Working Paper: NBER ID: w14041
Authors: Patricia M. Danzon; Andrew J. Epstein
Abstract: This study examines the effect of price regulation and competition on launch timing and pricing of new drugs. Our data cover launch experience in 15 countries for drugs in 12 therapeutic classes that experienced significant innovation over the decade 1992-2003. We use prices of established products as a measure of the direct effect of a country's own regulatory system, and find that launch timing and prices of innovative drugs are influenced by prices of established products. Thus, if price regulation reduces drug prices, it contributes to launch delay in the home country. New drug launch hazards and launch prices in low-price countries are also affected by referencing by other, high-price countries, especially within the EU, as expected if manufacturers delay launch in low-price markets to avoid undermining higher prices in other countries. Thus, referencing policies adopted in high-price countries can impose welfare loss on low-price countries. Prices of new drugs are influenced mainly by prices of other drugs within the same subclass; however, dynamic competition from new subclasses undermines new drug launch in older subclasses. Association with a local firm accelerates launch only in certain regulated markets. These findings have implications for US proposals to constrain pharmaceutical prices in the US through external referencing and drug importation.
Keywords: price regulation; drug launch; pricing; interdependent markets; pharmaceutical industry
JEL Codes: I11; I18; K2; L5; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price regulation (L51) | launch delays (L93) |
| older, cheaper drugs (L65) | new drug prices (P22) |
| regulatory referencing by high-price EU countries (F55) | launch delays in low-price countries (F69) |
| local corporations (L39) | launch timing (Y60) |
| local corporations (L39) | launch prices (P22) |
| competitor prices (D41) | launch hazard (Y60) |
| lagged prices of established products (L11) | expected prices of new drugs (P22) |