Regulation of the Pharmaceutical - Biotechnology Industry

1
Regulation of the Pharmaceutical
-
Biotechnology Industry
Patri
c
ia M. Dan
z
on
Eric L. Keuffel
Revised
January 15, 2013
Patricia Danzon is the Celia Moh Professor of
Health Care
S
yste
m
s, Insurance and Risk
Manage
m
ent at the
W
h
a
rton Schoo
l
, University of Pennsylvania,
and Research Associate of the
NBER. 207 Colonial
P
enn Center, 3641 Locust

W
alk, Philadelphia, PA, 19104
-
6218.
Eric Keu
ff
el is a
n Assistant Professor
in the Risk, Insurance and Healthcare Management
Department at the Fox School of Business, Temple University. 610 Alter Hall, 1801
Liacouras Walk, Philadelphia, PA 19122.
Paper prepared for
:
“Economic Regulation and Its Reform: What Have
We
Learned?” (NBER / University of Chicago Press )
2
Regulation of the Pharmaceutical
-
Biotechnology Industry
Introducti
o
n
Phar
m
aceuticals and h
u
m
an biologic products are
reg

u
lated in virtually all as
p
ects of the
product life
-
cycle: safet
y
, efficacy and
m
anufactu
r
ing quality as a conditi
o
n for
m
arket acces
s
;
pro
m
otion; and pricing. Since the regulatory structure dev
e
loped for phar
m
aceuticals has
largely been extended to hu
m
an biologic
m

edicines, we hereafter use “p
h
ar
m
aceutic
al
s” to
include
b
i
ologics, and
w
e note ex
p
li
c
itly wh
e
re b
i
ologics are treated di
ff
erently. The r
a
tion
a
le
for heavy regulation of phar
m
aceuticals is n

o
t
i
n
trinsic
nat
u
ral
m
onopoly
, since any
m
arket
power enjoyed by individual products derives u
l
ti
m
ately from govern
m
ent
-
granted patents
(See
Chapter 2 in this volume for more on natural monopoly)
. Rather, regulation of
m
arket access,
m
anu
f

acturing and promotion arise because product efficacy and safety can
b
e critical to
patie
n
t health but are n
o
t i
m
m
ediately observable
. Evaluating
s
afety and efficacy
a
s a c
o
ndition
of market acce
s
s and
m
onitoring
m
anufacturing
quality and pro
m
otion accuracy o
v
er the

prod
u
ct life
-
cycle are public go
o
ds
that can in theory be efficiently provided by an expert
agency such as the Food and Drug Ad
m
i
nistration
(FDA). By contrast, price regulation is best
understood as a response by pu
b
lic insurers to the fact that insurance makes consu
m
ers price
-
insensitive.
When consu
m
ers are heavily insured, producers of patented products face highly
inelastic de
m
and
and hence can charge higher prices than they would in the absence of
insurance. Price regulation and other rei
m
burs

e
m
ent controls are a response of govern
m
ent
p
ayers to this
interaction of insurance and patents.
Although these considerations
s
uggest that regulation of the
phar
m
aceutical industry is
potentially welfare enhancing, designing the opti
m
al
structure of such regulation is not si
m
ple.
Market access regul
ation
entails both
resource c
o
s
t
s and fore
g
one patient benefits in ter

m
s of
3
fewer drugs and delay of
those that do launch. Measuring these costs, designing the opti
m
al
regulatory structure and finding the
best balance between costs and
benefits has been the subject
of both aca
d
e
m
ic research and policy
debate and
experi
m
entation.
Opti
m
al reg
u
lation
of
pro
m
otion
and the expansion of post
-

marketing regulatory control are
relati
v
ely rece
n
t
exte
n
sion
s
of this debate. On the pricing side, regu
lati
o
n should ideally constrain pricing moral
hazard while preserving insur
a
nce coverage for patients and
sufficient
patent power to assure
in
c
entiv
e
s
f
or
a
ppropri
a
te

r
esearch and develop
m
ent
(R&D). Much has been learned from
the
experience
with
different
price regulatory regi
m
es, mostly in countries with national health
insurance syste
m
s. But designing regulato
r
y structures that are both theoretically sound and
e
m
pirically practical
re
m
ains an i
m
portant theoretical and policy challenge.
In this
p
aper, Section I
d
escri

b
es
t
h
e
technolo
g
ical characteristics
of the
p
har
m
aceutical
sector and the pri
m
ary objectives of regulation.
S
ections II provides an overview of
safety and
efficacy re
g
ulation
in t
h
e US and abroad. Sec
t
i
o
n III reviews the e
m

piri
c
al
evi
d
ence, lessons
lear
n
ed and proposals f
o
r change in safety and efficacy regulation
.
Section IV
discusses
patents
, focusi
n
g
on those aspects of p
h
ar
m
aceutical patenting t
h
at
interact with regulation, which include patent extension policy
and regulatory exclusivities
,
regulation of generic entry, the exten
s

ion of patents to
d
eveloping countries and
affordability
concerns
.
Section V
d
escri
b
es re
g
ulation
of
pric
i
ng, rei
m
burse
m
ent and profit
; the evidence on
effects of this regulatio
n
;
and ev
idence on
industry structure and co
m
petition

.
Section VI
summarizes evidence on phar
m
aceutical pro
m
oti
o
n,
focusing
m
ainly on direct to cons
u
m
er
advertising (DTCA)
in the USA
, wh
i
ch has
beco
m
e
far
m
ore
i
m
portant
ov

e
r the last
15 years
,
following changes in
regulatory oversight that re
m
ain contentious and unsettled. The final
section concludes on lessons learned
a
nd areas for future research.
4
I. Technological Background and
Objectives of Regulation
The phar
m
a
ceutical industry is characterized by unusually high costs of R&D.
Historically, t
he research
-
based industry
has
invest
ed
between 15
-
20 percent of sales in
R
&

D
(CBO, 2006; EFPIA, 2011)
and the R&D cost of bringing a new compound to market was
estimated at $1.3 Billion in 2005 (an
update from the commonly cited $802 million estimated
in
2001
)
, an increase from
$138m in the
1970s and $318
m
in the
1990s
.
(Adams and Brantner,
2006; DiMasi and Grabowski, 2007; DiMasi et
al., 2003; DiMasi et al., 1991; Hansen, 1979)
.
V
ariation in the expected cost exist
s
across therapeutic categories and depends on a range of
factors
(DiMasi et al., 2004)
. Generally, the
high cost per new drug approved
reflects high costs
of pre
-

clinical testing and
human clinical trials, high failure rates and the opportunity cost of
capital tied up during the 8
-
12 years of deve
l
op
m
ent. To so
m
e extent, this high and rising cost
of R&D ref
l
ects regulations that exist in
all industrialized countries, requiring t
h
at new
co
m
p
ounds
m
eet standar
d
s of safety, efficacy and
m
anufacturing
q
uality as a condition of
m

arket access. The
m
ain initial foc
u
s of regulati
o
n since the
1
930s was safety, and this has
ree
m
erged recently as a
critical issue.
Si
nce the 196
0
s
m
ost countries also re
q
uire pre
-
approval
evidence of efficacy,
m
onitor
m
anu
f
acturing quality throughout the product life, and regulate

promotion and advertising
to physicians and consumers.
The economic rationale for these
require
m
ents
derives from
the fact that the risks and
benefits of phar
m
aceuticals are non
-
obvious, can
differ across patients, and can only be known
from
controlled studies in large patient popul
a
tions. Gathering and eva
l
uating such infor
m
ation
is a public
good, and a regulatory agency that
has both
m
edical and statistical expertise can
more accurately and efficiently
m
onitor and e

v
aluate
t
h
e evi
d
ence from
clinical trials than can
individual physicians or patients. However, regulation that requires e
x
te
n
siv
e pre
-
la
u
nch
cli
n
ical trial data on safety and efficacy inc
r
eases the R&D c
o
sts inc
u
rred by fir
m
s, increases
5

delay in launch of new
m
edicines, and
m
ay
reduce the nu
m
ber of drugs developed and the
extent of c
o
mpetition.
T
he size and duration of clin
i
cal tri
als required to
d
etect re
m
ote risks
o
r
cu
m
ulative
r
i
sks
f
rom

long term
the
r
apies
c
an be
large. The rising co
s
t
s
o
f
R&D, combined
with new technologies f
o
r eval
u
ating infor
m
ation,
have pro
m
pted recent i
n
itiati
v
es to
accelerate approvals and opti
m
ally

integrate evidence from
pre
-
ap
p
roval cli
n
ical t
r
ials with
post
-
approval observational experience.
In the US, the statutory regulation
o
f
pha
r
m
aceuticals
t
h
rou
g
h the Food and Drug Ad
m
i
nistration (FDA) is in
a
ddition to

–
and uncoordinated with

the
increasing level of indir
e
ct regulation through tort
liability. Critical unres
o
lved issues in
m
arket access regulation are: (
1
) how
m
uch infor
m
ation on risks and benefits sh
o
uld be
req
u
ired prior
to launch; (2) what is the approp
r
iate trad
e
-
o
f

f
between ben
e
f
its and risks, given
that so
m
e risks are i
n
evitable; and (
3
) what is the a
p
propriate
mi
x of pre
-
and post
-
launch
m
onitoring of risks, what
m
ethods should be used, and what is t
h
e appropriate
m
i
x of
regulation by an expert

agency (s
uc
h as the FDA or an
independent agency) and t
o
rt lia
b
ilit
y
?
A second importa
n
t characteristic of the phar
m
aceutical ind
u
stry is the critical role of
patents, which results from
its research intensity. Given the cost structure with high, globally
joint fixed costs of R&D and
low
m
a
rginal cos
t
s of production, patents a
r
e essential to enable
innovator fir
m

s to recoup their R&D invest
m
ents.
However, patents work by enabling innovator
fir
m
s to charge prices above
m
arginal cost, which raises issues of appropriate levels of prices
a
nd profits and appropriate str
u
cture and duration of patents. Concern that prices
m
ay be
excessive is one rationale for price regulation in
m
any countries
(although, as discussed below,
insurance coverage is probably an equally i
m
portant deter
m
inant of
pric
e levels
).
Defining
regul
a

t
ory
c
riteria
f
or a
d
m
itting post
-
pate
n
t gen
e
ric e
n
tra
n
ts
remains
a conte
n
ti
o
us issue, e
ve
n
f
or tra
d

itio
n
al che
m
ical compounds. More co
m
plex and yet to
b
e
fully
resol
v
ed
b
y regulatory
agencies are t
h
e con
d
itions for
a
p
proving
biosimilars
,
that
is, altern
a
tive v
e

rsions of large
6
m
o
lecule, biotechnology products such as proteins,
m
onoclonal antibodies etc. As the nu
m
ber
and utilization of these expensive biologics exp
a
nd, so does concern to establish a low
-
cost
regulatory path for
approval of generic biologics
w
ithout full scale clinical trials, in order to
sti
m
ulate p
o
st
-
patent
p
rice co
m
petition.
The global

n
ature of phar
m
aceutical
p
roducts h
a
s also raised contentious
q
uestions o
v
er
opti
m
al patent regi
m
es in developing countries
and cross
-
nationally. The WTO’s Ag
r
ee
m
ent on
Trade
-
related Aspects of Intell
e
ctual Property Rights (TRIPS) requ
i

res all
m
e
m
ber countries to
recognize 20 year product patents by 2015. However,
in response to concern that patents would
m
ake drugs unaffordabl
e in low inco
m
e countr
i
es, TRIPS per
m
its
m
e
m
b
er states to issue
co
m
pulsory lice
n
ses
under certain conditions, including
a “nation
a
l e

m
ergency.” TRIPS also
leaves decisions on
allowing
parallel i
m
ports to the discret
i
on of individual me
m
ber states. In
m
ost
industrialized countries inclu
d
ing t
h
e US, the tr
a
ditio
n
al r
u
le has been n
a
tional ex
h
au
s
tion

of
pate
n
t rig
h
ts, which
m
eans that a patent holders can bar
the unauthorized i
m
po
r
tation of the
paten
t
ed product (parallel
trade) from
other countries. Proposals i
n the
US to legalize parallel
trade,
including
commercial
drug i
m
portation by wholesalers,
w
ould under
m
ine t

h
e
traditional
rule
of
national exhaustion of patent rig
h
t
s
. If
enacted, this would
u
nder
m
ine manu
f
actur
e
r
s
’
ability to
p
rice
d
i
s
c
ri
m

i
nate between
countries, which could have serious welfare con
s
eq
u
ences
as
d
i
s
cussed bel
o
w.
A third characteri
s
tic of the phar
m
aceutical ind
u
s
t
ry is the d
o
m
i
nant role of third party
pay
m
ent through social and private health insur

a
nce. Like any insurance, third party pay
m
ent
for drugs creates
m
oral
h
azard, with incenti
v
es for consu
m
ers to overuse and/or use
unnecessarily expensive drugs. In addition, by
m
aking de
m
and less elastic,
insurance creates
incentives
f
or fir
m
s to charge hig
h
er prices than
they would in the absence
of insurance. In
response to these insurance
-

ind
u
ced distortions, since the 1980s government
-
run health syste
m
s
in
m
ost countries have adopted ela
b
orate
regulatory syste
m
s to control p
h
ar
m
aceutical
7
expenditures, through regulation of
m
anufacturer prices
a
nd/
or rei
m
burs
e
m

ent and
li
m
its on
total drug spending
and
on c
o
mpany revenues. Private insurers in the US also use formularies
of covered drugs, co
-
payments and negotiated prices
; however,
because these private ins
u
rers
m
ust compete for market s
h
are, t
h
eir controls lack the l
e
verage of public payer controls. The
controls adopted by both public and private insurers have significant effects on de
m
and for
phar
m
aceuticals, on the nature of c

o
mpetition a
n
d hence on
p
rofitability, incenti
v
es for R&D
and the su
pply of new
m
edicines.
Because phar
m
aceuticals are potentially glo
b
al products and R&D incentives depend on
expected
g
l
o
bal re
v
enues, national regulat
o
rs face free ri
d
er incenti
v
es.

E
ach country faces a
short run incentive to adopt regul
a
tory policies that
drive its do
m
estic prices to country
-
specific
m
arginal cost, free riding on others to pay for the
joint costs
o
f
R&D. But if
all cou
n
tries pay
only their country
-
specific
m
arginal cost, R&D cannot be sustained. The global nature of
phar
m
aceuticals and the
long R&D lead ti
m
es

–
roughly 12
y
ears from
drug discovery to
product approval, on average
–
m
ake the incenti
v
es for short run free
riding by individual
countries particularly acute.
W
hile there is w
i
despread consensus in support of differential
pricing b
et
w
een the richest and poorest nations, no
consensus exists on a
p
propriate price levels
for these c
o
untries or between
high and
m
i

ddle
-
inco
m
e
countries. In practice, the a
b
ility of
phar
m
aceutical fir
m
s to price
d
i
scri
m
i
nate is di
m
i
nishing as
m
ore countries
ado
p
t national
p
rice
regulatory policies that reference prices in oth

e
r countries and/or legalize drug i
m
portation (also
called parallel trade or i
n
tern
a
tional exhaustion of
patent rights). These cross
-
national price
spillo
v
ers in
turn c
r
eate incenti
v
es
f
or
f
i
r
m
s to delay or n
o
t l
a

unch new drugs in low
p
rice
m
arkets, if these low prices would under
m
ine pote
n
tially higher prices in other
m
arkets. Thus
the design
o
f
each country’s price regulat
o
ry system
can aff
e
ct not o
n
ly their do
m
estic
8
availability of drugs but also availa
bi
lity in other countries t
h
rough price

s
pillo
v
ers in the short
run, and through R&D incenti
v
es in the long run.
Unlike so
m
e other industries, regulat
i
on of the phar
m
aceutical industry
h
as not
di
m
i
nished or undergo
n
e fu
nd
a
m
ental changes
o
ver recent
d
ecades, alt

h
ough focus of
m
arket
access regulation has shifted betwe
e
n concerns
f
or safety vs. cost and delays, a
nd the structure
of price/reimbursement
regulation has beco
m
e more
co
m
p
l
ex. The
m
otivations for regulation of
phar
m
aceuticals

i
m
perfect and/or asymmetric
info
r

m
ation for
m
arket access reg
u
lation,
patents and insurance
-
related
m
oral hazard for p
r
ice/reimbursement
re
g
ulation
–
re
m
ain and
have, if anything, increased over ti
m
e. These are sum
m
arized in Table 1.
Re
gulatory trends over ti
m
e within the US and cross
-

national differences pro
v
ide a
wealth of useful
experience from which so
m
e lessons can be lea
r
ned. This r
e
view will
fo
cus
pri
m
arily on US issues and evi
de
nce, reflecting t
h
e do
m
inance of US
-
based literature
.
Moreover,
US
r
e
gulatory policy has a disproportionately

large
effect on the industry, because
the US
m
a
rket accounts for almost fifty perce
n
t of global phar
m
aceutical revenues. Howev
e
r,
we draw extensively on experience from other countries for evidence
on price and
rei
m
burse
m
ent regulation, cross
-
national spillover effects and access to p
h
ar
m
aceuticals in
develo
pi
ng countries.
Insert Table 1
about

here
The appropriate economic
m
odel of the ph
a
r
m
aceutical industry is either monopolistic
co
m
petition or ol
igop
o
ly
with product differ
e
ntiation. However, both positive and normative
analysis
m
u
st also take into
account the roles of phy
s
ician prescribing and third party pay
m
ent
as key
determinants of
de
m

and elasticit
i
es and cross
-
p
rice elasticities. Moreover,
m
odels of
opti
m
al pricing
m
ust recognize the i
m
portance of R&D
a
nd fixed costs. In this context, welfare
conclusions about optimal levels of R&D, product variety or drug use are proble
m
atic. Most
9
analysis to date and
m
ost of our discussion are therefore pos
itive rat
h
er t
h
an nor
m

ative.
Although the industry is characterized by high fix
e
d costs,
m
odels in which fir
m
s
endogenously choose sunk costs, in the form
of either
R&D or
promotion to retain co
m
petitive
advantage and deter co
m
p
e
tition / entry
(Sutton, 1991)
, do not seem
appropriate and appear to
be clearly refuted by t
h
e evidence
o
f
entry over the last two decades by thousands of s
m
all

fi
r
m
s. We return to t
h
is
below.
II. Overview
of Safety and Efficacy
Regulation
1. The US
The first comprehensive federal legislation
regulating food and drugs in the US was the
Pure Food and Drug Act of 1906 (The
W
iley Act)
which required that product labels and
packaging not contain false state
m
ents about curative
effects, but stopp
e
d short of requiring
m
anufacturers to pro
v
ide evidence to prove
safety
or efficacy
(Palumbo FB, 2002)

. The 1938
Food, Drug and Co
s
m
etics Act (FDCA), which r
e
placed the
W
iley Act, required any firm
seeking to market a new che
m
ical entity (
N
CE) to file a new drug application (NDA) to
de
m
onstrate that the drug was safe for use as suggested by the proposed labeling. The Food and
Drug Ad
m
i
nistration (
F
DA) had 180 days to reject the NDA. As new for
m
s of print and radio
advertising
had e
m
erged since the
W

iley Act, the FDCA e
s
tablished jurisdiction over drug
advertising, but policing was left to the Federal Trade Com
m
i
ssion (FTC) rather than the FDA.
This Act al
s
o esta
b
lish
e
d the req
u
ir
e
m
ent that patie
n
t
s obt
a
i
n
a pres
c
ri
p
tion

f
rom
a
physician in
order to obtain retail drugs.
The 1962 Kefauver
-
Harris A
m
endments to the 1938 FDCA were
the outco
m
e of
hearings that were initiated due to concern ov
e
r the proliferation, pricing and advertising of
10
drugs of dubious efficacy. The
final legislation also reflected concern to strengthen safety
require
m
ents, following the thalido
m
ide tragedy that caused hundreds of birth defects in Europe
whereas the drug was still under review in
the US. The 1962 A
m
endments define the
regulations that
largely still operate today. They strengthened safety require

m
ents; added the
require
m
ent that drugs show proof of efficacy, usually by double
blind, rando
m
ized controlled
trials of the drug relative to pla
c
ebo; re
m
oved the ti
m
e li
m
it (pr
e
viously 180 days
) within which
the FDA could reject an NDA; extended FDA
regulation to cover c
l
inical testing and
m
anufacturing; and restricted
m
anufacturers’ promotion to
approved indications. Basic
require

m
ents for pro
m
o
t
ional
m
aterials were defined, including that such
m
aterials cannot be
false or
m
i
sleading; they
m
ust
provide a fair balance of ris
k
s and benefits; and they
m
ust
provide a “brief sum
m
a
r
y” of contraindications, side effects and effectiveness. Regulatory
oversight of pro
m
otional
m

aterial was ce
d
ed back
to t
he FDA from
the FTC.
The presumption underlying the re
q
uire
m
ent for proof of efficacy was t
h
at i
m
perfect
and possibly asym
m
etric infor
m
ation prevent
e
d physicians and consu
m
ers from
m
aking
accurate evaluations, leading to wasted expenditures on ineffecti
v
e
drugs and other a

s
sociated
costs, and excessive product differentiation t
h
at under
m
ined price co
m
p
e
tition. Although Phase
III trials, in
v
olving double
-
blinded, rando
m
i
zed placebo
-
co
n
t
rolled trials in large
p
atient
populations,
were initially intended to
esta
b

lish efficacy, over ti
m
e these trial req
u
ire
m
ents have
been expanded to detect re
m
ote risks and/or cu
m
ulative treat
m
ent risks of chronic
m
e
dications.
The size and
duration of cli
n
ical trials, toget
h
er
with increased regulatory review time, added to
de
lay in the launch of new drugs, leading to for
e
gone benefits for consu
m
ers, shorter effective

patent life and foregone revenue f
o
r fir
m
s, albeit with the intent
of avoiding potentially larger
costs for co
n
su
m
ers.
1
Moreover, since so
m
e regulato
r
y costs
are fixed, independent of
11
potential
m
arket size, such regulation raises t
h
e
expected
re
v
enue
threshold required to break
even on a new drug, leading to

higher break
-
even prices,
ceteris paribus,
and fewer drugs,
particularly drugs to treat
rare disea
s
es with s
m
all pote
n
ti
a
l market
s
i
ze.
Subsequent legislation has add
r
essed several of these cost
-
increasing effects of the 1962
A
m
end
m
en
t
s. The Orphan Drug Act of 1983 (ODA) sign

i
ficantly increased incentives to invest
in orphan diseases (define
d as conditions that affect less than 200,000
i
ndividuals in the US) by
increasing revenues and decreasing costs
. Specifically,
d
rugs
that
receive
orphan status are
granted
m
arket exclu
s
ivity
f
or seven years (t
h
at is, si
m
ilar co
m
p
ounds will n
o
t be appro
v

ed
to
treat the sa
m
e condition) and receive a 50% tax credit for exp
e
nses accrued through clinical
testing. Orphan drugs
m
ay also benefit from
research grants f
r
om
the NIH and accelerated or
Fast Track FDA approval (see below). Following the ODA, the
nu
m
ber
of orphan drug
approvals has increased significantly.
Between 1979 and 1983, orphan drug approvals
increased at approxi
m
ately the sa
m
e rate as other drugs.
B
y 1998, the
r
e were

m
ore than five
ti
m
es as
m
any orphan drugs as in 1979, but fewer than twice as
m
any
non
-
orphan drugs
(Lichtenberg FR, 2003)
.
However, these numbers may overstate the growth of true orphan
compounds because
some orphan drug filings represent small indication
s of drugs that have
large overall markets and that would probably have been developed without the ODA
,
including
many specific cancer
types for cancer drugs.
Insert Graph 4 About here
An i
m
porta
n
t initi
a

ti
v
e to
reduce d
e
l
a
y in t
h
e FDA review of
regulatory filings was the
Prescription Drug User Fee Act (PDUFA) of 1993
.
2
Under PDUFA, phar
m
aceutical fir
m
s agree
to pay substantial user fees to enable the FDA
to hire
m
ore reviewers and hence expedite drug
review
.
3
In fiscal year 2
0
10
, the $

573
m
illion
in fees accou
n
ted for
62
% of total proce
s
sing
costs at the FDA
(FDA, 2011)
. In
addition to u
s
er fees, the
PDUFA created a sy
s
t
em that
12
classifies
new drug applications that target un
m
et
m
edical needs as “priority re
v
i
ew”, as

opposed to “standard review”, with target duration of 10
m
onths for standard review and 6
months for priority review drugs. Prior to 1992, the FDA classified drugs into either A
,B or C
categories, and an AA category
was
developed
to
speed
the
r
e
view of AIDS products.
PDUFA
significantly increased the review staff of the FDA and reduced review times for drugs. On net,
the implementation of PDUFA has increased social welfare with benefits accruing to both
manufacturers (who effectively extend their patent window) and
the public (who
receive drugs
faster). The
main
criticisms of the system are the potential for “regulatory capture” (although
clearly the FDA continues to reject
many
applications) and
concern that speedier approvals
may
impinge on safety
—

although welfare
analysis which make conservative assumptions of the
effects of PDUFA on
drug
withdrawal rates
(and consumer harm associated with such
withdrawals)
suggest that the negative impact is relatively small in relation to the benefits of the
legislation
(Berndt et al., 2005; Philipson et al., 2008)
.
T
he most recent iteration
s
of PDUFA
(PDUFA
IV and
V,
2007 and
2012)
established strengthened the FDA’s ability to grant
conditional approval, subject to
Risk Evaluation and Mitigation Strategies (REMS) and
strengthen
ed
the Sentinal Program
, which enables the FDA to
monitor
post
-

launch
safety
by
querying large patient clai
ms databases to detect rare
adverse events.
These programs enable
the
FDA to approve drugs for restricted usage and improve
post
-
launch
detection of remote risks,
which should increase the net welfare gains from market access regulation.
The 1997 FDA Mo
dernization Act (FDAMA) renewed the priority review system
and
created Fast Track status to pote
n
tially expedite the entire clin
i
cal trial process for novel drugs
(FDA, 2005(b))
, by additional
m
eetings, correspondence and review progra
m
s with the
F
DA.

Products
m
ay receive fast track designation if t
h
ey are “intended for the treat
m
ent of a serious
or life
-
threatening condition” and “demonstrate
the potential to address un
m
et
m
e
dical needs
13
for the condition”
(FDA, 1997, 2005(b))
. In a
d
dition, “Accelerated A
p
proval”
s
t
atus refers
to FDA acceptance of a
p
proval on t

h
e b
asis of a
su
rrogate en
d
point t
h
at “is reasona
b
l
y
likely to
predict clinical benefit” rather
than a cli
n
ical
b
e
n
efit. Accel
e
rated appro
v
al is o
n
e of the
potential review processes for which fast track drugs
m
ay qu

a
lify. Fast track has reduced
overall
develop
m
ent times by approxi
m
ately 2.5
years
(TCSDD, 2003)
, but so
m
e have argued
that fast track and priority review are associated with increased prevalence of post
-
a
p
proval
adverse events (see below).
The incr
e
as
e
d ti
m
e taken by cli
n
ical tri
a
ls

a
nd
regulatory review not only increases the
out
-
of
-
pocket cost of R&D but also reduces effective patent life. To address this, the 1984
Patent T
e
rm Restor
a
tion and Co
m
petition A
c
t
(h
e
rea
f
ter the
H
atch
-
W
ax
m
an Act) gra
n

ted
innovator fir
m
s an extension of patent
term
for up to five years
.
4
However, as a quid pro quo,
the 1984 Act expedited post
-
patent entry by g
e
neric
m
anufacturers. Specifically, generic
m
anu
f
actur
e
rs are
p
er
m
itted to work on the a
c
tive
ingre
d

ient
b
e
f
ore the p
a
tent expiry
(t
he Bolar
exe
m
ption)
and generics can be approved with
an Accelerated New Drug
Application (ANDA),
which requires only that the g
e
neric prove bioe
q
uivale
n
ce a
n
d che
m
ical equivale
n
ce to the
origi
n

ator
pr
oduct, with
o
ut new safety and efficacy
trials. Hatch
-
W
ax
m
a
n conferred a five
year
max
i
m
u
m
d
ata exclusivity period after the inno
v
ator’s NDA approval (three years for other data
not sub
m
itted in support of an NCE
a
pproval),
after which generic fir
m
s

a
re free to
us
e
innovator clinical trial data to
prepare their AN
DA (the EU allows
10 years of data exclusivity)
(Kuhlik, 2004)
. Moreover, Hatch
-
W
ax
m
an grants
to the
f
i
r
st
g
eneric
f
i
rm
to success
f
ully
challenge a patent (a
paragr

a
ph IV filing) 180 days as the e
x
clusive ANDA
-
approved generic in
the
m
arket
(Kuhlik, 2004)
. In
the 1990s
,
some
originator fir
m
s
were
accused of
“evergreening” their
drugs by late filing of follow
-
on patents on
m
i
nor aspects of the
co
m
pound; excessively litigating challenges to
patents; entering collusive agree

m
ents with
14
generic
m
anufacturers; and developing follow
-
on products that rese
m
ble that or
iginal product
except
for
m
i
nor changes that nevertheless
m
ay suffice for a new patent e.g. single iso
m
er
versions.
T
he FTC has taken anti
t
r
u
st enforce
m
ent action a
g

ainst agree
m
ents between originator
and generic firms to d
e
lay the launch of generics
(FTC, 2002)
. The 2003
Medicare Modernization Act includes changes to
deter these practices, b
u
t this re
m
ains an
unsettled area.
Insert Figure 1 About Here
The Hatch
-
W
ax
m
an Act l
a
id the n
e
cessary
foundation for fast and cheap generic entry
im
m
ediately after patent expiry in the US.

As of 2011, g
enerics account
ed
for
80
percent of
prescriptions filled
in the US
, co
m
pared to 19
p
erce
n
t in 1
9
84 when Hatch
-
W
ax
m
an was
enacted; but
,
generics account
ed
for
only
2
7

percent of
national
drug expenditures, reflecting
their low prices.
(IMS, 2012)
In addition to Hatch
-
Waxman provisions, t
he rapid and
co
m
prehensive generic e
r
osion of originator
sales
post patent expiry
also reflects
s
t
ate
-
level
legislation aut
h
orizing phar
m
acists to substitute generics for originator drugs (unless the
physician notes “brand required”) and insurance rei
m
burse

m
ent incentives to
phar
m
acies and
patients to acce
p
t
generic
su
b
stitution (
s
ee section V). T
h
e speed
of generic entry, generic
m
arket shares and prices differ significantly across countries
,
reflecting regulat
o
ry differences in
market
acce
s
s and in rei
m
burse
m

ent incenti
v
es for phar
m
acists and patients
(Danzon and
Furukawa, 2003b)
. E
m
pirical evide
n
ce related to Hatch
-
Wax
m
an as well as cross
-
national
differences are discussed below.
Insert Graph 7 about here
The FDAMA also initiated sig
n
ificant change in
pro
m
otion regulation,
b
y per
m
itting

co
m
panies to inform
physicians of potential unapproved (“off
-
label”) uses of drugs through the
15
distribution of pee
r reviewed journals. It per
m
itted co
m
p
anies to iss
u
e econo
m
ic analyses to
payers, provided that the analysis “shall not
be considered to be false or
m
i
sleading…the health
care econo
m
ic infor
m
ation directly rel
a
tes to an [approved] indication…and is based o

n
co
m
petent and reliable scientific e
v
idence”
(FDA, 1997)
.
The regulations governing direct to consu
m
er advertising (DTCA) were subject to
revised interpretation in an FDA Dr
a
f
t Guid
ance issued in 1997. Previously, product claim
advertise
m
ents that named both the drug and the
condition it treated were required to disclose
all the
r
i
sks and cont
r
ai
n
dications within t
h
e

c
ontent of
the a
d
vertise
m
ent
(Wilkes et al., 2000)
T
he 1997 FDA guidance still required fir
m
s to present a “fair
b
alance” between risks and
benefits and not
m
i
slead with false adve
r
tising; however, broadca
s
t a
d
s could
m
eet the
require
m
ent for disclosure by providing several o
t

her sources to obtain the full label, including
a toll
-
free n
u
m
ber, an internet site, a print
ad or a “see your physician” advice
(GAO, 2002a)
.
The 199
7 draft guidance (for
m
alized in 1999) sti
m
ulated the growth of DTCA, especially
broadcast ads.
Total annual DTCA spending grew from $266 million in 1994 (prior to FDA
relaxation in advertising policy) to $5.4 billion in 2006, but has subsequently moderate
d to
$4.5 billion as of 2009
(Donohue et al., 2007; Ve
ntola, 2011)
Much of the growth is
attributable to expansion o
f
spending for television advertising.
2. Other Industriali
z
ed Countries

Each country has its o
w
n drug approval process,
although
in
practice
s
m
aller
countries
frequently review and reference
approvals grant
e
d by other
m
ajor agencies such as the US FDA
or the Euro
p
ean Medici
n
es Agency (E
M
A). Following the thalido
m
ide tragedy and the
stren
g
theni
n
g of safety and efficacy require

m
ents in the US in
1962, the UK tightened safety
regulations in 1964
and added efficacy requirem
e
nts in 197
1
. Other ind
u
strialized c
o
untries
adopted similar regulations,
a
lthough so
m
e, su
c
h as France and Japan, have
had
less stringent
efficacy re
q
uire
m
ents
(Thomas, 1996)
.
16

In 1995 the
European Union established the
European Medicines Agency (EM
A) as a
centralized approach to drug approval for EU
m
ember states. The EM
A offers two tracks to
drug approval. The centralized
proc
edure involves review by the EM
A and provides
si
m
ultaneous appro
val of the drug in all countri
e
s of the EU. Alternatively, a firm
can use the
mutual recognition approach, see
k
ing approval by one rapporteur
country
with
reciprocity
in
other EU countries, subject to
their review and objection. The
EM
A is the required app

roval
route for biotech products and is optional for
other new drugs. National syste
m
s re
m
a
i
n for
products that seek approval in only a few countries.
The EMA also has
made more progress
than the FDA
in establishing approval pathways for biosimilars
–
although both regulatory
bodies likely will continue to modify these
guidelines
as experience with biosimilars
accumulates.
Since the 1990s the regulatory authori
t
ies and the industry in the three major
phar
m
aceutical
m
arkets
–
the US, the EU and J

a
pan
–
have worked thr
o
ugh the I
n
ternational
Com
m
ission on Har
m
on
i
zation (ICH) to har
m
onize their
evidence
require
m
ents for
s
afety,
efficacy and
m
anufacturing quality. As a result
o
f
the har
m

onization
m
easures, co
m
panies can,
to a sig
n
i
f
i
c
ant deg
r
ee,
c
o
m
pile a
si
n
gle doss
i
er for sub
m
ission to th
e EM
A, the US FDA and
Japan.
However, so
m

e important di
f
f
erences in regulatory require
m
ents re
m
ain and each
agency still
m
akes its own evaluation based on
its
own risk
-
be
n
efit trade
-
off. For exa
m
ple,
the
EM
A
often
requir
es trials of new drugs rel
a
tive to
c

urrent t
r
eat
m
ent whereas the FDA more
often uses a place
b
o co
m
parator, exce
p
t where use of placebo would i
m
ply unethical tre
a
t
m
ent
of
patie
n
t
s. Ja
p
an requir
e
s so
m
e trials on Japanese nationals.
The EM

A and the UK
Medicines Agency have
adopted user fee progra
m
s
to expedite
review, and the EM
A has adopted an Orphan Drug Law. As a result of har
m
onization and other
m
easures, differences in
m
arket approv
a
l require
m
ents are no longer a
m
ajor source of
difference in ti
m
in
g of drug launch between the
U
S
and “free pricing” countries in the EU,
17
notably the UK and Ger
m

any (until 2004). Lar
g
er differences re
m
ain in the approval process
for generics. Measures si
m
ilar to the US Hatch
-
Wax
m
an provisions have been proposed for the
EU but so far have not been adopted by the EMA
or by all EU countries’ national regulatory
agencies.
3. Developing Countries
More proble
m
atic is the appropriate regulato
r
y agency and standards for drugs intended
pri
m
arily for use in developing
countries. Since
d
i
sease incidence, co
m
peting risks, c

os
t
s and
benefits of treat
m
ent
m
ay be vastly different
in these countrie
s, decisions based on FDA or
EM
A risk
-
benefit trade
-
offs
m
ay be
inapprop
r
iate. For exa
m
ple, in 1999 Wyeth withdrew its
rotavirus
vaccine, Rotashield, from
the US
m
arket
due to c
o

ncern t
h
at t
h
e risk of se
v
ere (b
u
t
infrequent) intussuce
p
ti
o
n would be unacceptable r
e
lati
v
e to the vaccine
’
s benefit, given the
relatively l
o
w risks from rota
v
i
rus in the US. The vaccine
b
eca
m
e unavailable

in
d
eveloping
countries, which expressed no interest in using
it,
although
their
benefit
-
risk ratio would have
been very different, given their
m
uch higher i
n
cidence and higher death rates from
rotavirus
(Hausdorff, 2002)
.
More
generally, if willingness to pay high R
&
D and delay costs in order to reduce drug
risks is inco
m
e elastic, then requir
ing that d
r
ugs targeted at deve
l
oping countries

m
e
et the
standards of the FDA/EM
A
m
ay impose inapp
r
opriately high regulatory costs in developing
countries. On the other hand, anecdotal evide
n
ce indicates that the developing countries
the
m
selves are unwilli
n
g to acce
p
t
d
rugs that are not approved for
m
arketing in t
h
e US or the
EU.
There is some potential for reducing regulatory burden in order to accelerate approvals
important for addressing health in developing countries. One example is the “Tentative
Appr
oval” designation introduced by the FDA specific to the PEPFAR (Presidents Emergency

Plan for AIDS Relief) program which has
enabled
generic and innovator firms to introduce new
18
combinations and
speed
generic
approvals for
distribution
of AIDS products pri
marily in Sub
-
Saharan Africa
.
Through 2009
, o
ver 100 generic formulations
had been approved
under the
program
(PEPFAR, 2012)
.
But for many drugs ,
especially those for diseases specific to developing countries
,
inappropriately high costs of reg
u
lat
o
ry co

m
pliance
a
re probably less important than low
potential revenues in discouraging R&D
for drugs to treat diseases prevalent only or
predo
m
inantly in less developed countries, such as
m
alaria, TB or leisch
m
aniasis.
Various
“push” and “pull” subsidy
m
echanis
m
s have
b
een proposed and so
m
e have been i
m
ple
m
ented,
to in
c
rease

f
i
nancial i
n
c
e
ntives
f
or i
n
vest
m
ent
in these LDC
-
only drugs
[
see, for example,
(Kremer, 2002; Mahmoud et al., 20
06;
Towse
,
2012;
Towse an
d Kettler, 2005)
]
.
In order to
encourage greater R&D efforts on “developing
country” diseases, the

US Congress
also
approved a priority review legislation (2009) in which the
FDA
grants a
transferable
priority
review
voucher
which allows for
accelerated review by the FDA for any product
in return for an
approval of a
product which treats a “neglected disease”
(Grabow
ski et al., 2009; Moe et al.,
2009; Ridley et al., 2006)
.
W
hile this
approach
has proven
m
ore
policitally
f
easi
b
le than a
sub

s
idy
f
inanced by a broader tax, the efficiency and distributional consequences
are uncertain.
To date, one voucher has
been granted
for a
n approval of a
n
anti
-
malarial
(Novartis
-
Coartem
:
Voucher used for priority review for
Ilari
s sBLA
which was ultimately denied
)
.
Overall, recent
evidence indicates an increase in R&D activity on “neglected diseases”
although the absolute
level of act
ivity is still quite limited
and it is not clear which “push” or “pull” incentives have
been most influential in helping to accelerate development activity

(Moran, 2009; Moran et al.,
2009)
.
III. Effects of
Safety a
n
d Efficacy Regulations: Evidence and Issues
19
1.
Costs
of
Regulation
Much of the early econ
o
m
i
c analysis
of ph
a
r
m
aceutical regulation focused on effects of
the 1962 Kefauver
-
Harris A
m
end
m
e
nts on R&D costs,

delays in launch of
new drugs, decline in
the nu
m
ber of new drug introductions and changes in industry structure that occurred in the
1960s and 1970s, raising questions of
causation
(Baily, 1972; Grabowski et al., 1978;
Peltzman, 1973; Wiggins, 1981b)
Number of new drug launches
Grabowski, Vernon et al. (1978) report that the
nu
m
ber of NCEs fell from 233 in the five
-
year period 1957
-
1961 to 93 in 1962
-
1966 and 76 in
1967
-
1971. So
m
e decline would be consistent with t
h
e intent of the legislation, if some of the
prior introductions
were ineffective. However, the percentage of t
o

tal ethical drug sales
accounted
f
or by new NCEs declined roughly in proportion to the nu
m
b
e
r of drugs, from
20.0
percent in 1957
-
1961 to 5.5 percent in 1967
-
1971. The authors contend that this finding is
inco
nsi
s
te
n
t with the
a
r
g
u
m
ent that
o
nly the
m
ost insigni

fi
ca
n
t drugs were
eli
m
inated
.
5
Grabowski
e
t al.
a
l
so
a
tt
e
mpt to
m
easure the
m
arginal reduction pla
u
si
b
l
y
a
tt

r
ibuted to
the 1962 A
m
endments after controlling for other
possible contributing f
a
ctors,
including the
depletion of new product opportunities; the thalido
m
ide tragedy that
m
ay have
m
ade
m
anufacturers and physicians
m
ore risk ave
r
se, hence reduced de
m
and for new drugs; and
phar
m
acological advances that
m
ay have raised R&D costs independent
of

regulation. They
co
m
pared trends in NCE discoveries in the US
relative to the UK, an appropriate comparat
o
r
country because of its strong and successful r
e
search
-
based
p
har
m
aceutical industry. This is a
quasi
-
n
a
t
ur
a
l experi
m
ent since the UK did not a
d
opt
efficacy require
m

ents until 1
9
71 and its
1963 safety require
m
ents were statistically unrelated to the flow of new discoveries. Grabowski
et al. find that research p
r
oductivity, defined as nu
m
ber of NCEs per (lagged) R&D
expenditure, declined sixfold betwee
n 1960
-
61 and 1966
-
1970 in the US, co
m
pared to a
20
threefold decline in the UK, and that the 1962
Am
endments increased the cost per new NCE in
the US by a factor of 2.3. They conclude that these differentials are plausibly attributable to
regulation, since t
he UK would have been equal
l
y affected by exogenous changes in scientific
opportunities and testing nor
m

s and by any thalido
m
ide
-
related change in de
m
and. In fact, these
esti
m
ates based on using the UK as a bench
m
ark
are probably conserv
a
ti
v
e esti
m
ate
because
regulatory changes in t
h
e US, as the large
s
t
s
i
ngle phar
m
aceutical

m
arket,
would influence
incentives
f
or innovative R&D for all fir
m
s, regar
d
less of country of do
m
icile, and hence could
have contributed to the decli
n
e in NCE discoveries in the UK.
Insert Graph 1 and Graph 2 about here
R&D Cost per NCE
There is little doubt that regu
l
ation has contributed to the
increase in R&D cost per n
e
w drug approved, but the relative
contribution of regulation vs.
other factors is uncertain. Baily (1972) and
W
i
ggins (1981) concluded that the 1962
A
m

end
m
en
t
s led to a large i
n
crease in the R&D cost per new drug approved, but with
significa
n
t
v
ariation acr
o
ss therapeutic categ
o
ries.
More recent evidence s
h
ows that the cost of
developing new drugs has continued to outpace the CPI, despite no
m
ajor change in explicit
regulatory require
m
ents, although undocu
m
ented changes in regulatory require
m
ents
m

ay have
occurred. DiMasi has found that capitalized cost per
approved NCE,
m
easured in present value
at launch, grew from
$138 million in
the 1970s to $318 million in the 1980s to $802 million in
the 1990s and iscurrently
estimated to be in the $1.2
-
$
1.3 b
illion range for both traditional and
biotech products
(DiMasi and Grabowski, 2007; DiMasi et al., 2003; DiMasi et al., 1991)
.
Although critics
contest the estimate
, in part, due to the confidential nature of the firm and
product specific panel data required
for appropriate calculation of c
osts over time
, other recent
attempts have found similar cost levels
.
(Adams and Brantner, 2006)
Roughly half of th
e
total

21
cost is out
-
of
-
pocket expense, including spending on drugs that
u
lti
m
ately fail; the re
m
ainder is
foregone i
n
terest
o
r op
p
ortunity co
s
t
of capital.
Updating the cost of capital calculation with the
Fama
-
Fr
ench three factor model
rather than the traditional CAPM approach
also suggests
greater risk and, therefore, a larger opportunity cost component

(Vernon et al., 2010)
.
T
he
inflation
-
adjusted rate of
growth of out
-
of
-
pock
e
t costs has re
m
ained relatively constant (7.0%
1970
-
1980, 7.6% 1980
-
1990). Interestingly, despite
–
or
because of
–
the
m
ajor advances and
invest
m

ents in
m
i
crobiology, co
m
binatorial c
h
emistry, high
-
throughput screening, robotics,
bioinfor
m
atics, and geno
m
i
cs, that revolution
i
zed drug discovery in the 1980s and 1990s, pre
-
clinical
costs
related
to
drug
d
i
scovery have grown at a slo
w
er annual rate (2.3% in the 1990s)
than the costs of clinical trials (11.8%) which reflect shifts in

m
edical care technologies, rather
than drug discovery technologies. T
h
e cli
n
ic
a
l c
o
st growth
r
ate in the 1990s includes an incr
e
ase
in
n
u
m
ber of
trial pa
r
t
i
c
ipa
n
ts,
m
ore

procedures and higher cost per participant, the
lat
ter partly
reflecting new
m
edical care technologies.
6
Besides changing regulator
y requirements
, other
contributing factors include: c
h
ange in types of drugs and diseases pursued, as R&D e
ff
o
rt shi
f
ts
towards
m
ore di
ff
i
cult diseases once the “low hanging” diseases have been addressed; increased
focus on chronic diseases which require longer trials
to detect cumulative effects; collection of
econo
m
i
c as well as clin

i
cal data, to satisfy
growing payer de
m
ands for evidence of cost
-
effecti
v
eness; and
p
ossibly
g
r
ow
ing public de
m
and for saf
e
ty that
m
i
ght lead fir
m
s to invest
voluntarily in larger/longer trials in order to
detect rare effects.
Insert Graph 3 About Here
For certain types of drugs, particularly
t
hose used by large populations of relatively

healthy subjects, such as
vaccines, relucta
n
ce to tolerate even r
e
m
ote risks
is in
c
rea
s
i
n
g the size
and duration of trials in order to detect very rare adverse e
v
ents. F
or exa
m
ple, r
e
cent t
r
ials
f
or
22
the r
o
tovir

u
s vaccine in
v
olve 70,000 patie
n
t
s. In
a qualitative survey Cole
m
an et al. (2005)
report that
v
accine
m
anufacturers attribute v
a
cci
n
e shorta
g
es and reduced incentives
f
or
discovery, in part, to the high safety
standar
d
s t
h
at are req
u

ired by the
F
DA
(Coleman et al.,
2005)
.
7
Danzon et al
.
(2005c) sh
o
w
that both regulat
o
ry require
m
ents and co
m
petition have
c
o
ntrib
u
ted to exit of vaccine
m
anufacturers
(Danzon and Pereira, 2005; Danzon et al.,
2005c)
.
On the other hand, regulatory changes (such as use of bio

m
a
r
kers rather than survival as
the endpoints, Fast Track status etc.) which expedite drugs that treat life
-
threatening diseases
for which no effective therapies exist have no doubt
reduced costs and del
a
y, contributing to the
g
rowth in nu
m
ber of drugs appr
o
ved and in
d
evelop
m
ent for cancer, inflam
m
ato
r
y diseases etc.
in recent years. Other factors such as advances in science and
relatively generous reimburse
m
ent
under Medic

a
re Part B have also contributed to the proliferation of R&D, p
a
rticularly biologics
f
o
r these high priority conditions,
m
aking it hard to identify the net effect of regulatory changes
on R
&
D.
However, it see
m
s
safe to conclude that, given PDUFA, FDAMA and other
m
easures
that have been adop
t
ed to expedite trials
and review
for high priority drugs, the balance has
shifted and there is now less concern over undue costs and delay at lea
s
t for these
h
i
g
h priority

dr
ugs, and perhaps
m
ore concern over adequate proof of saf
e
ty and efficacy.
As indicted earlier
the 2012 reauthorization of PDUFA (2012)
enhances the tools available to FDA
to address post
-
launch safety.
Lags in Launch
Several analyses find that the 1962
Am
endments increased delay in launch of new
drugs in the
US
rel
a
tive to
o
t
her cou
n
t
r
i
e
s

(
Grabowski, 1976; Grabowski and Vernon, 1976;
Wardell, 1973; Wardell and Lasagna, 1975; Wiggins, 1981a)
. Grabowski and Vernon (1978)
compare introduction dates in the US and the UK for drugs discovered in the US between
23
1960 and 1974. The proportion of d
rugs introduced first in the US
declined significantly
between 1960
-
1962 and 1972
-
1974, while the proportion introduced later in the US
increas
i
ng
significantly. The authors
conclude
that increased regulat
o
ry scrutiny in the US caused
multinational co
m
pani
es to introduce new products abroad before their US launch. Si
m
ilarly,
Grabowski (1976) finds that
m

any more drugs were introduced first in Europe despite
m
ost
being discovered in the US or by US
-
based
fi
r
m
s. Dranove and Meltzer (1994) esti
m
ate that
the
average ti
m
e from a drug’s first worldwide patent
application
to
its
approv
a
l by the FDA
rose from
3.5 years in the 1950s to al
m
ost 6 years in the 1960s and 14 years in the
m
i
d 1980
(Dranove and Meltzer, 1994)

. They also found that, beginning in the 1950s,
m
ore i
m
portant
drugs
-
especially drugs that proved to
be successf
u
l in t
h
e
m
arketplace
-
ha
v
e been developed
and approved
m
ore rap
i
dly than less important drugs. They attrib
u
t
e t
h
is
d

i
ff
erenti
a
l
to actions
of drug co
m
p
a
nies as
m
uch as to regulatory priority setting
.
8
However, evidence from
the 1990s indicates t
h
at the US no longer lags and
m
ay lead the
m
ajor EU markets in number and ti
m
i
ng of
m
a
j
or new drug launches

(Danzon et al., 2005d)
.
Graph 5
about here
Given the coordination of standards and si
m
ilarity of
regulatory require
m
ents in the European
EM
A and the FDA, differences in launch ti
m
i
ng
between the US and the EU appear to be driven
less by differences in
m
arket approval require
m
ents and
m
ore by price and rei
m
bursement
r
e
g
u
lati

o
n in the EU, inclu
d
ing t
h
e
f
act th
a
t price s
p
illo
v
ers c
r
eate i
n
centi
v
es
f
or
m
anu
f
actur
e
rs
to i
n

te
n
ti
o
nally d
e
lay launch in l
o
w
-
price
m
arkets. One exception is Japan which has relatively
high launch prices and unusually long launch lags due to its unique
m
arket approval
require
m
ents, including country
-
specific trials.
2. Benefits of Safety a
n
d Efficacy Regulation
24
Co
m
pared to costs, t
h
ere are

m
any fewer studies of the benefits to consu
m
ers from
regulation. The only significant attempt to w
e
igh both the benefits and costs of th
e 1962
A
m
end
m
en
t
s is Peltz
m
an’s (1973) study. He attempts to
m
e
a
sure the benefit associated with the
new efficacy standar
d
s by co
m
paring the growth
of
m
arket shares of dr
u

gs launched prior to
1962 to those launched after 1962. The assu
m
pt
i
on was that new
products would capture
greater initial
m
arket s
h
are after 1962 if the A
m
end
m
ents inc
r
eased the average efficacy of new
drugs relative to drugs already on the
m
arket (Peltz
m
an 1973). He concludes that the benefits
were
m
i
n
i
mal and were far outweighed by t
he costs of regulation, which he esti

m
ates as
foregone consu
m
er surplus due to the reduced
flow of NCE
s
. These conclusions depend
critically on the
m
ethods for e
s
ti
m
ating costs and benefits, which have been questioned (for
exa
m
ple, Te
m
i
n (1979)). In
particular, benefits
m
ay be understated and costs
m
ay be overstated
by ascribing the decline in NCEs solely to the regulation. Never
t
heless, this is an i
m

portant
study beca
u
se it offers a theoretical and e
m
pirical fra
m
ewo
r
k for evaluating the net
b
enefits
of
the 1962 efficacy req
u
ire
m
ents.
Several recent studies have exa
m
ined the benefits and costs of
the priority
review
policy
introduced by PDUFA in 1992. Undoubtedly,
P
DUFA expedited the time to
m
arket for
“priority” drugs. Between 1993 and 2003 the medi

an ti
m
e to approval declined from 14.9 to
6.7
m
onths, while review ti
m
es for “stand
a
rd” products only decreased from
27.2 to 23.1
months
(Okie, 2005)
. Olson (2000) uses data
from 1990
-
92 and 1992
-
95 to exa
m
ine the
difference in the effects of fi
r
m
characteristics on review t
i
mes before and after the 1992
PDUFA. She finds that
f
i

rm
characteristics w
e
re not associated with review ti
m
es after
1992, suggesting that the regulatory
cha
n
ge helped eli
m
inate fi
r
m
adv
a
ntages that existed
prior to
1992
(Olson, 2000)
. PDUFA was also subsequently a
m
ended to reduce filing
fees for s
m
aller fir
m
s
.
25

Olson (2004a) also attempts to quantify the sa
f
ety i
m
pact of PDUFA and co
m
pare the
costs of faster approvals to the benefits.
She finds that post
-
launch
reports of adverse drug
reactions (ADRs) are
m
o
re likely
for drugs that the FDA rates as “priority”, after controlling for
drug utilization, disease
characteristics, patient character
i
stics, drug review ti
m
e and year
specific e
ffects
(Olson, 2004)
. Contr
o
lling for these factors, she
concludes

that
there
are 60
-
84%
m
ore serious ADRs, 45
-
72%
m
o
re ADRs that result in hospit
a
lization and 61
-
83% more ADRs
that res
u
lt in death due to PDUFA. In order
calculate benefits from
reduced delay, Olson uses
Lichtenberg’s esti
m
ate of how the increase in t
h
e stock of priority review d
r
ugs for particular
therapeutic categ
o

ries i
n
crea
s
ed life expecta
n
cy for persons
w
ith those conditions
(Lichtenberg,
2002)
. She finds that under the
m
ost conservative assu
m
pt
i
ons (bia
s
i
ng
a
gainst
s
a
f
et
y
) the
sa

fe
ty impact reduces net benefit by just 8% (
m
easured in expec
t
ed g
a
in
in li
f
e yea
r
s). A large
sh
ar
e of
the bene
f
it is attributed to t
h
e
f
aster launch of new drugs with pri
o
rity review status.
This figure increases to 11% if ADRs are
under
-
reported by 30%. Subsequent research has
found that ADRs gathered through the FDA pos

t
-
m
arketing
surveillance
m
echani
s
m
s
generally
underreport ADRs, but the degree
is not well established
(Bennett et al., 2005; Brewer and
Colditz, 1999)
. Whereas Ols
o
n finds significant negative
safety effects of acceleratedreview, the
General Accounting Of
fice found that drug withdra
w
als rates differed insignificantly between the
period before
and after the PDUFA;
however, this study did not control for other factors that
m
ay
h
a

ve influenced drug withdrawals rates
(
GAO, 2002b)
.
None of these studies e
s
ti
m
ate the savings to fir
m
s from
accelerating the
R
&
D process,
including lower capitalized cos
t
s of R&D and increased effective
patent
life. DiMasi
(2002)
esti
m
ates t
h
at a 25 p
e
rc
e
nt redu

c
tion in phase le
n
gth
f
or all
p
hases of
cli
n
ical t
r
ials
w
ould
reduce the average cost per NCE by $129M, or by
16.1% assu
m
i
ng a base cost of $802M
(DiMasi, 2002)
. Since this esti
m
ate is based on a
random
sample of 68
drugs that entered