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Importation And Innovation

  • Frank R. Lichtenberg

Importation of drugs into the US may soon become legal. Since prices of drugs are lower in most other countries than they are in the US, importation would result in a decline in US drug prices. The purpose of this paper is to assess the consequences of importation for new drug development. First, the author presents a simple theoretical model of drug development which suggests that the elasticity of innovation with respect to the expected price of drugs should be at least as great as the elasticity of innovation with respect to expected market size (disease incidence). Then, the cross-sectional relationship between pharmaceutical innovation and market size among a set of diseases (different types of cancer) exhibiting substantial exogenous variation in expected market size is examined. Two different measures of pharmaceutical innovation are analysed: the number of distinct chemotherapy regimens for treating a cancer site and the number of articles published in scientific journals pertaining to drug therapy for that cancer site. Both analyses indicate that the amount of pharmaceutical innovation increases with disease incidence. The elasticity of the number of chemotherapy regimens with respect to the number of cases is 0.53. The elasticity of MEDLINE drug cites with respect to cancer incidence throughout the world is 0.60. In the long run, a 10% decline in drug prices would therefore be likely to cause at least a 5-6% decline in pharmaceutical innovation. Evidence suggests that pharmaceutical industry employment would also decline (by at least 3.5-4%) in response to an exogenous 10% decline in drug prices.

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Article provided by Taylor & Francis Journals in its journal Economics of Innovation and New Technology.

Volume (Year): 16 (2007)
Issue (Month): 6 ()
Pages: 403-417

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Handle: RePEc:taf:ecinnt:v:16:y:2007:i:6:p:403-417
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  1. Frank R. Lichtenberg, 2005. "Pharmaceutical Knowledge-Capital Accumulation and Longevity," NBER Chapters, in: Measuring Capital in the New Economy, pages 237-274 National Bureau of Economic Research, Inc.
  2. James W. Hughes & Michael J. Moore & Edward A. Snyder, 2002. ""Napsterizing" Pharmaceuticals: Access, Innovation, and Consumer Welfare," NBER Working Papers 9229, National Bureau of Economic Research, Inc.
  3. Lillard, L.A. & Rogowski, J. & Kington, R., 1999. "Insurance Coverage for Prescription Drugs: Effects on Use and Expenditures in the Medicare Population," Papers 99-09, RAND - Labor and Population Program.
  4. Anna Merino, 2003. "Demand for pharmaceutical drugs: A choice modelling experiment," Working Papers, Research Center on Health and Economics 704, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Anna Merino, 2003. "Demand for pharmaceutical drugs: A choice modelling experiment," Economics Working Papers 704, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Thomas A. Abbott & John A. Vernon, 2005. "The Cost of US Pharmaceutical Price Reductions: A Financial Simulation Model of R&D Decisions," NBER Working Papers 11114, National Bureau of Economic Research, Inc.
  7. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
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