Center for Advanced Management




Dr. Matthew Higgins (Georgia Institute of Technology)


  • Datum: 07.09.2012
    Zeit: 12:00 - 13:30
    Ort: Kaulbachstraße 45, Raum E03

Starving (or Fattening) the Golden Goose?: Generic Entry and the Incentives for Early-Stage Pharmaceutical Innovation

Over the last decade, generic penetration in the US pharmaceutical market has increased substantially, providing significant consumer surplus gains. But is generic entry reducing the flow of early stagepharmaceutical innovation and therefore future availability of new medicines? We explore this questionusing novel data sources and an empirical framework that models the flow of early-stage pharmaceuticalinnovations as a function of generic penetration, scientific opportunity and challenges, firm innovativecapability, and additional controls. Our estimates suggest a sizable, robust, negative relationship betweengeneric entry and early-stage pharmaceutical research activity. A 10% increase in generic penetrationdecreases early-stage innovations in the same market by 7.3%. This effect is weaker in top therapeuticmarkets where an increase in generic penetration by 10% decreases the flow of early-stage innovations by2.2%. However, in those top markets, a 10% increase in the stock of Paragraph IV challenges decreasesthe flow of early-stage innovation by 3.9%. Our estimated effects appear to vary across therapeuticclasses in sensible ways, reflecting the differing degrees of substitution between generics and brandeddrugs in treating different diseases. Finally, we are able to document that with increasing genericpenetration, firms in our sample are shifting their R&D activity to more biologic-based (large-molecule)products rather than chemicals-based (small-molecule) products as evidenced in their early-stagepipelines. We conclude by discussing the potential implications of our results for long-run consumerwelfare, policy, and innovation.

Regulation and welfare:
Evidence from paragraph iv generic entry in the pharmaceutical industry

With increasing frequency, generic drug manufacturers in the United States are able to challenge the monopoly status of patent-protected drugs even before their patents expire. The legal foundation forthese challenges is found in Paragraph IV of the Hatch-Waxman Act. If successful, these ParagraphIV challenges generally lead to large market share losses for incumbents and sharp declines in averagemarket prices. This paper estimates, for the first time, the welfare effects of accelerated generic entryvia these challenges. Using aggregate brand level sales data between 1997 and 2008 for hypertensiondrugs in the U.S. we estimate demand using a nested logit model in order to back out cumulated consumersurplus, which we find to be approximately $270 billion. We then undertake a counterfactual analysis,removing the stream of Paragraph IV facilitated generic products, finding a corresponding cumulatedconsumer surplus of $177 billion. This implies that gains flowing to consumers as a result of this regulatorymechanism amount to around $92 billion or about $133 per consumer in this market. These gainscome at the expense to producers who lose, approximately, $14 billion. This suggests that net short-termsocial gains stands at around $78 billion. We also demonstrate significant cross-molecular substitutionwithin the market and discuss the possible appropriation of consumer rents by the insurance industry.Policy and innovation implications are also discussed.