A Reexamination of the Costs of Medical R&D Regulation

Tomas Philipson, Sun Eric, Dana Goldman and Jena Anupam B. ()
Additional contact information
Sun Eric: Department of Anesthesia, Stanford University Hospitals, Stanford, CA, USA
Jena Anupam B.: Department of Health Care Policy, Harvard Medical School, 180 Longwood Avenue, Boston, MA 02115, USA

Forum for Health Economics & Policy, 2012, vol. 15, issue 1, 1-28

Abstract: Recent evidence suggests that the economic value of increased health has been enormous, with most of these gains being driven by medical R&D. The R&D process for pharmaceuticals is particularly expensive and time consuming, with well-known studies from the Tufts Center for the Study of Drug Development suggesting that developing a single successful drug costs around $1 billion and takes roughly 12 years. We argue that these estimates are incomplete because they do not incorporate the social costs imposed by the regulatory process, namely the costs to producers in terms of forgone profits and the costs to consumers in terms of delayed access to drugs. In this article, we develop a framework to estimate the social costs imposed by the regulatory process. Under this framework, delays in drug development are socially costly because of reduced consumer surplus (due to delayed access to beneficial therapies), reduced producer variable profits, and increased R&D expenditures. We apply this framework to the case of therapies aimed at treating AIDS, non-Hodgkin’s lymphoma, and breast cancer. In each case, we find that the effects of drug delays on consumer surplus and variable producer profits are far larger than the effects on R&D costs. These findings suggest that patients, not firms, would be the primary beneficiaries from any improvements in streamlining the drug development process.

Keywords: medical innovation; pharmaceutical regulation (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1515/fhep-2012-0020

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