Pharmaceuticals, Incremental Innovation and Market Exclusivity

Abstract

This paper assesses the welfare gains from incremental innovation in pharmaceuticals. Such innovation can yield consumer gains through improved quality, but the additional market exclusivity granted to innovators may also delay generic entry, a practice referred to as "evergreening." Quantifying this tradeoff is vital in determining the optimal patent policy and regulatory treatment of incremental innovation. Using patient-level panel data on consumption of the antidepressant class of pharmaceuticals, I estimate individual preferences for new treatments that represent incremental improvements over existing products using a random coefficient model of demand. I combine these results with a supply-side model to estimate welfare under various scenarios, such as changes to market exclusivity policies. Our results show that considering the overall incremental innovations and market exclusivities granting to the SSRI antidepressant market, the benefits overwhelmed the costs, while for the 6-month market exclusivities granted to pediatric studies, the benefits from pediatric use are undermined by the consumer loss from market exclusivities.