Friday, August 24, 2012

31 August 2012: Killing the Golden Goose or Just Chasing it Around the Farmyard?: Rising Generic Entry and the Incentives for Early-Stage Pharmaceutical Innovation

Chirantan Chatterjee
Indian Institute of Management, Bangalore

Over the last decade, generic penetration in the US pharmaceutical
market has increased substantially, providing significant consumer
surplus gains. But is generic entry reducing the flow of early stage
pharmaceutical innovation and therefore future availability of new
medicines? 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 and challenges, firm innovative capability, and additional
controls. Our estimates suggest a sizable, robust, negative
relationship between generic entry and early-stage pharmaceutical
research activity. A 10% increase in generic penetration decreases
early-stage innovations in the same market by 7.3%. This effect is
weaker in top therapeutic markets where an increase in generic
penetration by 10% decreases the flow of early-stage innovations by
2.2%. However, in those top markets, a 10% increase in the stock of
Paragraph IV challenges decreases the flow of early-stage innovation
by 3.9%. 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 (largemolecule) products rather than
chemicals-based (small-molecule) products as evidenced in their
early-stage pipelines. We conclude by discussing the potential
implications of our results for long-run consumer welfare, policy, and

Date: August 31, 2012
Time: 11:30 A.M.

Seminar Room 2
Indian Statistical Institute Delhi Centre,
7, S. J. S. Sansanwal Marg,
New Delhi-110016 (INDIA)


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