Dynamic R&D and the Effectiveness 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 effects of various policy interventions aimed at increasing the introduction rate of new drugs within a specifi…c therapeutic area. Advanced computational methods --such as continuous time and polynomial approximations --overcome the modeling difficulties 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 affecting earlier stages of drug development are less effective than those aimed at later stages. The reason for this …finding is a strategic response to policy-induced changes in the number of drugs under development and on the market.