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Pharmaceutical Profits and the Social Value of Innovation

Author

Listed:
  • David Dranove
  • Craig Garthwaite
  • Manuel Hermosilla

Abstract

Prior research has shown that exogenous shocks to the demand for medical products spur additional product development. These studies do not distinguish between breakthrough products and those that largely duplicate the performance of existing products. In this paper, we use a novel data set to explore the impact of the introduction of Medicare Part D on the development of new biotechnology products. We find that the law spurred development of products targeting illnesses that affect the elderly, but most of this effect is concentrated among products aimed at diseases that already have multiple existing treatments. Moreover, we find no increase in products targeting orphan disease or those receiving either fast track or priority review status from the FDA. This suggests that marginal changes in demand may have little effect on the development of products with large welfare benefits.

Suggested Citation

  • David Dranove & Craig Garthwaite & Manuel Hermosilla, 2014. "Pharmaceutical Profits and the Social Value of Innovation," NBER Working Papers 20212, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20212
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    References listed on IDEAS

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    1. Pierre Dubois & Olivier de Mouzon & Fiona Scott-Morton & Paul Seabright, 2015. "Market size and pharmaceutical innovation," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 844-871, October.
    2. Blume-Kohout, Margaret E. & Sood, Neeraj, 2013. "Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development," Journal of Public Economics, Elsevier, vol. 97(C), pages 327-336.
    3. Mark R. Trusheim & Murray L. Aitken & Ernst R. Berndt, 2010. "Characterizing Markets for Biopharmaceutical Innovations: Do Biologics Differ from Small Molecules?," NBER Chapters, in: Frontiers in Health Policy Research, volume 13, National Bureau of Economic Research, Inc.
    4. Rodrigo Cerda, 2007. "Endogenous innovations in the pharmaceutical industry," Journal of Evolutionary Economics, Springer, vol. 17(4), pages 473-515, August.
    5. Mark Trusheim & Murray L. Aitken & Ernst R. Berndt, 2010. "Characterizing Markets for Biopharmaceutical Innovations: Do Biologics Differ from Small Molecules?," NBER Working Papers 16014, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Manuel Hermosilla, 2021. "Rushed Innovation: Evidence from Drug Licensing," Management Science, INFORMS, vol. 67(1), pages 257-278, January.
    2. Mark Duggan & Craig Garthwaite & Aparajita Goyal, 2016. "The Market Impacts of Pharmaceutical Product Patents in Developing Countries: Evidence from India," American Economic Review, American Economic Association, vol. 106(1), pages 99-135, January.
    3. Hermosilla, Manuel & Wu, Yufei, 2018. "Market size and innovation: The intermediary role of technology licensing," Research Policy, Elsevier, vol. 47(5), pages 980-991.
    4. Agarwal, Ruchir & Gaule, Patrick, 2022. "What drives innovation? Lessons from COVID-19 R&D," Journal of Health Economics, Elsevier, vol. 82(C).
    5. Dranove, David & Garthwaite, Craig & Heard, Christopher & Wu, Bingxiao, 2022. "The economics of medical procedure innovation," Journal of Health Economics, Elsevier, vol. 81(C).
    6. Colleen Carey, 2017. "Technological Change and Risk Adjustment: Benefit Design Incentives in Medicare Part D," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 38-73, February.
    7. Margaret K. Kyle, 2019. "The Alignment of Innovation Policy and Social Welfare: Evidence from Pharmaceuticals," NBER Chapters, in: Innovation Policy and the Economy, Volume 20, pages 95-123, National Bureau of Economic Research, Inc.
    8. Barton H. Hamilton & Andrés Hincapié & Robert A. Miller & Nicholas W. Papageorge, 2021. "Innovation And Diffusion Of Medical Treatment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 953-1009, August.
    9. Caroline Savage Bennette & Anirban Basu & Scott D. Ramsey & Zachary Helms & Peter B. Bach, 2019. "Health Returns to Pharmaceutical Innovation in the Market for Oral Chemotherapy in Response to Insurance Coverage Expansion," American Journal of Health Economics, MIT Press, vol. 5(3), pages 360-375, Summer.
    10. Fabian Gaessler & Stefan Wagner, 2022. "Patents, Data Exclusivity, and the Development of New Drugs," The Review of Economics and Statistics, MIT Press, vol. 104(3), pages 571-586, May.
    11. Manuel Hermosilla & Jorge Lemus, 2018. "Therapeutic Translation of Genomic Science: Opportunities and Limitations of GWAS," NBER Chapters, in: Economic Dimensions of Personalized and Precision Medicine, pages 21-52, National Bureau of Economic Research, Inc.
    12. Higgins, Matthew J. & Yan, Xin & Chatterjee, Chirantan, 2021. "Unpacking the effects of adverse regulatory events: Evidence from pharmaceutical relabeling," Research Policy, Elsevier, vol. 50(1).
    13. Matthew T. Knowles, 2022. "How access to addictive drugs affects the supply of substance abuse treatment: Evidence from Medicare Part D," Health Economics, John Wiley & Sons, Ltd., vol. 31(8), pages 1649-1675, August.
    14. Sanzenbacher, Geoffrey T. & Wettstein, Gal, 2020. "Drug insurance and the strategic behavior of drug manufacturers: Evergreening and generic entry after Medicare Part D," Journal of Health Economics, Elsevier, vol. 72(C).
    15. David Dranove & Craig Garthwaite & Manuel I. Hermosilla, 2020. "Expected Profits and The Scientific Novelty of Innovation," NBER Working Papers 27093, National Bureau of Economic Research, Inc.
    16. Jillian Chown & David Dranove & Craig Garthwaite & Jordan Keener, 2019. "The Opportunities and Limitations of Monopsony Power in Healthcare: Evidence from the United States and Canada," NBER Working Papers 26122, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • H0 - Public Economics - - General
    • I1 - Health, Education, and Welfare - - Health
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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