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An exploratory study of FDA new drug review times, prescription drug user fee acts, and R&D spending

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  • Vernon, John A.
  • Golec, Joseph H.
  • Lutter, Randall
  • Nardinelli, Clark

Abstract

FDA approval times have declined significantly since the enactment of the Prescription Drug User Fee Act (PDUFA) in 1992. As a result, present value expected returns to pharmaceutical R&D have likely increased. In the current paper we employ a unique survey dataset, one which includes data from 1990 to 1999 on firm-level pharmaceutical R&D expenditures for 7 large, U.S.-based drug companies. We estimate the effect FDA approval times have on firm R&D spending. Controlling for other factors such as pharmaceutical profitability and cash flows, we estimate that a 10% decrease (increase) in FDA approval times leads to an increase (decrease) in R&D spending from between 1.4% and 2.0%. Combining this estimate with recent research on the link between PDUFA and FDA approval times, we calculate that for the firms in our sample, R&D spending in the 1990s increased by an additional 5.0-7.2% as a result of this legislation. This amounted to an additional $3.2 billion to $4.6 billion in pharmaceutical R&D expenditures (2005 $US), and possibly several new drugs. Because PDUFA continued to provide incentives for R&D after 1999, and because it is probable that firms not in our sample were similarly affected by PDUFA, our estimates may be conservative. Considering more industry-wide measures of R&D expenditures over a similar time period (1992-2001) we calculate PDUFA may have incentivized an additional $10.8 billion to $15.4 billion in pharmaceutical R&D. Recent economic research has shown that the social rate of return on pharmaceutical R&D is very high; therefore, the social benefits of PDUFA (over and above the benefits of more rapid consumer access) are likely to be substantial.

Suggested Citation

  • Vernon, John A. & Golec, Joseph H. & Lutter, Randall & Nardinelli, Clark, 2009. "An exploratory study of FDA new drug review times, prescription drug user fee acts, and R&D spending," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1260-1274, November.
  • Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1260-1274
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    References listed on IDEAS

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    1. Bronwyn H. Hall, 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," NBER Working Papers 4096, National Bureau of Economic Research, Inc.
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    3. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
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    5. Ellison, Sara Fisher & Mullin, Wallace P, 2001. "Gradual Incorporation of Information: Pharmaceutical Stocks and the Evolution of President Clinton's Health Care Reform," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 89-129, April.
    6. Branch, Ben, 1974. "Research and Development Activity and Profitability: A Distributed Lag Analysis," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 999-1011, Sept./Oct.
    7. Henry G. Grabowski, 1968. "The Determinants of Industrial Research and Development: A Study of the Chemical, Drug, and Petroleum Industries," Journal of Political Economy, University of Chicago Press, vol. 76, pages 292-292.
    8. Joseph Golec & Shantaram Hegde & John A. Vernon, 2005. "Pharmaceutical Stock Price Reactions to Price Constraint Threats and Firm-Level R&D Spending," NBER Working Papers 11229, National Bureau of Economic Research, Inc.
    9. Henry Grabowski & John Vernon, 2000. "The determinants of pharmaceutical research and development expenditures," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 201-215.
    10. Berndt Ernst R. & Gottschalk Adrian H. B. & Philipson Tomas & Strobeck Matthew W., 2005. "Assessing the Impacts of the Prescription Drug User Fee Acts (PDUFA) on the FDA Approval Process," Forum for Health Economics & Policy, De Gruyter, vol. 8(1), pages 1-25, January.
    11. Joseph H. Golec & John A. Vernon, 2006. "European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending," NBER Working Papers 12676, National Bureau of Economic Research, Inc.
    12. Tomas J. Philipson & Ernst R. Berndt & Adrian H. B. Gottschalk & Matthew W. Strobeck, 2005. "Assessing the Safety and Efficacy of the FDA: The Case of the Prescription Drug User Fee Acts," NBER Working Papers 11724, National Bureau of Economic Research, Inc.
    13. John A. Vernon, 2005. "Examining the link between price regulation and pharmaceutical R&D investment," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-16.
    14. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
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    Cited by:

    1. Tomas J. Philipson & George Zanjani, 2013. "Economic Analysis of Risk and Uncertainty induced by Health Shocks: A Review and Extension," NBER Working Papers 19005, National Bureau of Economic Research, Inc.
    2. Joseph P. Cook & Graeme Hunter & John A. Vernon, 2010. "Generic Utilization Rates, Real Pharmaceutical Prices, and Research and Development Expenditures," NBER Working Papers 15723, National Bureau of Economic Research, Inc.
    3. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
    4. John Vernon & Joseph Golec & J. Stevens, 2010. "Comparative Effectiveness Regulations and Pharmaceutical Innovation," PharmacoEconomics, Springer, vol. 28(10), pages 877-887, October.

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