Technical Market Failure Assesment

DANGERS IN SEEING REGULATION AS AN ESSENTIALLY
TECHNICAL MATTER DESIGNED TO ADDRESS MARKET FAILURES

Table of Contents
1.0 Introduction..................................................................................................................3
2.0 Discussion...................................................................................................................5
2.1 Overview of Regulation............................................................................................6
2.2 Regulatory Risk......................................................................................................10
2.3 Risk Management in Regulations..........................................................................12
2.4 Regulations in Pharmaceutical Industry.................................................................13
2.5 Regulatory Risks and Failures in Pharmaceutical Industry...................................15
2.6 Accountability Framework......................................................................................20
2.7 Recommendations and Suggestions.....................................................................22
3.0 Conclusion.................................................................................................................24
References.......................................................................................................................26
Page 2 of 28

1.0 Introduction
The concept of regulation has always been a critical success factor (CSF) in the study
of business as the regulatory framework provides a backdrop against which business
performs its activity. The regulation may be defined to be a set of rules of directive
made by the relevant authority which is responsible for providing a controlled
environment wherein the business will operate. Regulation in business context may be
conceptualized to be a set of rules and policies that may bind an organization and its
management to perform its activity in socially viable manner in order to bring
sustainability in its operation in the long run not only for the customers or other
stakeholders associated with the business but also for the society as a whole1.
Different industries have to abide by different sets of regulations and the pharmaceutical
industry operates in one of the most regulated environments across the world 2. Since
pharmaceutical industry deals with life-saving drugs and critical medicinal products
elements which are necessary for a human being and a sustainable living for a society,
it is imperative for the government to device regulatory framework in which operation of
the country will be not only socially acceptable but also ethically and morally viable3.
In order to maintain a license to operate and perform the business, pharmaceutical
companies may need to comply with a complex set of rules and regulations and
therefore it will be interesting to assess regulatory framework in the backdrop of the
pharmaceutical industry4.
1 Demortain, D. (2017). Expertise, regulatory science and the evaluation of technology and risk: Introduction to the
special issue. Minerva, 55(2), pp.139-159.
2 Alves, T. L., Lexchin, J. and Mintzes, B. (2019). Medicines information and the regulation of the promotion of
pharmaceuticals. Science and engineering ethics, 25(4), pp.1167-1192.
3 Levaggi, R., Moretto, M. and Pertile, P. (2017). The dynamics of pharmaceutical regulation and R&D
investments. Journal of Public Economic Theory, 19(1), pp.121-141.
4 Alves, T. L., Lexchin, J. and Mintzes, B. (2019). Medicines information and the regulation of the promotion of
pharmaceuticals. Science and engineering ethics, 25(4), pp.1167-1192.
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It has often been observed that a set of rules and guidelines may consist of its inherent
drawbacks and flaws as well and regulation is no exception to the same. There have
been instances where regulation risk arises and businesses fail to mitigate such risks
and failures and therefore collapse5. On the contrary, a stringent set of rules and
policies may affect business operations in an adverse manner and therefore regulators
may also need to be careful to devise sets of policies that will be actionable by the
companies as well6. In short, regulation should act as a double-edged sword which
should be in line with the broader objective of the government in the long run.
Therefore, it may be stated that the regulations will be acceptable not only for the
company but also for the society and regulators as well.
In the given paper, the researcher has aimed to provide a brief discussion as to the
regulation, regulatory framework, and regulatory risk and market failure arising out of
the same in the context of the pharmaceutical industry.
At the very outset of the study, the researcher provides a brief introduction to the theme
of the paper supported by the detailed discussion on the given topic. In the subsequent
sections of the paper, the researcher has provided an analysis of the theme in a step by
step manner defining a regulatory framework and regulatory framework and also risk
management approach in a regulated framework as set by the government. Also, the
discussion has involved regulation in the pharmaceutical industry and how a
pharmaceutical company operates in a given regulatory framework and thereby
5 Apps.who.int. (2020). Public-Private Roles in the Pharmaceutical Sector - Implications for Equitable Access and
Rational Drug Use - Health Economics and Drugs Series, No. 005: 2. Pharmaceutical markets: structure and
performance: 2.3 Pharmaceutical market failure. Available at:
<https://apps.who.int/medicinedocs/en/d/Jwhozip27e/6.3.html> [Accessed 16 April 2020].
6 Schiel, C. R. (2018). Leveraging Pharma to Lower Premiums: Medical Loss Ratio Regulation in the Pharmaceutical
Industry. BYU L. Rev., p.205.
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mitigates the regulatory risk and market failure. While performing the discussion, the
researcher has also attempted to provide an overview as to the accountability
framework followed by a corresponding recommendation and suggestion as to what
needs to be done by both ends, that is company as well as regulator, to maintain a
sustainable regulatory framework in which the industry may operate in most optimum
manner and regulators objectives may also get fulfilled. Finally, the researcher has
concluded the paper by way of a concluding note
2.0 Discussion
Government intervention in the pharmaceutical industry has been traditionally an
extensive affair to provide a regulatory framework. Since the industries deal with
medicinal products that are necessary for a sustainable living for the society, it becomes
critical for the government to closely monitor, control and supervise the operation of the
industry7.
As per the economic theory, a market failure suggests a concept of failure of the
industry due to the market externalities affecting the business operation and thereby
sustainability in the long run. In a 'perfect market', was coined in the economic theory,
where buyers and sellers transact with each other in a most optimum and reasonable
manner, may not be available in every industry context under a given regulatory
framework8. Since the pharmaceutical industry is a highly regulated one, there have
been cases of market failure that are directly related to regulatory risks as well.
7 Demortain, D. (2017). Expertise, regulatory science and the evaluation of technology and risk: Introduction to the
special issue. Minerva, 55(2), pp.139-159.
8 Alves, T. L., Lexchin, J. and Mintzes, B. (2019). Medicines information and the regulation of the promotion of
pharmaceuticals. Science and engineering ethics, 25(4), pp.1167-1192.
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Information imbalance, failure of competition, market externalities, etc are some of the
factors of pharmaceutical market failure where regulation has been a critical
component. The subsequent section of the paper will discuss in detail how market
failure can be witnessed through a regulation risk and regulatory failures.
However, before beginning with such discussion, it will be necessary for the researcher
to provide a brief background as to the concept of regulation in terms of its theory,
practical use, the strategic horizon as well as importance and impact on the society as a
whole. Gradually, then the researcher will enter into the risk horizon related to
regulations where the regulatory risks will be discussed in the context of pharmaceutical
market failure9.
2.1 Overview of Regulation
The regulation may be defined to be a set of norms, rules, and practices imposed by an
authority on society and players in a given field operating and acting towards the
achievement of a common goal for the greater public interest. Different researchers
have argued that regulation may be defined as an intervention that may be direct or
indirect; there should be an explicit presence of intention and such intentionality is
portrayed as an inherent feature of a regulation. Such intervention can be economic as
well as non-economic, incentive-based or punishment-based10.
In the opinion of Koop and Lodge (2017), the primary motive of setting a regulatory
framework may be considered to be manifold. For example, a business may be needed
to be regulated so that the operation is socially viable, or environmentally sustainable.
9 Levaggi, R., Moretto, M. and Pertile, P. (2017). The dynamics of pharmaceutical regulation and R&D
investments. Journal of Public Economic Theory, 19(1), pp.121-141.
10 Koop, C., and Lodge, M. (2017). What is regulation? An interdisciplinary concept analysis. Regulation &
Governance, 11(1), pp.95-108.
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Besides, it may also be noted that the stakeholders' interests may need to be retained
and kept intact and that is the reason regulatory authorities and bodies may play a
significant role in ensuring such interest of the stakeholders11.
Researchers put the argument for the rationale of regulating an activity from the context
of market failure. It has been observed that an uncontrolled marketplace may fall or
experience failure without proper supervision, monitoring and follow up mechanisms.
This is especially applicable in monopolistic nature of market where one player primarily
dominates the market, set prices, rules and dictates the purchase decision and
influence the entire market dynamics for own interest.
In this context, it will be interesting to discuss a regulatory burden that may be
considered to be an obligation for the ones with whom the burden is being imposed.
Since a complex set of rules may force the players in a market to act in a certain and
prescribed manner, the same involves both cost implication as well as time involvement
12.
Regulations may impact private as well as corporate life and significantly influences the
life of not only individual public, but also the organizations, nursing homes, schools,
small and big sized non-profit organizations, manufacturers, pharmacies, retail shops,
etc. The researchers have identified three key aspects of the regulatory burden that are
noted below:
 Standard-setting: The "rule" itself is a typical feature of regulation that directs a
group of people or organizations to act in a specified manner and choices or
11 Koop, C., and Lodge, M. (2017). What is regulation? An interdisciplinary concept analysis. Regulation &
Governance, 11(1), pp.95-108.
12 Alves, T. L., Lexchin, J. and Mintzes, B. (2019). Medicines information and the regulation of the promotion of
pharmaceuticals. Science and engineering ethics, 25(4), pp.1167-1192.
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preferences may get limited. No such rule is being imposed by State-based
regulatory authority for a self-regulatory body and such variation of the nature of the
regulator may, in turn, significantly impacts the stakeholders of regulation and
compliance framework.
 Behavior modification: In the opinion of Karas, Feldman, Bai, Kang and Anderson
(2019), this is another critical component of the concept of regulation since non-
compliance of a given rule and requirement set may attract punishment in the form
of penalties, fines, withdrawal, non-approval, and cancellation, etc, there may prevail
a sense of threat or fear of such punishment which, at times, may adversely impact
the operation of the industry13. It is needless to mention that such an impact may
vitiate the very basic purpose of setting up the regulation in the market14.
 Information gathering: As per Alves, Lexchin and Mintzes, 2019), the regulators
need to know what they need to regulate and therefore it is critical for the regulatory
bodies to have detailed know-how and database about the market which needs to
be regulated. As a result, the information gathering process is a critical factor in
regulation setting a process15.
Researchers have opined that regulations have been two-fold in terms of achieving its
objective. There have been instances where regulations have been successful and
there is a number of cases where regulations and regulatory framework have been
proved to be unsuccessful. For example, the Environmental Protection Agency (EPA) in
13 Karas, L., Feldman, R., Bai, G., Kang, S. Y. and Anderson, G. F. (2019). Pharmaceutical Industry Funding to Patient-
Advocacy Organization: A Cross-National Comparison of Disclosure Codes and Regulation. Hastings Int'l & Comp. L.
Rev., 42, p.453.
14 Karas, L., Feldman, R., Bai, G., Kang, S. Y. and Anderson, G. F. (2019). Pharmaceutical Industry Funding to Patient-
Advocacy Organization: A Cross-National Comparison of Disclosure Codes and Regulation. Hastings Int'l & Comp. L.
Rev., 42, p.453.
15 Baldwin, R., Cave, M. and Lodge, M. (Eds.). (2010). The Oxford handbook of regulation. Oxford university press.
Page 8 of 28

the USA has failed miserably during the '70s and 80's to control air and water pollution.
However, the EPA invested their effort and millions of dollars to prevent such pollution16.
The theorists have proposed different paradoxes that may exist in a regulatory
framework few of which are mentioned herein.
Paradox one: over-regulation creates under regulation
It has been observed that an aggressive and stringent statutory policy may vitiate the
basic purpose of regulation and therefore the private players and market may not be
able to cope up with such stringent rules and policy sets and therefore a sense of under
regulation prevails throughout the market.
Paradox two: strict regulation may generate and increase the risk level
It is observed that imposing strict regulations may restrict new entrants into the market
and therefore it is a kind of discouragement for the players with innovative ideas and
newer sources and resources17.
Paradox three: Adopting best available technology will discourage innovation
In the US context, it has been observed that the government or EPA environment
protection agency is advocating for Best Available Technology (BAT) to be implemented
by the industry players; however, such proposition may restrict the scope to invent or
innovate with the existing technology18. As a result, the market gets fully clumsy with
new technology without sufficient resources back up to be utilized to run and use such
technology to its fullest extent.
Advantages
16 Sunstein, C. R. (1990). Paradoxes of the regulatory state. The University of Chicago Law Review, 57(2), pp.407-
441.
17 Sunstein, C. R. (1990). Paradoxes of the regulatory state. The University of Chicago Law Review, 57(2), pp.407-
441.
18 Parker, D. (2012). THE OXFORD HANDBOOK OF REGULATION edited by Robert Baldwin, Martin Cave and Martin‐
Lodge. Public Administration, 90(2), pp.563-564.
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 Helps the government or the regulatory agencies or the bodies to effectively
control the market
 The regulation also helps the authorities to reduce the information asymmetry
that may be prevailing within the market 19
Disadvantages
 Compliance with regulations may prove to be a costly affair at times.
 Regulations may prevent the operations of price mechanism at times and hence
the market corrections and dynamics may get adversely affected20.
2.2 Regulatory Risk
The reason for regulatory failures may be explained from two approaches namely
rhetorical and analytical. Rhetorical approach states that regulatory failure may occur in
three different ways:
 Futility: The researchers have stated that irrespective of regulatory effort, the
present situation may not be changed and that may be denoted with the example
that the behavior of people will remain the same regardless of the regulated
intervention21.
 Jeopardy: The approach states that the implementation of certain rules and policies
sets in one aspect will invite complexities and cost implications in another aspect.
For example, the adoption of a particular safety standard may involve serious cost
19 Levaggi, R., Moretto, M. and Pertile, P. (2017). The dynamics of pharmaceutical regulation and R&D
investments. Journal of Public Economic Theory, 19(1), pp.121-141.
20 Getrevising.co.uk. (2020). Government Regulation. Available at:
<https://getrevising.co.uk/grids/government_regulation>[ Accessed 16 April 2020]
21 Karas, L., Feldman, R., Bai, G., Kang, S. Y. and Anderson, G. F. (2019). Pharmaceutical Industry Funding to Patient-
Advocacy Organization: A Cross-National Comparison of Disclosure Codes and Regulation. Hastings Int'l & Comp. L.
Rev., 42, p.453.
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implications in terms of setting up necessary resources to be used in order to comply
with the standard22.
 Perversity: As per Demortain (2017), it means that regulatory interventions produce
exactly the opposite of the intended outcome; for example, the prohibition of a
certain medicine on the precautionary grounds may cause death or fatal injuries of a
patient23.
The analytical approach of regulatory failure is linked to the concept of bounded
rationality that significantly may impact individual as well as an organizational decision-
making process. Since the information is costly and capacity of an individual or an
organization to process the information for the purpose of decision making within a
given time frame and cost consideration is limited, there arises the concept of bounded
rationality that may raise question on the impact or the effectiveness of regulation
because of the ambiguity as to the cause effect relationship of regulatory instruments.
2.3 Risk Management in Regulations
Risk management may be defined to be a structured and methodological process of
eliminating or reducing risk by adapting an efficient mechanism. Risk management is an
approach whereby the risks are avoided or mitigated with the help of different tools
available for the purpose24. The risk management may consist of five different steps. In
the initial phase, the risks are being identified and then it is measured in terms of its cost
implication and timeliness. Then the probable solutions are examined and different
22 Karas, L., Feldman, R., Bai, G., Kang, S. Y. and Anderson, G. F. (2019). Pharmaceutical Industry Funding to Patient-
Advocacy Organization: A Cross-National Comparison of Disclosure Codes and Regulation. Hastings Int'l & Comp. L.
Rev., 42, p.453.
23 Demortain, D. (2017). Expertise, regulatory science and the evaluation of technology and risk: Introduction to the
special issue. Minerva, 55(2), pp.139-159.
24 Herrera, M. (2013). Four Types of Risk Mitigation and BCM Governance, Risk and Compliance. [online]. MHA
Consulting. Available at: <https://www.mha-it.com/2013/05/17/four-types-of-risk-mitigation/> [Accessed 16 April
2020]
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alternatives are being placed for decision making purposes. Out of those alternatives,
one best alternative is being chosen and finally the same is being implemented to
manage risk in the most optimum manner25. At the last, the result is being strictly
monitored and followed up and any deviation from the standard is being taken up for
further consideration26.
The theories of risk management may show that there are a number of ways in which
may be managed. One can avoid the risk by completely eliminating the same, or the
risk may be mitigated that means that the likelihood of the impact of risk is being
reduced to a certain extent. Thirdly, the risk may be transferred if at all it cannot be
eliminated or mitigated and such transfer is being made to a third party through mutual
negotiation and dealings27. Finally, the risk may be accepted if there is no chance of
transferring or reducing and mitigating the risk28.
2.4 Regulations in the Pharmaceutical Industry
Before discussing the regulatory framework in the given sector, it will be wise to discuss
the industry sector in brief so as to have an overview as to the growth prospects and
size of the industry. Such discussion will be helpful for the readers as well to
comprehend the regulatory contexts subsequently in a more detailed manner. The
industry has been one of the most regulated industries across the world and sizably big
25 Levaggi, R., Moretto, M. and Pertile, P. (2017). The dynamics of pharmaceutical regulation and R&D
investments. Journal of Public Economic Theory, 19(1), pp.121-141.
26 Karas, L., Feldman, R., Bai, G., Kang, S. Y. and Anderson, G. F. (2019). Pharmaceutical Industry Funding to Patient-
Advocacy Organization: A Cross-National Comparison of Disclosure Codes and Regulation. Hastings Int'l & Comp. L.
Rev., 42, p.453.
27 Banta, C., 2016. Risk Tolerance: To Avoid, Transfer, Mitigate Or Accept—That Is The Question!. [online] Pivot
Point Security. Available at: <https://www.pivotpointsecurity.com/blog/risk-tolerance-in-business/.> [Accessed 16
April 2020].
28 Rowe, C. (2016). The 5 Step Risk Management Process [Updated for 2018]. [online]. Clearrisk.com. Available at:
https://www.clearrisk.com/risk-management-blog/bid/47395/the-risk-management-process-in-5-steps [Accessed
16 April 2020].
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in the globe. The revenue of the industry worldwide had been $1,204.8 billion in the
year 2018 with almost 49% market share occupied by North America29.
It may also be observed that the total nominal spending in the USA in the year 2018 had
been almost $482 billion and the branded drugs occupied almost 79% of total
pharmaceutical revenue30.
The impact of regulation has been so strict in the given sector that the industry may
experience a number of products recalls quite often. In the year 2019, almost 20% of
the medicinal instruments and products have been recalled by the companies as a
result of regulatory pressures on account of non-compliance. It shows that the average
number of units per pharmaceutical recall in 2019 has been approximately 311,560 31.
The growth prospect in the industry may be conceived to be sufficiently on a higher
scale and it may be expected that the industry will attain global growth by the next few
years, with the highest focus on the USA. It shows that pharmaceutical sales in North
America will be around $635 billion by 202232.
The regulatory landscape in the pharmaceutical sector has been dynamic and expected
to be changing with time. Therefore, the regulatory authorities in the given industry have
always been proactive in designing and implementing different sets of rules, policies
29 www.statista.com. (2020). Topic: Global Pharmaceutical Industry. Available at:
<https://www.statista.com/topics/1764/global-pharmaceutical-industry/#dossierSummary__chapter5> [Accessed
16 April 2020].
30 www.statista.com. (2020). Topic: Global Pharmaceutical Industry. Available at:
<https://www.statista.com/topics/1764/global-pharmaceutical-industry/#dossierSummary__chapter5> [Accessed
16 April 2020].
31 www.statista.com. (2020). Topic: Global Pharmaceutical Industry. Available at:
<https://www.statista.com/topics/1764/global-pharmaceutical-industry/#dossierSummary__chapter5> [Accessed
16 April 2020].
32 Statista. (2020). Forecast Pharma Global Sales By Region 2023 | Statista. [online] Available at:
<https://www.statista.com/statistics/299694/world-pharmaceutical-sales-by-region-forecast/.> [Accessed 16 April
2020].
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and regulation sets in order to maintain a compliance framework that focuses on
oversight and enforcement of the existing laws. In the consideration of Levaggi, Moretto
and Pertile (2017), along with the same, the regulatory authorities in the pharmaceutical
sector are also introducing different regulatory requirements for the players in the given
market for socially acceptable norms to be followed in order to make the sector socially
sustainable in the long run33. However, it is wise to note that compliance with such
stringent regulatory policies may not be achievable for the companies in a given
scenario of constraint with respect to time frame, cost implications and effort to be put.
As a result, there are chances of regulatory failures that in turn, may be reflected
through market failure in the given sector. Since the implications of such failure to
comply with the regulatory obligations are severe, the repercussion can also be
significantly high. Therefore, regulatory authorities have constantly been active in device
remediation program as well in order to perform an extensive inspection and root cause
analysis for such failure.
Since regulatory failures in the given industry are common phenomena, the regulator
should put emphasis towards improved harmonization of different rules and policy sets
that may lead to compliance. The pharmaceutical industry may be considered to be
agile in adopting and implementing regulatory changes for the future development and
therefore a number of companies in pharmaceutical sector aim to attain this objective
through a consistent development of integrated regulatory framework for the purpose of
compliance and hence long-term sustainability34.
33 Levaggi, R., Moretto, M. and Pertile, P. (2017). The dynamics of pharmaceutical regulation and R&D
investments. Journal of Public Economic Theory, 19(1), pp.121-141.
34 Blogs.deloitte.co.uk. (2020). Risk and Regulation: A wave of change for pharma - Thoughts from the Centre.
Available at: <https://blogs.deloitte.co.uk/health/2014/07/risk-and-regulation-a-wave-of-change-for-
pharma.html> [Accessed 16 April 2020].
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2.5 Regulatory Risks and Failures in the Pharmaceutical Industry
Worldwide there has been a number of instances of market failure in the pharmaceutical
industry because of a number of reasons some of which are briefly narrated as below:
Underhand promotion
It has often been observed that medicinal product has been marketed in such a
manner so that the factual data related to the impact of the medicine has been
ignored and misrepresentation of fact has been evident. Management of different
pharmaceutical companies has set up front groups to enhance the sale of their
products and practitioners are encouraged to promote their products among the
patients against lump-sum fees or some commission or monetary and even non-
monetary benefits.
Unethical testing
It has also been observed that the purpose of testing may be proved to be fatal on
the parties on whom the tests are being performed. Sometimes, patients are given
medicines they do not need and on the contrary some patients are denied
medication they need. Sadly, such effort is being resorted to in order to check the
efficiency and effectiveness of the product. There have been cases where medicines
have been given to a patient without his knowledge and consent which that patient
did not need at all. As a result, there had been several health issues in the patient
which could have been easily ignored by the companies performing such tests.
Market ineffectiveness of products
In western countries, several medicinal products have been banned for example
medicines related to Alzheimer's disease have been banned in several countries due
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to its effectiveness in the patients. However, some of the companies in the sector
have still been continuing to promote these products among unknowing target
groups who are approached with the false representation about the product and its
effectiveness just to enhance the sale of such obsolete and dangerous product.
It is needless to mention that all these problems may be solved with the establishment
of better regulation and regulatory frameworks. The Medicine and Healthcare product
Regulatory Agency (MHRA) should ensure that the market is regulated in such a
manner that no unethical practices are being entertained and any noncompliance may
be strictly monitored and controlled and dealt with by the regulatory authority in a more
detailed and stringent manner.
However, some of the researchers argue that regulation may not be considered to be a
solution rather than a problem. it may be construed that the regulators and the industry
jointly have been engaged to create a conglomerate and joint lobbying campaign in
several countries across the world including Europe. Since the regulators work in close
association with the industry experts and professionals and management, the industry
may have sufficient and, at times, unethical access to the detailed blueprint of
regulatory framework of MHRA and therefore industries may have, at their disposal, the
relevant strategy sets to nullify and bypass such regulations for their own vested interest
35.
The issue of asymmetric information as market failure
35 Apps.who.int. (2020). Public-Private Roles in the Pharmaceutical Sector - Implications for Equitable Access and
Rational Drug Use - Health Economics and Drugs Series, No. 005: 2. Pharmaceutical markets: structure and
performance: 2.3 Pharmaceutical market failure. Available at:
<https://apps.who.int/medicinedocs/en/d/Jwhozip27e/6.3.html> [Accessed 16 April 2020].
Page 16 of 28

The pharmaceutical market is typically characterized by its asymmetric information set
prevailing in the market as one of the key characteristics of the industry among its
competitive framework. Since the products and the nature of the products are technical
the market is characterized by asymmetric information sent between buyer and seller.
The sellers have most of the information and know-how about the product including its
components, effects, and impacts on human bodies. On the contrary, the end-users do
not pose the required skill and therefore may be considered to be less aware of the
potential impact and effectiveness of a product. From an economics point of view, it
may be noted that the pharmaceutical market across the globe has been oligopolistic by
nature as few large players dominate the industry and the number of medium and small
size players are competing with each other. The market is primarily being occupied
largely by major few large players and as a result, there seems to be a monopolistic
attitude by the large players where the pricing is being set by them only in due approval
with regulatory bodies. On the contrary, the product features, impacts including approval
may also get largely affected by such nature of the market as the management of large
companies are in close association with regulatory bodies through their lion’s share of
representation in the regulatory authorities and joint lobbying campaign, as stated
herein elsewhere within the paper.
Therefore, it may be true to state that the market does have an information imbalance
between buyers and sellers which may cause market failure at times. The regulators
should be more active to reduce such imbalance and establish an efficient
communication framework and protocol so that the relevant information about the
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products may get passed on to the target audience or the buyer groups. Therefore, the
purchase decisions undertaken by them may be more efficient and well informed 36.
Pharmaceuticals economics and regulation
Pharmaceutical industry is one of the typical industries across the globe where the
regulation and economics play a significant role in designing the market attribute. This is
because of the fact that the drug development cost is comparatively higher than that of
other industries whereas, the incremental cost of production is relatively lower than
other market players37. In short, the high fixed cost of development and relatively lower
incremental cost of production are two key determinants of market behavior in the
pharmaceutical sector 38.
In this context, it will be interesting to denote that the USA market is typical
pharmaceutical market access to the world where such two distinct features are
relatively identifiable as compared to other countries' markets. The Food and Drug
Administration (FDA) is a US government agency that supervises and controls the drug
development process in the pharmaceutical industry in terms of designing a regulatory
framework for the same. The purpose of the agency is to ensure the quality and
efficiency of the medicine available to the people of the country. Since production cost is
high, the drug development process needs a critical oversight by the regulators so that
36 Apps.who.int. (2020). Public-Private Roles in the Pharmaceutical Sector - Implications for Equitable Access and
Rational Drug Use - Health Economics and Drugs Series, No. 005: 2. Pharmaceutical markets: structure and
performance: 2.3 Pharmaceutical market failure. Available at:
<https://apps.who.int/medicinedocs/en/d/Jwhozip27e/6.3.html> [Accessed 16 April 2020].
37 Mulinari, S. (2016). Regulating pharmaceutical industry marketing: Development, enforcement, and outcome of
marketing rules. Sociology Compass, 10(1), pp.74-86.
38 Apps.who.int. (2020). Public-Private Roles in the Pharmaceutical Sector - Implications for Equitable Access and
Rational Drug Use - Health Economics and Drugs Series, No. 005: 2. Pharmaceutical markets: structure and
performance: 2.3 Pharmaceutical market failure. Available at:
<https://apps.who.int/medicinedocs/en/d/Jwhozip27e/6.3.html> [Accessed 16 April 2020].
Page 18 of 28

the efficiency of the drug is enough for the end-users in order to satisfy their health
needs39. However, the incremental production cost is relatively low in the market and
hence the companies need to fix the price of the medicines much above the production
cost in order to attain a break-even point within an optimum time frame (Herder, 2019).
Such peculiarity in the cost structure of the industry along with the regulatory framework
has paved the way for market efficiency as well as failure in the given sector in terms of
non-compliance and inability of designing an efficient market strategy40.
It may also be observed from the report of Tufts Center for the Study of Drug
Development's (CSDD), a US-based non-government agency, that the average cost of
drug development in the USA has been almost $2.6 billion and the same may need
almost 10 to 12 years to come up in the market for sales41.
The break-up of such huge costs may be attributable to the fact that almost $1.4 billion
is being spent towards actual out of pocket expense and balance $1.2 billion may be
conceived to be the time value of money due to such huge time gap of almost a decade.
2.6 Accountability Framework
In order to enforce the regulation, the researchers have opined a different theoretical
framework. Since the implementation and enforcement of regulation may call for
behavior modification, as stated elsewhere in the paper, a structured and rational
approach will be necessary for the implementers or regulatory bodies to follow and
strictly abide by for the purpose of devising an efficient regulatory environment. In this
39 Herder, M. (2019). Pharmaceutical Drugs of Uncertain Value, Lifecycle Regulation at the US Food and Drug
Administration, and Institutional Incumbency. The Milbank Quarterly, 97(3), pp.820-857.
40 Econlib. (2020). Pharmaceuticals: Economics and Regulation - Econlib. Available at:
<https://www.econlib.org/library/Enc/PharmaceuticalsEconomicsandRegulation.html> [Accessed 16 April 2020].
41 Lo, C. (2020). Counting the cost of failure in drug development. [online]. Pharmaceutical-technology.com.
Available at:<https://www.pharmaceutical-technology.com/features/featurecounting-the-cost-of-failure-in-drug-
development-5813046/>[Accessed 16 April 2020].
Page 19 of 28

context discussion about DREAM (Detecting – Responding – Enforcing – Assessing –
Modifying) framework may be found useful which is performed briefly as below:
 Detecting: The process of acquiring relevant information on undesirable and
unsolicited and unethical and non-compliant behavior
 Responding: The process of developing policy sets, rules, and regulations to deal
with such problems so discovered and detected.
 Enforcing: The process of implementing such policies, rules and regulations in the
practice and operations.
 Assessing: The process of measuring the extent of success or failure of such
implementation or enforcement activities.
 Modifying: The process of adjusting the aforesaid rules or policy sets, if found
necessary, for effective implementation in the long-run42.
The accountability framework in a regulation may be governed by a number of rule sets.
In this paper seven such rules have been identified as below:
 Procedural fairness
The entire process of regulation and institutional designing should be fair to both the
parties be it, government or the individual and organizations.
 Information disclosure
Since the regulation deals largely with the information, suppression of information or
the misrepresentation of data or the fact, it is important to have an information
disclosure environment wherein both the parties involved may interact with each
42 Baldwin, R., Cave, M. and Lodge, M. (2012). Understanding regulation: theory, strategy, and practice. Oxford
University Press on Demand.
Page 20 of 28

other with sufficient information, at their disposal, so that the accountability may exist
in both ways43.
 Hearing
Regulation may be strict but it should the regulators may need to be compassionate
and hence a trial-based hearing process may be something utmost needed in order
to implement regulatory framework successfully and efficiently within a society44.
 Rules on rules
Regulation is defined as a set of rule and the government or regulatory body should
incorporate rules regarding the various aspects of regulation in terms of how it is to
be implemented, controlled, maintained, complied with and monitored by both
parties45.
 Structural hardwearing
This concept is almost similar to the concept of “agency leadership”. The hierarchy
should be efficiently designed so that the appellate body or tribunal may be at the
helm of the affairs supervising and controlling the entire hearing process46.
 Objectives and guidance
Denoted objective sets and guidance materials may help both the government as
well as the stakeholders involved to assess the impact of non-compliance including
its consequences (Vijay, 2017).
 Methodologies
43 Vijay, G. (2017). Systemic failure of regulation: the political economy of pharmaceutical and bulk drug
manufacturing. In The Politics of the Pharmaceutical Industry and Access to Medicines (pp. 73-107). Routledge.
44 Calcagno, C., Chapsal, A. and White, J. (2019). Economics of Excessive Pricing: An Application to the
Pharmaceutical Industry. Journal of European Competition Law & Practice, 10(3), pp.166-171.
45 Calcagno, C., Chapsal, A. and White, J. (2019). Economics of Excessive Pricing: An Application to the
Pharmaceutical Industry. Journal of European Competition Law & Practice, 10(3), pp.166-171.
46 Calcagno, C., Chapsal, A. and White, J. (2019). Economics of Excessive Pricing: An Application to the
Pharmaceutical Industry. Journal of European Competition Law & Practice, 10(3), pp.166-171.
Page 21 of 28

The procedural methodologies may at times, prove to be burdensome; however, for
a greater good of the society and in the long-term, a structured procedural
methodology will help the regulator to be fair and accountable enough to the
society47.
2.7 Recommendations and Suggestions
There have been instances of failure in the pharmaceutical industry as a result of
regulatory risks and therefore it is important for the management to observe certain
suggestions that may be put across as a learning point from previous failure and
experience. These points may be briefly enumerated as below:
Talent search
Since the pharmaceutical sector is a technical one there are requirements of
educational qualification as well as technical knowledge of the resources working in the
sector. In the opinion of Mulinari (2016), therefore the regulatory compliance should be
abided by the management in order to enhance the quality of the recruitment and
selection process of the industry and make it more agile and less volatile48. It has often
been observed that the recruitment of wrong people may have led to the business
failure that may primarily be attributable to the non-compliance of regulatory
requirements with respect to staff selection in the given sector (Herder, 2019).
Operation and manufacturing
Manufacturing drug and the process of drug development may be termed to be critical
for the success or failure of the business and therefore the management should put
47 Vijay, G. (2017). Systemic failure of regulation: the political economy of pharmaceutical and bulk drug
manufacturing. In The Politics of the Pharmaceutical Industry and Access to Medicines (pp. 73-107). Routledge.
48 Mulinari, S. (2016). Regulating pharmaceutical industry marketing: Development, enforcement, and outcome of
marketing rules. Sociology Compass, 10(1), pp.74-86.
Parker, D. (2012). THE OXFORD HANDBOOK OF REGULATION edited by Robert‐
Page 22 of 28

greater emphasis on streamlining the operation and optimizing the process by
implementing the relevant regulatory policies for the same. In this context, it may be
noted that various pre-approval, approval and post-approval elements should be
incorporated within the drug development process in a more detailed manner so as to
avoid unnecessary cost implications at the drug development phase of the product with
less quality49.
3.0 Conclusion
on the basis of the discussion and analysis as performed in the preceding sections of
the paper, the researcher has reached to a controlling statement that may underscore
the relevance of the regulatory framework in the pharmaceutical industry scenario. It
may be noted that different regulatory frameworks and rules and regulation sets exist in
the given market for years and the regulators and corresponding authorities have been
proactively managing and maintaining application of those regulations in a practical
scenario and also ensuring that compliances are being performed at most and optimum
manner.
Still, there have been instances of regulatory failure which has, in turn, impacted the
industry and hence the industry has been experiencing a number of failures due to
various reasons. The reasons have been cited herein by the researcher and in the
paper, the researcher has put across the different scenarios of regulatory failure.
However, in doing so, the researcher has provided a brief background as to the theme
of the paper by providing an overview of the regulation, the regulatory framework and
the regulatory framework in a specific industry context. In addition, the researcher has
49 Pharmamanufacturing.com. (2019). Learning from pharma's failures. Available at:
<https://www.pharmamanufacturing.com/articles/2019/learning-from-pharmas-failures/>[Accessed 16 April
2020].
Page 23 of 28

also evaluated the regulatory risk in the pharmaceutical sector by citing different
examples.
The paper has been focused primarily on the US pharmacy sector though the relevance
cannot be undermined in a global context as well. Various recommendatory measures
have also been stated in the paper for the regulator as well as the management of the
companies performing in the field for years. Finally, it may be concluded that a well-
designed regulatory framework and well efficient management of the same supported
by ethical and efficient management and corporate governance from the point of view of
the companies will certainly help the society to attain its long-term objective of
sustainability in medicinal product sector in the most cost and time-efficient manner.
Page 24 of 28

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