Starving (or Fattening) the Golden Goose?: Generic Entry and the Incentives for Early-Stage Pharmaceutical Innovation
Over the last decade, generic penetration in the U.S. pharmaceutical market has increased substantially, providing significant gains in consumer surplus. What impact has this rise in generic penetration had on the rate and direction of early stage pharmaceutical innovation? We explore this question using novel data sources and an empirical framework that models the flow of early-stage pharmaceutical innovations as a function of generic penetration, scientific opportunity, firm innovative capability, and additional controls. While the aggregate level of early-stage drug development activity has increased, our estimates suggest a sizable, robust, negative relationship between generic penetration and early-stage pharmaceutical research activity within therapeutic markets. A 10% increase in generic penetration is associated with a 7.9% decline in all early-stage innovations in the same therapeutic market. When we restrict our sample to first-in-class pharmaceutical innovations, we find that a 10% increase in generic penetration is associated with a 4.6% decline in early-stage innovations in the same market. Our estimated effects appear to vary across therapeutic classes in sensible ways, reflecting the differing degrees of substitution between generics and branded drugs in treating different diseases. Finally, we are able to document that with increasing generic penetration, firms in our sample are shifting their R&D activity to more biologic-based (large-molecule) products rather than chemical-based (small-molecule) products. We conclude by discussing the potential implications of our results for long-run welfare, policy, and innovation.
We thank Tamer Abdelgawad, Iain Cockburn, Darren Filson, Carolin Haeussler, Bart Hamilton, Dietmar Harhoff, Sherry Knowles, Margaret Kyle, Jeff Macher, Joseph Mahoney, Alex Oettl, Ivan Png, Jerry Thursby, and Brian Wright as well as seminar participants at the University of Illinois, University of Passau, University of California Berkeley, Carnegie Mellon University, Ludwig Maxmilians University Munich, National University of Singapore, India Statistical Institute (Delhi), Georgia Institute of Technology and conference participants at the USPTO Conference on Patents, Entrepreneurship and Innovation (Washington, DC) and the Asia Pacific Innovation Conference (APIC), for valuable comments and discussions. Programming and research assistance by Jeremy Watson, Winston Yang and Suvojyoty Sahais is gratefully acknowledged. We also thank IMS Health Incorporated for their generous support and access to their data. The statements, findings, conclusions, views, and opinions contained and expressed herein are not necessarily those of IMS Health Incorporated or any of its affiliated or subsidiary entities. The statements, findings, conclusions, views, and opinions contained and expressed in this article are based in part on data obtained under license from the following IMS Health Incorporated or affiliate information service(s): IMS Midas™, IMS Lifecycle™, IMS National Disease and Therapeutic Index™, IMS National Prescription Audit™, IMS Health Incorporated or its affiliates. Higgins acknowledges funding from The Imlay Professorship. Chatterjee acknowledges IIM Bangalore for supporting his extended research visit to Georgia Tech. Higgins and Branstetter acknowledge funding from NSF SCISIP Grants #1064122 and #1360057. Authors are listed alphabetically and the usual disclaimers apply. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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