Innovation Pharmaceuticals

How reimbursement affects innovation

Below are some excerpts from seminal papers examining how changes in reimbursement or market size affect pharmaceutical innovation.

Acemoglu and Lin (2004):

Our estimates suggest that a 1 percent increase in the size of the potential market for a drug category leads to a 6 percent increase in the total number of new drugs entering the U.S. market. Much of this response comes from the entry of generics, which are drugs that are identical or bioequivalent to an existing drug no longer under patent protection.

More important, there is a statistically significant response of the entry of nongeneric drugs, which more closely correspond to new products and “innovation”: a 1 percent increase in potential market size leads to approximately a 4 percent increase in the entry of new nongeneric drugs.


Blume-Kohout and Sood (2013):

…we estimated effects of Part D on each stage of clinical R&D, Phase I through Phase III…we estimate the number of drugs entering Phase I trials in 2004–2005 increased by 27% versus expected trends. By 2006–2007, for the average drug class, the number of drugs entering Phase I trials had increased by about 34% versus expected trends, and by 2008–2010 Phase I trials had increased by a little over 50%. At the means, this translates to about 2–3 additional drugs reported as entering Phase I trials, per drug class…

In a Poisson regression with class-specific time trends, we do find a significant effect of Part D beginning in 2008, with a MedicareShare*(Year>2007) coefficient estimate of 0.74 (p=.013), corresponding to an elasticity of new drug approvals with respect to market size of about 2.8….

Our results indicate that the increase in outpatient prescription drug coverage provided through Medicare Part D has had a significant impact on pharmaceutical R&D. We observe evidence of a structural break in established R&D trends after passage and implementation of Part D, with greater percentage increases in drug trials for therapeutic classes that are most used by Medicare beneficiaries. In addition, we find stronger effects of Part D for protected classes,


Dubois, de Mouzon, Scott-Morton, Seabright (2015):

This article quantifies the relationship between market size and innovation in the pharmaceutical industry using improved, and newer, methods and data. We find significant elasticities of innovation to expected market size with a point estimate under our preferred specification of 0.23. This suggests that, on average, $2.5 billion is required in additional revenue to support the invention of one new chemical entity. This magnitude is plausible given recent accounting estimates of the cost of innovation of $800 million to $1 billion per drug, and marginal costs of manufacture and distribution near 50%.


Dranove, Garthwaite, Hermosilla (2014):

In this paper, we use a novel data set to explore the impact of the introduction of Medicare Part D on the development of new biotechnology products. We find that the law spurred development of products targeting illnesses that affect the elderly, but most of this effect is concentrated among products aimed at diseases that already have multiple existing treatments. Moreover, we find no increase in products targeting orphan disease or those receiving either fast track or priority review status from the FDA. This suggests that marginal changes in demand may have little effect on the development of products with large welfare benefits.


Kyle and McGahan (2009):

We examine the relationship between patent protection for pharmaceuticals and investment in development of new drugs. Patent protection has increased around the world as a consequence of the TRIPS Agreement, which specifies minimum levels of intellectual property protection for members of the World Trade Organization…We find that patent protection is associated with increases in research and development (R&D) effort when adopted in high income countries. However, the introduction of patents in developing countries has not been followed by greater investment. Particularly for diseases that primarily affect the poorest countries, our results suggest that alternative mechanisms for inducing R&D may be more appropriate than patents.

These articles were identified by a recent Health Affairs blog post by Frank and Ginsburg.

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