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Does adoption of pharmaceutical innovation respond to changes in the regulatory environment?

Varol, Nebibe, Costa-Font, Joan ORCID: 0000-0001-7174-7919 and McGuire, Alistair (2012) Does adoption of pharmaceutical innovation respond to changes in the regulatory environment? Applied Economic Perspectives and Policy, 34 (3). pp. 531-553. ISSN 2040-5790

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Identification Number: 10.1093/aepp/pps027


This paper investigates how regulation impinged on the launch strategies of international pharmaceutical corporations for new molecules across the main OECD markets between 1960–2008. Comprehensive IMS data is used to analyze the international diffusion of 845 molecules from 14 different anatomic therapeutic categories using non-parametric survival analysis. The paper focuses on two main regulatory changes that substantially reshaped the barriers to entry: the U.S. Hatch-Waxman Act in 1984, and the establishment of the European Medicines Agency (EMA) in 1995. We find that legal transaction costs have a significant impact on timing of launch. Stringent market authorization requirements for new pharmaceutical products in the United States after 1962 resulted in a significant U.S. drug lag in the introduction of pharmaceutical innovation vis-à-vis Europe from 1960–1984. However, financial incentives stemming from the 1984 Hatch-Waxman Act proved effective in closing this lag. A more streamlined EMA regulatory approval process has reduced barriers to entry in Europe, thereby enabling quicker diffusion of pharmaceutical products, yet a marked pattern of delay in the adoption of innovation is still evident due to local differences in pricing regulations. Any new molecule launch strategically takes place first in higher-priced European Union (EU) markets as a result of the threat of arbitrage and price dependency across EU Member States.

Item Type: Article
Official URL:
Additional Information: © 2012 The Authors
Divisions: European Institute
Social Policy
Centre for Economic Performance
LSE Health
Health Policy
Subjects: R Medicine > RA Public aspects of medicine > RA0421 Public health. Hygiene. Preventive Medicine
R Medicine > RM Therapeutics. Pharmacology
JEL classification: I - Health, Education, and Welfare > I1 - Health > I11 - Analysis of Health Care Markets
I - Health, Education, and Welfare > I1 - Health > I12 - Health Production: Nutrition, Mortality, Morbidity, Suicide, Substance Abuse and Addiction, Disability, and Economic Behavior
I - Health, Education, and Welfare > I1 - Health > I18 - Government Policy; Regulation; Public Health
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
Date Deposited: 23 Aug 2012 14:54
Last Modified: 06 Jan 2024 03:33

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