NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

New Drugs and Increased Longevity

"The result of the ODA has been the development since 1983 of more than 200 drugs and biological products to treat rare diseases. In the decade prior to 1983, fewer than ten such products came to market."

"About 40 percent of the two years added to the average life span between 1986 and 2000 can be traced to the introduction of new drugs."

It costs a pharmaceutical firm around $800 million to develop a new drug. In effect, that amount is the bill for the first pill produced and sold. But if the market for the drug is large enough, then the cost of research and development will be spread over perhaps millions of users and eventually will make a profit for the company.

Therefore, as drug consumers, individuals are better off if their ailment -- say, hypertension or elevated cholesterol -- is common. That's because the drug companies have a stronger financial incentive to develop a drug to treat that disease than to do research on a drug for some rare condition that will bring in relatively few new customers. In other words, those with common diseases are more likely to have multiple potential remedies, according to NBER Research Associates Frank Lichtenberg and Joel Waldfogel.

In Does Misery Love Company? Evidence from Pharmaceutical Markets Before and After the Orphan Drug Act (NBER Working Paper 9750), the economists explain that the Orphan Drug Act (ODA), passed by Congress in 1983, gave pharmaceutical companies new incentives to develop drugs for diseases afflicting fewer than 200,000 Americans. By reducing the cost of development and protecting the market from competition, the Act makes these new drugs potentially more valuable.

First, the ODA gave the maker of a new drug seven years of exclusive access to the market -- that is, to sell the drug to those suffering from a specific rare disease -- following approval of the drug by the Food and Drug Administration (FDA). The FDA cannot approve another drug for the same condition without the consent of the first pharmaceutical concern. This "exclusivity" is ranked as "the most sought incentive."

Second, drug makers qualify for a tax credit for clinical research expenses of up to 50 percent of clinical testing expense. Third, the FDA provides grant support for an investigation of rare disease treatments. These last two provisions reduce the large fixed costs to the company of developing a new drug.

The result of the ODA has been the development since 1983 of more than 200 drugs and biological products to treat rare diseases. In the decade prior to 1983, fewer than ten such products came to market. By 1998, the number of orphan drugs had increased five fold, while the number of non-orphan drugs merely doubled.

Moreover, over the past 20 years the use of orphan drugs increased more than the use of non-orphan drugs, according to a survey of physicians. And, the longevity of those with relatively rare diseases lengthened by about seven years, versus the two years of life added to those with common maladies. However, those with uncommon diseases still die younger on average than people with common death-causing diseases.

Most observers applaud the ODA for its effect of reducing the dependence of those with rare conditions on market size. The authors note that at least one incentive, boosting the extent of the market, does encourage extra investment in new drugs. So, a government-mandated price reduction of say 25 percent in the price of a drug might have as discouraging an effect on investment as a 25 percent reduction in the prevalence of a disease, and thus in the size of the market.

In The Impact of New Drug Launches on Longevity: Evidence from Longitudinal, Disease-Level Data from 52 Countries, 1982-2001 (NBER Working Paper No. 9754), Lichtenberg outlines his finding that new drug launches have added greatly to longevity in the last two decades in these nations, both developed and developing. Over the past 50 years, life expectancy around the world has increased sizably, from an average of 46.5 years for a child born in 1950-5 to an average of 65 years for a child born in 1995-2000. Also, the gap in life expectancy between rich and poor countries has been halved, from 25 to 12 years. Sorting out the causes for longevity improvements, however, has proved difficult. Many health researchers have primarily credited more education, higher income, better lifestyle, and a safer environment for increased longevity. In this paper, Lichtenberg calculates that about 40 percent of the two years added to the average life span between 1986 and 2000 can be traced to the introduction of new drugs. N ew drug launches account for a substantial fraction of medical innovations. On average, the introduction of new drugs lengthened the life of people in these 52 countries by just short of three weeks each year.

Lichtenberg uses data from the IMS Health Drug Launches database and the World Health Organization Mortality database. He ties together the number of new drugs launched since 1982 with the number of those surviving to certain ages, such as 55 and 65 years, for each major disease category, country, and year. An increase in the stock of new chemical entities - drugs whose key ingredient has not previously been available in the country to treat disease - boosts the survival rate to age 65. When the stock of drugs is measured with a lag of three to six years, the effect on longevity is more than twice as large as in the first three years. This suggests that it may take several years for a new drug to be diffused to more consumers and have its full impact on survival rates. Using his results, Lichtenberg calculates an upper-bound cost per life-year gained from the launch of new drugs of $4,500. That sum is far lower than most estimates by economists of the value of a life-year. So Lichtenberg suggests that spending on new drugs may be a cost-effective way to increase longevity.

-- David R. Francis


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