Starving (or Fattening) the Golden Goose: Generic entry and the incentives for early-stage pharmaceutical innovation

Description

Over the past decade, generic penetration in the U.S. pharmaceutical market has increased significantly, generating substantial gains in consumer surplus. This paper examines the impact of rising generic penetration on the rate and direction of early-stage pharmaceutical innovation. Using novel data and an empirical framework that models early-stage innovation as a function of generic penetration, scientific opportunity, firm capabilities and other controls, the study finds that while overall drug development activity has increased, there is a strong and robust negative relationship between generic penetration and early-stage research within therapeutic markets. Specifically, a 10% increase in generic penetration is associated with a 7.9% decline in total early-stage innovations and a 4.6% decline in first-in-class innovations within the same market. The magnitude of this effect varies across therapeutic classes, reflecting differences in substitutability between generic and branded drugs. Additionally, firms appear to be shifting their R&D focus toward biologic (large-molecule) products rather than chemical (small-molecule) drugs in response to increasing generic competition. The study concludes by discussing the implications of these findings for long-term welfare, pharmaceutical policy and innovation strategies.

Publication Date

1-1-2015

Publisher

National Bureau of Economic Research (NBER)

Keywords

Pharmaceutical innovation, Pharmaceutical industry, Pharmaceutical policy

Source Link URL

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2502714

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