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Effects of reimportation on new drug development

Effects of reimportation on new drug development. Frank R. Lichtenberg frank.lichtenberg@columbia.edu Columbia University and National Bureau of Economic Research. Hypothesis.

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Effects of reimportation on new drug development

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  1. Effects of reimportation on new drug development Frank R. Lichtenberg frank.lichtenberg@columbia.edu Columbia University and National Bureau of Economic Research

  2. Hypothesis Reimportation will reduce incentives to develop new drugs, which will slow the rate of increase of longevity and quality of life

  3. New drug development:causes and consequences Expected drug price Number of drugs developed Expected profits Expected market size Patient Outcomes (e.g., survival)

  4. Expected price and expected market size have similar effects on innovation incentives Profit = (P – c) Q – F P: price c: variable cost per unit (manu. & marketing cost) Q: quantity (market size) F: fixed cost Given c and F, Profit is reduced when either P or Q is reduced  evidence about the effect of market size on drug development can provide insight into the probable effect of reimportation (or price controls) on drug development

  5. Previous evidence • Scherer: link between profits and R&D investment in the pharmaceutical industry • Lichtenberg: link between market value of pharma firms (which reflects PDV of expected future profits) and R&D investment • Danzon, Wang, and Wang: drug launch decisions are affected by expected price and market size

  6. Illustration • Using data on 14 cancer sites, examine relationship between incidence and number of drugs to treat that type of cancer

  7. Source: Incidence data: http://seer.cancer.gov/csr/1975_2000/results_single/sect_01_table.04_2pgs.pdf Drug data: Micromedex DRUGDEX DRUG EVALUATIONS

  8. A 10% decrease in incidence is associated with a 10% decrease in the number of drugs

  9. Implications • A 10% decrease in incidence (market size) is associated with a 10% decrease in the number of drugs • This suggests that a 10% decrease in drug price would result in at least a 10% decrease in the number of drugs • Suppose that reimportation would reduce U.S. drug prices by 40% (Canadian drug prices may be about 40% lower than U.S. prices) • This would substantially reduce the number of drugs developed in the future, and, consequently, the longevity and health of Americans and others

  10. Conclusions • Reimportation will reduce incentives to develop new drugs, which will slow the rate of increase of longevity and quality of life

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