How the rise of generic drugs affects pharmaceutical innovation

For many years, researchers and industry observers have conjectured that rising generic penetration might have an impact on the rate and direction of pharmaceutical innovation. Using a new combination of data sets, we are able to estimate the effects of rising generic penetration on early-stage pharmaceutical innovation. While the overall level of early-stage drug development has continued to increase, generics have had a statistically and economically significant impact on where that development activity is concentrated and how it is done. In the full sample, we find that, as our baseline measure of generic penetration increases by 10% within a therapeutic market, we observe a decrease of 7.9% in early-stage innovation in that market. This implies that drug development activity is moving out of markets where generic competition is increasing and into domains where it is relatively less intense.

That’s from the conclusion of a new NBER working paper by Lee Branstetter, Chirantan Chatterjee, Matthew Higgins. Because I am not expert in this area, I have almost nothing of value to add, and, in part for that reason, I did not read the paper in full. However, what I did read was very well written and interesting. It’s worth your time if you’re seeking an introduction to pharmaceutical development and patenting, for example.

The conclusion offers some speculation about welfare effects. They’re good and nuanced, but somewhat limited, as they are focused on the effects of shifts in pharmaceutical innovation only. They did not include the fact that cheaper generics are, by themselves, a welfare gain to consumers though, possibly, a welfare loss to producers. Do these offset? At some degree of substitution of cheaper generics for less (or different) innovation we ought to be indifferent, if the latter is a net welfare loss and the former is a net welfare gain. Maybe some losses or changes in innovation are efficient for this reason. I don’t know.

In any case, maybe I’m not thinking about this correctly. But the fact that it entered my thoughts at all suggests that the authors might want to address it in a future draft. Or maybe they did so somewhere in the middle of the paper and I missed it. As I said, I did not read the whole thing.


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