Estimating the Impact of Accelerated Generic Entry on Consumer Welfare and Innovation in the Pharmaceutical Industry

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Pharmaceutical innovation in the postwar era has produced enormous gains in human welfare. To continue these advances it is essential that public policymakers around the world strike the right policy balance between the competing goals of drug access and sufficient incentives to conduct research and development (R&D) created by intellectual property protection for new drugs. In the U.S., this balance is set primarily by the Hatch-Waxman Act (1984). In recent years, however, court rulings, subsequent legislation, and regulatory changes have led to a sharp acceleration in the entry of generic drugs, reducing the profits earned by the inventors of the original branded drugs. Past efforts to quantify the consumer benefits generated by this generics explosion have been hampered by the lack of high-quality data spanning a large number of pharmaceutical product markets and a reasonable interval of time over which modern discrete choice models of demand could be estimated. Access to the universe of U.S. drug sales data at the product level from the late 1990s through the late 2000s allows this project to quantify the impact of a surge in generic challenges to patent-protected pharmaceutical products on the (short-run) consumer welfare of drug purchasers in select pharmaceutical markets. Preliminary results suggest the gains are quite large with consumer welfare gains easily outweighing producer losses. Further research will provide more precise estimates of these gains. While the potential benefits of lower drug prices are clear to economists, policymakers, and the public, it is equally clear that the acceleration of generic entry could, in theory, have a depressing effect on the incentives to conduct some kinds of pharmaceutical R&D. The data resources mobilized by this project allow for the confirmation of the existence and quantification of the strength of this relationship across drug markets and time. Preliminary results suggest that overall drug development has not declined, but that the nature and direction of pharmaceutical innovation has shifted significantly in response to rising generic competition, with potentially significant consequences for the well-being of future drug consumers. This project will provide more precise measures of these effects, potentially showing where, in the product space, research effort gets diverted as generic competition within a particular drug category rises. Broader Impacts: Recent policy changes in the U.S. have accelerated generic entry, and greater generic competition has helped lower drug prices in the U.S. This research project will quantity the consumer gains generated by rising generic competition, but also measure the extent to which the rise in generic competition has influenced the scale, direction, and nature of pharmaceutical drug development. Because the U.S. pharmaceutical market has and will continue to play a disproportionately important role in global industry profits, it is especially important that U.S. policy strike the right balance between access to drugs on the one hand and sufficient incentives for drug innovation on the other. The results of this project will be an important guide to policymakers seeking the optimal balance.