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Importation and Innovation

  • Frank R. Lichtenberg

Importation of drugs into the U.S. would result in a decline in U.S. drug prices. The purpose of this paper is to assess the consequences of importation for new drug development. A simple theoretical model of drug development 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). I examine 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. I analyze two different measures of pharmaceutical innovation: 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.

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File URL: http://www.nber.org/papers/w12539.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12539.

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Date of creation: Sep 2006
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Publication status: published as Frank R. Lichtenberg, 2007. "Importation And Innovation," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 16(6), pages 403-417.
Handle: RePEc:nbr:nberwo:12539
Note: EFG HC ITI PR
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  1. James W Hughes & Michael J Moore & Edward A Snyder, 2003. "Napsterizing Pharmaceuticals: Access, Innovation and Consumer Welfare," Levine's Working Paper Archive 618897000000000555, David K. Levine.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Anna Merino, 2003. "Demand for pharmaceutical drugs: A choice modelling experiment," Economics Working Papers 704, Department of Economics and Business, Universitat Pompeu Fabra.
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