Room: Phillips 219
Time: Tue 15:00 PM-16:30 PM

Pharmaceutical Innovation and Regulation

Chair: Jonathan Ketcham (Arizona State University)

Session Description

Economics indicates that capital markets respond to expected profits and the level of uncertainty. In some markets, such as pharmaceuticals, regulation plays an important role in altering the expected profitability of potential products. As a result, regulation can alter investments in research and development (R&D), in terms of both the level of R&D and the type of products brought to market.
The three papers in this session provide both theoretical and empirical evidence on the relationships between regulation, pharmaceutical R&D, and the availability of prescription drugs. In the first, Meg-Blume Kohout and Neeraj Sood analyze the effects of the 2003 Medicare Modernization Act (i.e., “Part D”) on R&D. Part D has various and potentially competing effects on the expected profitability of pharmaceutical products, with greater insurance coverage, an expanding role of pharmacy benefits managers, and uncertainty about future regulatory reform. They find that shortly after the passage of Part D, R&D spending increased substantially in drug classes with high consumption by elderly patients, relative to classes with greater prevalence of younger consumers.
Andrew Mulcahy analyzes the strategies that innovator and generic-producing firms employ when the innovator product faces patent expiration in the US. Though innovators commonly seek to extent their patent life, the existence of “Paragraph IV” (P4) certification and its accompanying exclusivity provide generic firms with a mechanism to challenge those extensions. Andrew employs several novel empirical strategies to determine when generics are likely to incur the costs of these challenges.
Jay Bhattacharya and colleagues develop a theoretical model and provide an empirical test of two alternative regulatory regimes. In one regime, used by the US FDA, proof of efficacy from randomized controlled trials is required to legally sell the drug. In the other regime, used in Italy and many other countries, proof of efficacy is coupled with price controls. The model and the empirical results indicate that the addition of price controls results in lower average drug quality, but prices vary less with quality.

Key Terms None Listed

Session Organizer: Jonathan Ketcham (Arizona State University)

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Presentations

1. The effect of innovator patents on generic entry via Paragraph IV certification

   Presenter: Andrew Mulcahy (University of Pennsylvania)

   Discussant: Chris Stomberg (Bates White)

2. How does quality influence the diffusion of new medical products?

   Presenter: Rena Conti (University of Chicago)

   Discussant: Stephen Parente

3. Pharmaceutical industry, drug quality and regulation. Evidence from US and Italy

   Presenter: Jay Bhattacharya (Stanford University)

   Discussant: Lorens Helmchen