How drug companies use the stock market to inform their advertising budgets

By Kevin Manne

BUFFALO, N.Y. —  When stock market returns are higher than expected, drug companies increase their advertising budgets – and the advertising is more effective – according to new research from the University at Buffalo School of Management.

Forthcoming in print in the Journal of Marketing Research, the study found that the initial valuation of a new drug provides a unique perspective on corporate marketing strategy.

“When a firm plans to launch a new product, it looks for signals on how well a product will be received before establishing a marketing budget,” says study author Inho Suk, PhD, associate professor of accounting and law in the UB School of Management. “For drug companies, information from the capital market’s perceptions of a new drug plays an important role in marketing decisions.”

The researchers analyzed more than 500 drug development projects over the 12 years after the FDA relaxed its regulation on ethical drug advertising on television in 1997.  They focused on drugs targeted for a U.S. launch to analyze corresponding daily stock return data.

Suk says information from the capital market valuations of new products can be used to make decisions even beyond marketing.

“Financial analysts can improve the accuracy of their earnings forecasts, and stock purchase and sales recommendations by taking into account their predictions on the marketing managers’ advertising decisions,” he says.

Suk collaborated on the study with Pradeep Chintagunta, the Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing, University of Chicago Booth School of Business; and Kyung Park, visiting faculty in marketing, Purdue University Krannert School of Management.