IMPORTATION AND INNOVATION

Abstract

Importation of drugs into the US may soon become legal. Since prices of drugs are lower in most other countries than they are in the US, importation would result in a decline in US drug prices. The purpose of this paper is to assess the consequences of importation for new drug development. First, the author presents a simple theoretical model of drug development which suggests that the elasticity of innovation with respect to the expected price of drugs should be at least as great as the elasticity of innovation with respect to expected market size (disease incidence). Then, the cross-sectional relationship between pharmaceutical innovation and market size among a set of diseases (different types of cancer) exhibiting substantial exogenous variation in expected market size is examined. Two different measures of pharmaceutical innovation are analysed: the number of distinct chemotherapy regimens for treating a cancer site and the number of articles published in scientific journals pertaining to drug therapy for that cancer site. Both analyses indicate that the amount of pharmaceutical innovation increases with disease incidence. The elasticity of the number of chemotherapy regimens with respect to the number of cases is 0.53. The elasticity of MEDLINE drug cites with respect to cancer incidence throughout the world is 0.60. In the long run, a 10% decline in drug prices would therefore be likely to cause at least a 5–6% decline in pharmaceutical innovation. Evidence suggests that pharmaceutical industry employment would also decline (by at least 3.5–4%) in response to an exogenous 10% decline in drug prices.

Keywords:

• Pharmaceuticals
• Importation
• Innovation
• Cancer
• Chemotherapy
• Employment

Notes

¹Abbott and Vernon (2005) review the literature on the linkages between pharmaceutical price regulation, profits, cash flows, and investment in R&D.

²Danzon et al. (2005) and Kyle (2005) examine the effect of prices, or price controls, on the probability and timing of launch of existing drugs in different countries. Danzon et al. (2005) present evidence that countries with lower prices or smaller market size experience longer delays in access to new drugs. Kyle (2005) found that companies delay launch into price-controlled markets, and are less likely to introduce their products in additional markets after entering a country with low prices.

³ http://csdd.tufts.edu/NewsEvents/RecentNews.asp?newsid=29

⁴Product definitions and designation as randed or generic are determined by Multum, Inc.

⁵A choice-modeling experiment performed by Merino-Castelló (2003, p. 31) also provided evidence of low price elasticity of demand for pharmaceuticals.

⁶Department of Health & Human Services (2000), ‘Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices,’ April.

⁷The estimated elasticity is based on Goldman et al. 's\/ (2002) calculations, using the demand response shown in Table IV of Lillard et al. (1999) for elderly with Medicare only. Using information from the Medicare Current Beneficiary Survey (MCBS), they assumed that the average coinsurance rate for these elderly is 100% without insurance and 45% with insurance. The 45% average coinsurance rate is based on our calculation of observed coinsurance rates (out-of-pocket expenditures divided by total expenditures) for people with private supplemental drug coverage in the 1995 MCBS.

⁸This measure differs from ‘prevalence’, which is the cumulative number of people currently affected.

⁹ http://www.wrongdiagnosis.com/lists/incid.htm

¹⁰Some of the estimates are based on household data (i.e., on self-reported medical conditions), whereas others are based on surveys of medical providers.

¹¹See http://www.bccancer.bc.ca/PPI/CancerTreatment/default.htm. There are also alternative cancer therapies; see http://www.bccancer.bc.ca/HPI/UnconventionalTherapies/default.htm.

¹²According to IMS Health, cancer drugs (cytostatics) account for about 5% of global drug expenditure. IMS Retail Drug Monitor, January 2005, http://open.imshealth.com/download/jan2005.pdf.

¹³Other categories include ‘local regimens’ (regimens not widely used; used by fewer than four regional cancer centers) and ‘emergent regimens’ (regimens which have not yet been accepted as standard regimens).

¹⁴See http://seer.cancer.gov/csr/1975{_}2002/results{_}merged/sect{_}01{_}overview.pdf.

¹⁵The elasticity is virtually identical when we use the log number of cases in the US in 2000 instead of the log number of cases in Canada in 2002. US and Canadian incidence across cancer sites is extremely highly correlated.

¹⁶The great majority of journals are selected for MEDLINE based on the recommendation of the Literature Selection Technical Review Committee, an NIH-chartered advisory committee of external experts analogous to the committees that review NIH grant applications. The majority of the publications covered in MEDLINE are scholarly journals; a small number of newspapers, magazines, and newsletters considered useful to particular segments of NLM's broad user community are also included. Citations for MEDLINE are created by the NLM, international partners, and collaborating organizations.

¹⁷Novelty is also a necessary condition for patenting. A searchable US patents database exists, and some investigators have used patent counts and citations as innovation indicators. However, the US patent classification system is much cruder than the MeSH classification system with respect to medical innovation and is inadequate for our purposes.

¹⁸Prices of other (non-drug) medical treatments (e.g., hospital care) are also undoubtedly lower in the developing region than they are in the developed region. But the ratio of the expected drug price to the price of other medical treatments may be lower in the developing region (due to the low marginal cost of drugs). This could explain why (β_DM−β_DL) is almost three times as large as (β_NM−β_NL).

¹⁹This measure was constructed from the Multum Lexicon database (http://www.multum.com/Lexicon.htm).

Additional information

Notes on contributors

Frank R. Lichtenberg

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