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Endogenous innovations in the pharmaceutical industry

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Abstract

This paper addresses the creation of new products in the US pharmaceutical sector, during the second half of the 20th century. We indicate that the continuous increases in population, and thus in the market size of this sector, play a fundamental role in explaining the large creation of new drugs during that period. We also argue that population and market size can be endogenously determined through the impact of drugs over the mortality rate. Hence, these two effects reinforce each other, producing decrements in the mortality rate and increments in the stock of drugs over time. We obtained the set of new molecular entities approved by the FDA during the second half of the 20th century and we decomposed the data in a panel of 15 therapeutic categories over time. Using this data, we tested our hypotheses using different econometric methods. The results support the hypothesis and are consistent across methods.

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Notes

  1. Source: the Centers for Medicare and Medicaid Services, http://www.hcfa.gov/stats/nhe-oact/.

  2. The data on NME reported in Peltzman (1973) for the period 1950–1970 contains a few more NME compared to the data in this paper for the same period. However, the differences are not large and they seem to depend on discontinuity of the use of drugs over time.

  3. In fact, the form of the coefficient polynomials could be of higher order than the one considered on the text. However, in our specifications, we tested other possible specifications and we chose the linear specification here considered.

  4. The mean flow of drugs and the mean stock of drugs in our sample are 1.33 and 24.06, respectively.

  5. The mean regulatory stringency is approx. 23 months.

  6. Where we evaluate again at the mean flow of drugs.

  7. We include ten lags of market size and government research grants. We proved other specifications, but there was no significative improvement on the estimates.

  8. I thank a referee for pointing this out.

  9. This value is calculated as an average across therapeutic categories.

  10. Source: US Bureau of the Census (2001), US Statistical abstract 2001.

  11. This 65% is the average weight across therapeutic categories of drugs of individuals 65 and older in 1997.

  12. We use the mortality rate of individuals 65 and older because individuals in this group consume drugs more intensively.

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Acknowledgements

I received helpful comments from Edgardo Barandarian, Gary S. Becker, Fabian Lange, Kevin Murphy, Tomas Philipson, Annette Vissing-Jorgensen, an anonymous referee, the editor Uwe Cantner and participants at seminars at The University of Chicago and Pontificia Universidad Católica de Chile. The usual disclaimer applies.

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  1. Department of Economics, Pontificia Universidad Católica de Chile, Casilla 76, Correo 17, Santiago, Chile

    Rodrigo A. Cerda

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Cerda, R.A. Endogenous innovations in the pharmaceutical industry. J Evol Econ 17, 473–515 (2007). https://doi.org/10.1007/s00191-007-0059-3

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