Dynamic R&D and the Timing of Policy Intervention in the Pharmaceutical Industry

This study structurally estimates a dynamic model of drug development process in pharmaceutical industry, and uses counterfactual experiments to evaluate e¤ects of various policy interventions aimed at increasing the introduction rate of new drugs within a speci…c therapeutic area. Advanced computational methods –such as continuous time and polynomial approximations –overcome the modeling di¢ culties that limited previous studies to one or two stages of development process, and allow the model to describe the progress of drugs through all three phases of clinical trials and FDA approval. The primary result is that most policies a¤ecting earlier stages of drug development are less e¤ective than those aimed at later stages. The reason for this …nding is a strategic response to policy-induced changes in the number of drugs under development and on the market. [email protected] The author would like to thank Aviv Nevo, Mark Satterthwaite, Ulrich Doraszelski, Scott Stern, Paul Grieco as well as the participants of Northwestern IO seminars and IIOC conference for invaluable advice and discussion. The …nancial support by General Motors Center for Strategy in Management at Northwestern’s Kellogg School of Management is gratefully acknowledged. Author accepts the responsibility for all the errors.