The Economics of Pharmaceutical Development: Costs, Risks, and Incentives
Matheny, Jason Gaverick
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This dissertation addresses three open questions related to the economics of pharmaceutical development. First, how much does it cost to conduct a clinical trial? Second, what effect has the model policy for incentivizing pharmaceutical development, the Orphan Drug Act, had on pharmaceutical availability? And third, how can the costs and risks of pharmaceutical development be used to model an optimal development portfolio? We estimate clinical trial costs by decomposing firms’ publicly reported research and development expenses against clinical trial data. We obtain estimates that are broadly consistent with older estimates based on proprietary data. We also estimate the costs of clinical trial subjects. To our knowledge, such costs have not been estimated previously. We find that the costs of Phase I and Phase II clinical trial subjects are very high, supporting the adoption of adaptive trial designs to decrease trial length and size. We measure the effects of the Orphan Drug Act by estimating the size of a regression discontinuity in drug prescriptions as a function of disease prevalence. We find no significant discontinuity around the prevalence threshold that qualifies products to receive “orphan incentives” under the Act. We offer a novel theoretical explanation for the lack of an observed discontinuity: the Act has a perverse effect on drug availability due to price effects of the orphan incentives. Last, we estimate the costs of the U.S. Public Health Emergency Medical Countermeasure Enterprise (PHEMCE), based on a survey of product pipelines, and design an optimal portfolio for achieving fixed success probabilities. Our results support the President’s budget request for PHEMCE but suggest that to achieve reasonable success probabilities, PHEMCE will need to prioritize some products over others, or reduce costs by funding smaller trials. We formally model the tradeoff of cost for safety, and describe some policy implications of the tradeoff.