LAUSR

ABSTRACT Background: Our work is motivated by prior evidence of significant negative wealth effects reported by Jambulingam and Sharma, based on the Food and Drug Administration (FDA) 2 April 2009, warning letters to 14 major pharmaceutical companies pertaining to search engine advertising, in an effort to stop one critical dimension of internet marketing by pharmaceutical industry. Consequently, we expect the overall market for branded drugs to shrink. This shrinkage in future will affect market for generics, in turn, negatively impacting future cash flows of generic firms – a contagion effect. Materials and methods: We test contagion effect by measuring changes in shareholders’ wealth of a select sample of large generic firms around regulatory event. Using standard event-study methodology, we investigate whether this contagion wealth effect, due to internet advertising restrictions on pharmaceutical firms, do carry over to generic firms since they do not advertise themselves. Results: Our results show a significant and negative wealth effect (contagion) for shareholders of generic firms on event day 0. We also report this shareholder wealth loss, in dollar terms, to be of 783 million, on Event day 0 (when FDA posts the letter). Conclusion: This study privides empirical evidence that shows that internet marketing has significant impact on both branded and generic industry. Our findings carry implications for policy makers and regulators as further regulations are considered.