Comparing approval procedures for new drugs

Abstract

AbstractWe analyse how drug approval procedures influence the incentives of pharmaceutical firms to commercialise new drugs in the presence of international reference pricing. Since 1995, the European Medicines Agency (EMA) coordinates a centralised approval procedure for specific new drugs in the EU. With such a centralised procedure, the EMA grants simultaneous drug approvals for all EU countries. Alongside, non‐centralised procedures coexist for approvals of other new drugs and approvals can be sequential. We focus on the effects of the exogenous timing of drug approvals, either simultaneous or sequential, and we compare the effects of centralised versus non‐centralised procedures on the firms’ incentives to commercialise new drugs in different markets. In a context of international reference pricing, we show that a centralised procedure limits the number of countries where the firm commercialises new drugs, compared to a non‐centralised procedure. We also show in a simplified framework that countries are better off with non‐centralised procedures, while pharmaceutical firms in theory prefer the drug to be approved everywhere as soon as possible, as in an early centralised procedure. This is in line with the stated objective of the EMA to generate savings for the pharmaceutical firms.