1. Capital Market Returns to New Product Development Success: Informational Effects on Product Market Advertising 2. On the Expected Success Likelihood of New Drug Development and the Design of New Drug Market Launch Programs

Kyung Mi Park, Purdue University

Abstract

[Essay 1]^ I seek to answer the question: If the capital market reacts with abnormal stock returns to new product development success events, do these returns influence subsequent marketing decisions? Drawing on price informativeness and managerial learning theories, I posit that when firms are uncertain about how responsive the product market will be to their marketing activities, signals received from the capital market help them update their beliefs about the responsiveness. After decomposing the abnormal returns at the new drug approval event into components that can and cannot be predicted by the firm (i.e., predicted and unpredicted abnormal returns), I find that the post-approval advertising budget is larger when unpredicted abnormal approval returns are higher. Further, this tendency is more pronounced for detailing spending than for direct-to-consumer (DTC) advertising. Consistent with these higher budgets, I find that post-launch advertising effectiveness is better as unpredicted abnormal approval returns are higher, particularly for detailing (versus DTC). Overall, this study suggests that information flows from the capital market’s initial perceptions at new product introduction play an important role in subsequent marketing decisions in the product market.^ [Essay 2]^ While the pharmaceutical firms rely heavily on new product (i.e., drug) development, their marketing decisions take a considerable time even after a new drug is successfully developed. Recently, pharmaceutical firms tend to increase the marketing plan window which stretches three or more years ahead, deploying the drug potential with more efficient marketing functions. This paper examines whether the predicted probability of new drug development success during the development stage (1) reduces the delay in launching the newly developed drug after the drug is approved by FDA and (2) enhances post-launch advertising effectiveness on sales performance. Our analysis consists of the following three steps. First, the predicted probability of new drug development success at the beginning of the third clinical trials phase is estimated based on a hierarchical Bayesian probit model. Next, the analysis from a hierarchical Bayesian proportional hazard model reveals that new drugs with a higher predicted probability of development success are less delayed in launching the drugs in the market after FDA approval. Finally, I find that post-launch advertising effectiveness is greater for a drug with a higher development success probability and this relation is more pronounced when market launch of the drug is less delayed. Overall, our analyses suggest that the expected success probability or failure risk of drug development has important implications for post-development success in launching and marketing for the newly developed drug.^

Degree

Ph.D.

Advisors

Manohar U. Kalwani, Purdue University.

Subject Area

Marketing|Economics|Finance

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