Firm Characteristics and the Speed of FDA Approval

Abstract

This paper empirically examines the effect of firm‐specific characteristics on the length of time required by the Food and Drug Administration (FDA) to review and approve new‐drug applications between 1990 and 1992. The approach treats regulatory decisions as endogenous and explains the variation in regulatory behavior as a function of differences that exist between firms and drugs. Results show that, controlling for drug‐specific characteristics, regulators respond to firm‐specific characteristics when evaluating new drug applications. For instance, firms that are less diversified and more R&D‐inten‐sive receive shorter review times for their new‐drug applications than more diversified and less R&D‐intensive firms. The reason is that most firm characteristics signal information to reviewers about either firm reputation or application quality. This information reduces reviewers' uncertainty about approving a dangerous or ineffective drug and leads to faster review times. The results suggest that regulators respond to the heterogeneities among firms in the pharmaceutical market in systematic ways.