On quality standards and the timing of pharmaceutical investment.

Introduction: This study analyzes how a health authority's quality standard influences a pharmaceutical firm's R&D investment timing, comparing this decentralized process with a social planner's integrated approach. Methods: Drug quality evolves as a geometric Brownian motion, accelerating after irreversible investment. Using real options and optimal stopping theory, we model a sequential game between the regulator and firm, and a social planner who jointly sets both the investment threshold and quality standard. Results: The social planner invests earlier and achieves a higher total value than the combined payoff in the decentralized setting. Increasing the firm's remuneration can accelerate investment, but may delay commercialization if quality standards are set too high. Discussion: Decentralization creates inefficiencies through constrained optimization, whereas the social planner's unconstrained approach maximizes welfare. Remuneration design is a key policy tool for aligning incentives, particularly for neglected diseases that require timely solutions.