## Lawconfpaper2002-10-12.pdf

The Dual Effects of Intellectual Property Regulations: Within- and Between-Patent Competition in The US Pharmaceuticals Industry1 1 We are thankful for comments on the paper by numerous seminar audiences and in particular by Stephen Propper and Ernie Berndt. Both authors are thankful for financial support from Pfizer Inc, Astra -Zeneca, and Merck & Co., and Philipson from The George Stigler center for The Study of The Economy and The State. Abstract
Ingredient
age for ages greater than 18. For the 1689 products with first FDA approval dates prior to 1982 (age > 18), the proportion of products indicating generic entry is 57%. 13 http://www.fda.gov/cder/ndc/index.htm Using this information, we computed the number of drugs in a given drug’s class representing the between-patent comp etition (N), by age of the drug defined as before by the calendar year less FDA drug approval year. We then estimated an equation similar to eq. (1), substituting (ln Nit) for (ln nit). Estimates of the coefficients of the normalized age dummies (δt - δ0) are reported in Table 1 and plotted in Figure 3.14 In the first 3 years, the mean number of applicants increases by just 1.2%, while the mean number of drugs in the class increases by 12.6%. In the next 3 years, the mean number of applicants accelerates significantly, and the mean number of drugs in the class decelerates somewhat; by year 6, the mean number of applicants is 9.5% larger than it was at birth, while the mean number of drugs in the class is 20.9% larger than it was at birth. The increase in the number of drugs in the class remains higher than the increase in the number of applicants for the drug These calculations indicate that in the first 13 years of a drug’s life, and especially in the earlier years, the number of between patent competitors in the drug’s class typically increases more, in percentage terms, than the number of within patent competitors approved to market the same drug. Of course, the fact that the rate of between- patent entry is higher does not necessarily mean that between-patent entry has a larger impact on innovator sales than within-patent entry. To determine the relative magnitudes of the impacts of between-and within-patent entry on innovator sales, we need to estimate a model of innovator sales as a function of the two kinds of entry. C. Estimating the effects of entry on innovator drug sales growth In this section we attempt to estimate the effects of both forms of patent competition on the sales of a new 14 The ln(n) regression is based on data for 538 ingredients; the standard errors of the δt estimates range between .056 and .060. The ln(N) regression is based on data for 725 ingredients (sample size 7713); the standard errors of the δt estimates range between .014 and .016. The mean value of N at age 0 is 24.9. 15 The average rate of growth of N from year 0 to year 16 is 2.7% (=42.5% / 16). This estimate is about 50% higher than the growth rate of the aggregate stock of ingredients between 1986 and 2000. According to Multum Lexicon 9/17/00 edition, there were 1830 active ingredients. During the period January 1986-August 2000, the FDA approved a total of 417 new molecular entities. This implies that there were 1413 (= 1830 – 417) active ingredients at the beginning of 1986, and that the average annual growth rate of the stock during the period was 1.72%. 1. The Data

[1] Aghion, P., and Peter Howitt (1992), “A Model of Growth Through Creative Destruction”, [2] Berndt, Ernst R., Iain M. Cockburn, and Zvi Griliches, (1996), “Pharmaceutical Innovations and Market Dynamics: Tracking Effects on Price Indexes for Antidepressant Drugs” Brookings Papers on Economic Activity. Microeconomics, Vol. 1996, pp. 133-188. [3] Berndt, Ernst R., Linda Bui, David R. Reiley, Glen L. Urban, (1995), “Information, Marketing, and Pricing in the U.S. Antiulcer Drug Market “ The American Economic Review 85(2), Papers [4] Green, Jerry, and Suzanne Scotchmer, (1995), ”On The Division of Profits In Sequential Innovation”, RAND Journal of Economic, 26, 20-33.
[5] Gallini, Nancy, (1992), “Patent Policy and Costly Imitation”, RAND Journal of Economics, 23, p.
[6] Gilbert, Richard and Carl Shapiro, (1990), “Optimal Patent Length and Breadth”, RAND Journal of Economics, 21, p. 106-112.
[7] Grabowski, Henry, and John Vernon (1996), “Longer Patents for Increased Generic Competition in the US: The Waxman-Hatch Act After One Decade,” PharmacoEconomics 10, Suppl. 2, pp. [8] Hall, B., J. Van Reenen, (1999), “How effective are fiscal incentives for R&D? A Review of The Evidence”, NBER Working Paper No 7098, Cambridge, MA. [9] Horstmann, Ignatius, Glenn MacDonald and Alan Slivinski (1993), “Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent”, Journal of Political Economy [10] Judd, Kenneth, (1985), “On the Performance of Patents”, Econometrica, 53, p.567-585.
[11] Klemperer, Paul, (1990), “How Broad Should the Scope of Patent Protection Be?”, RAND Journal of Economics, 21, p. 113-130.
[12] Lu, J.Z, and W.S. Comanor, (1998), ”Strategic Pricing of New Pharmaceuticals”, Review of Economics and Statistics , 80(1), 108-118. [13] Nordhaus, William, (1969), Invention, Growth, and Welfare, Cambridge: MIT Press. [14] Peltzman, Sam, (1973), “An Evaluation of Consumer Protection Legislation: The 1962 Drug Amendments” The Journal of Political Economy, Vol. 81, No. 5., pp. 1049-1091. [15] Pakes, Ariel, (1985), “Patents as Options: Some Estimates of The Value of Holding European Patent Stocks”, Econometrica, v 54, 755-84. [16] Scotchmer, Suzanne, (1996), “Protection Early Innovators: Should Second-Generation Products be Patentable?,” RAND Journal of Economics, 27, p. 322-331.
[17] Wright, Brian, (1983), “The Economics of Invention Incentives: Patents, Prizes, and Research Contracts”, American Economic Review 73.
Typical extent of within- and between-patent competition, by age of the drug,
1982-2001
Within-patent-competition
Between-patent competition 10.0
Between-patent competition: average number of drugs within a drug’s class Within-patent competition: average number of producers of a drug Age of drug (years)
Proportion of Products with Therapeutic Equivalence Code, by age, 1982-2001 Age of product (years)
Number of drugs approved in class, and
number of applicants approved to market drug, by drug age, 1982-2001
No. of applicants approved to market drug (log change since FDA approval of drug) No. of drugs approved in class (log change since FDA approval of drug) Age of drug (years)
Number of New Molecular Entities Approved by the FDA, 1986-1999
Source: FDA Center for Drug Evaluation and Research Estimated reduction in innovator sales growth due to within- and between-patent entry
Age of drug (years)
Estimated percentage reductions in PDV of innovator sales resulting from
1-year, 3-year, and 5-year acceleration of patent expiration
Between-patent entry estimate and interest rate
Number of drugs approved in class, and number of applicants approved to market drug (log change (log change since FDA approval Summary Statistics from Medicaid State Drug Utilization Files Number and average price of Medicaid and non-Medicaid prescriptions in 1996 Medicaid Rx's refer to Rx's in which there was any payment by Medicaid.
The average price is the average amount paid by all payers.
Regressor:ln N (between-patent competitors) No. of observations 388,527Quarterly data, 1996:2 - 1999:4 National Drug Code Directory Drug Classes Drug Class Code
Drug Class Name
DIAGNOSTICS, RADIOPAQUE & NONRADIOACTIVE DRUGS USED IN DISORDERS OF GROWTH HORMONE SECRETION OPHTHALMICS-DECONGESTANTS/ANTIALLERGY AGENTS MOUTH PAIN, COLD SORE, CANKER SORE PRODUCTS

Source: http://research.chicagobooth.edu/economy/research/articles/178.pdf

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