Early Entrant Protection in Approval Regulation: Theory and Evidence from FDA Drug Review

Abstract

Early entrant protection in approval regulation exists when the first incumbents in an exclusive market niche receive more favorable regulatory treatment than later entrants. We show theoretically and empirically that this pattern can prevail for two reasons: regulatory capture and consumer co-optation. We consider a decision-theoretic model of dynamic product approval by an uncertain regulator. The model predicts early entrant protection even when later entrants offer quality improvements over market incumbents. We then test the model using duration analyses of NDA approval times for 1,629 new molecular entities submitted to the U.S. Food and Drug Administration (FDA) from 1950 to 2000. FDA approval times are shown to be increasing in order of market entry for the entire period studied, and across numerous sub-samples. A standard-deviation rise in the log of order of entry is associated with a 3.5-month increase in expected FDA approval time. The entryorder gradient appears to be heavily influenced by disease-level variables but not by firmlevel effects, supporting a consumer cooptation explanation and disfavoring capture and producer rent-seeking accounts. In addition, we present modest evidence that the entryorder gradient is conditioned upon factors affecting the pipeline value of the regulatory problem, suggesting that FDA regulatory decisions may anticipate the pipeline of future drugs for any given disease.