Examining Firm Responses to R&D Policy: An Analysis of Pediatric Exclusivity

Policies that offer extensions of market exclusivity are becoming an increasingly common strategy to incentivize pharmaceutical research, but the policy design may affect incentives in some unforeseen ways. Our paper investigates this issue for the Food and Drug Administration's pediatric exclusivity policy, which offers drug sponsors a six-month exclusivity extension for conducting additional pediatric studies of marketed drugs. Policy makers wanted to encourage pediatric studies for drugs that are medically important for children. However, since the exclusivity extension covers all indications and its private value increases with total sales, firms may have greater incentives to study drugs with large adult markets rather than drugs that are medically important to children. We use data from IMS Health, Medical Expenditure Panel Surveys, and the FDA to investigate the determinants of the FDA's demand and firms' supply of pediatric studies. We find that firms are more likely to conduct pediatric studies for drugs with larger sales markets, but little evidence that the likelihood of conducting the study relates to a drug's medical importance to children. Firms also conducted pediatric studies for older drugs with less remaining patent life over newer drugs. Our results provide evidence of incentive distortions from the policy design.