sponsors Professor Kathryn Harrigan and
Professor Frank Lichtenberg. I have been privileged to work with Professor Kathryn
Harrigan, renowned expert in the field of Partnerships and Strategic Alliances with
whom I have many discussions during my data collections; she was also the first person
to read fairly early versions of my papers. Also, I am grateful toCorporate Finance
Professor Wei Jiang who provided very important contribution for the direction of my
research and invaluable comments.
Also, I have privilege of being invited as a Visiting Scholar at Rutgers Business School
for 6 month and I am especially grateful to the Blanche and Irvin Lerner Center for the
Study of Pharmaceutical Management Issues for being my sponsor during this period.
During this time I have privilege to interact with distinctive group of academics and
practitioners in the field of finance and pharmaceutical management who have
contributed substantially to my understanding of specific issues pharmaceutical firms
face. I am deeply indebted to Campbell Pharmaceutical Seminar Series participants,
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and particularly Professor Howard Tuckman, for acting as my discussant at the
seminar; as well as, Professor Darius Palia and Professor Menaham Spiegel, who took
time to read the papers and give comments and answering my questions. I gratefully
acknowledge kind help of Ingrid Castillo of the Lerner Center, as well as Courtney
Stanton for proofreading the manuscripts.
I thank JoAnn, Jim and Trey Carland from Allied Academies for welcoming my papers
to present at the Allied Academies conferences; the editors of the Academy Accounting
and Financial Studies Journal and the Academy of Health Care Management Journal
for publishing my papers, as well as the Academy of Accounting and Financial Studies
and the Academy of Health Care Management review boards for the Distinguished
Research Awards. I am incredibly grateful for the useful comments from the
anonymous referees who have read my papers and provided suggestions, such as to
improve the structure of the essays and tighten up my argumentation.
Without financing, I could not have conducted my doctoral research either, I therefore
extend my deepest thanks to the organizations that funded my research and financed
trips to the conferences: Hanken Commerce and Industry Fund, Markus Wallenberg
Foundation and the Rutgers Business School and the Lerner Center for the Study of
Pharmaceutical Management Issues.
I also thank my friends and loved ones who provide me with various kind of support
during my PhD process, especially Nick and my son Henri, I thank you all for being
there for me.
Lastly, because my thesis context is the pharmaceutical industry and drug development
issues, I would like to thanks all those people whose daily work involve discovering new
drugs and finding cure for the diseases.
All errors are mine.
New York, 14th of May, 2013.
Lilia Hyttinen
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CONTENTS
1 RESEARCH AREA AND CENTRAL FINDINGS ...................................... 1
1.1. Introduction ........................................................................................................ 1
1.2. Summary of Research Focus and Objectives ...................................................... 1
1.3. The Structure of the Thesis ................................................................................. 1
2 SUMMARY, RESULTS AND CONTRIBUTIONS OF THE ESSAYS ....... 3
2.1. Ownership and Control Rights Transfers and Incomplete Contracts: Empirical
Analysis of Drug Development Partnerships ...................................................... 3
2.2. Law and Finance: Settlements of Pharmaceuticals’ Patents Litigations .......... 14
2.3. Signaling and Strategic Interactions: Competition between Biologics and
Biosimilars Drugs .............................................................................................. 21
3 SUMMARY AND CONTRIBUTION OF THE THESIS .......................... 30
REFERENCES ............................................................................................ 32

APPENDICES
Appendix 1 Paper 1: ..................................................................................................3 6
Appendix 2 Paper 2: ................................................................................................. 61
Appendix 3 Paper3. ................................................................................................. 84

TABLES
Table 1 ..........................................................................................................................6
Table 2 .......................................................................................................................... 7
Table 3 ........................................................................................................................ 12
Table 4 ........................................................................................................................ 17
Table 5 ........................................................................................................................2 3
Table 6 ........................................................................................................................24
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FIGURES
Figure 1 ..........................................................................................................................9
Figure 2 ........................................................................................................................ 10
Figure 3 ........................................................................................................................ 15
Figure 4 ........................................................................................................................ 19
Figure 5 ........................................................................................................................ 25
Figure 6 ........................................................................................................................ 27
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1 RESEARCH AREA AND CENTRAL FINDINGS
1.1. Introduction
The modern theoretical Corporate Finance research asks how the agency problems,
asymmetric information, signaling and incomplete contracting affect corporations’
optimal investing and financing activities while taking into consideration also the
strategic behavior of other market participants. Firm makes financing and investment
decisions in context of horizontal (competitors) and vertical (customers and suppliers)
interactions. Theoretical Corporate Finance research relies heavily on the use of
“family” of three models of asymmetric information: moral hazard (“hidden action”),
adverse selection/screening (“hidden information”), and signaling.
1.2. Summary of Research Focus and Objectives
This research is a collection of three empirical studies of economics of pharmaceutical
industry, while three theoretical models, i.e. incomplete contracting, asymmetric
information and signaling render frameworks for the three essays.
Financial Contracting under Moral Hazard (“hidden action”) is at the center of the first
essay. In addition to an agency problem, i.e. entrepreneur and financier, an issue of
contractibility (incomplete contracting) puts some constraints on corporate financing
/investing possibilities and, than, also decision and control rights became an issue. I
have examined the vertical customer (Pharma)-supplier (biotech firm) relationship
through the lenses of limited liability and moral hazard and credit rationing theories.
The following two essays address the issues of horizontal interactions (with
competitors): between a brand and a generic firm. The pharmaceutical firm (further, a
brand) faces two types of competition: from the other brand (“between patents”), and
from the generic firm (“within patent”) (Lichtenberg and Phillipson, 2002). In this
research, the focus is on the “within patent” competition. At the core of the second
paper is the intersection of law and finance, specifically, contracting and “hidden
information”. The issues of a credible threat, brands’ patents characteristics and the
asset’s value examined as the potential determinants of settlements of patents disputes.
The last essay is in the area of Signaling in Finance. The idea of signaling is that the
informed party conveys some information to the uninformed party by taking some
costly action. In essence, it means that undertaking an action has to be costly enough so
that not everyone takes it.
1.3. The Structure of the Thesis
The thesis consist of three essays.
1) Ownership and Control Rights Transfers and Incomplete Contracts: Empirical
Analysis of Drug Development Partnerships
2) Law and Finance: Settlements of Pharmaceuticals’ Patents Litigations
3) Signaling and Strategic Interactions: Competition between Biologics and
Biosimilars Drugs
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The first paper “Ownership and Control Rights Transfers and Incomplete Contracts:
Empirical Analysis of Drug Development Partnerships” examines drug development
partnerships, particularly, the issues of ownership and control rights allocations,
contingent contract design and favorable state verification. For example, how firms
incorporate contingency provisions to minimize the risk, including equity’s stake
purchase as part of a partnership contract. The theory of financial contracting (Hart,
2001) and (Bolton and Dewatripont, 2005) provided the theoretical framework to study
the issues throughout the first essay.
The second essay“Law and Finance: Settlements of Pharmaceuticals’ Patents
Litigations” analyses contracting under an information asymmetry; i.e. how a generic
firm uses credible threat to negotiate settlements of patents infringement disputes.
Though the private contracting (settlement) cannot fully compensate for a weak legal
system, can the settlement help to eliminate uncertainty and reduce the cost of
asymmetry of information? I have viewed a potential patent invalidation in court as
the cost of informational asymmetry.
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The 3 essay “Signaling and Strategic Interactions: Competition between Biologics and
Biosimilars Drugs” focus is also on competition between brand biologics and generic
biologics’ firms. The issue of signaling in finance is used to study the firms’
“commitment” to behave aggressively, as well as, the profit destruction hypothesizes
(predatory theory). In order for signaling to be credible, action must be costly enough,
so that only the “good” type (brand) has an incentive to signal his type. I have examined
the instruments of predation, such as an intense advertising and R&D spending (R&D
race).
The problems being examined are focused on the specific strategic interactions (events)
of the Pharmaceutical industry firms, and because the dissertation’s issues all are
relatively little analyzed, the study is relevant.
Due to unavailability of canned data I have manually collected three individual data
sets mainly from Lexis-Nexis database, and complemented it with the data from
various other sources, and to my knowledge, the three data sets collections are
comprehensive. Because of data limitations, not all of the questions raised have I been
able to test empirically at this time.
The rest of the introduction to the essays proceeds as follow. Section 2 presents
individual essays’ summaries, descriptions of the data, methodology, contributions and
briefly outlines the results of the three separate essays in the dissertation. Section 3
discusses the contribution of the thesis.