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 “ever-greening”, and reduce consumer surplus. Quantifying this trade-off is vital in determining the optimal patent policy and regulatory treatment of incremental innovation. To shed light on this problem, I focus on incremental innovations in selective serotonin reuptake inhibitor (SSRI) anti-depressant drugs. Based on individual-level prescription data, I conduct a structural estimation and found that the consumer surplus losses due to market exclusivity extensions far exceed the consumer surplus benefits from incremental innovation. Without considering innovation costs, the benefits to innovators from incremental innovations ranged from $660 million to $2.16 billion even in the absence of market exclusivity. Evidence indicates that the market exclusivity granted for incremental innovations in SSRIs resulted in a loss of social welfare of between $4.78 billion and $11.68 billion over the period 1996–2011. The result suggests that policy makers may need to revisit the provisions for granting market exclusivity to incremental innovations.