though, does not specifically attribute these changes to any par ticular causes. (*) Baily compares development costs per NDA for pre 1967. and post-1962 time periods. He finds these costs to be approximately 2 times greater after 1962 than before, and labels the 1962 Amendments as a significant causal factor. (6) Schnee compares NCT development costs through the 1950s and early 1960s. In his statistical results, development costs per NCE increased by $100),(XX) each year. The identified contributing causes are improved testing methodology, R&D input inflation, and changes in the mix of drug R&I). (7) Hansen estimates the cost per approved NCE more precisely than anyone else. For the 1950-1967 period, using 1976 dollars, he finds this cost to have risen to $54 million. He does not argue that the 1962 Amendments are a major factor in this increase. The main feature of the data is the wide range of estimates of the R&D input-new drug output cost relationship. This wide range exists because of differences in the way the monetary values of input factors are calculated (aggregate v. firm-specific data; current v. constant dollars; different indexes of input cost changes when constant dollars are used; inclusion or exclusion of opportunity costs of capital), differences in the output denominator (approved NDAs, or only approved NCEs), differences in the output lag period, and the changes in the setting of the drug development process over the almost three decades covered by the studies. In the carly 1950s the estimated cost of an NCE was $1.5 million (Mund); by the mid 1960's it was $23-30 million (Jadlow); and by the mid 1970's $54 million (Hansen). Total development and approval times were estimated to have increased by three or four fold between the mid 1950's and the later 1960's (Clymer), and perhaps to have doubled again since then (Sarett). Of these studies, only Jadlow's and Baily's conclude that the 1962 Amendments have been a major contributing cause of these increases. Advances in drug testing methodology are widely accepted as a major factor behind the increases, and R&D inflation and a changing R&D output mix as lesser factors. When all evidence is considered as a whole, the 1962 Amendments do not emerge as the major cause of the observed trends; yet Baily and Sarett, in particular, have provided a strong case for their significance, and others have added to that point. The 1962 Amendments may also have had an indirect effect on costs and times by contributing to development and utilization of improved testing methodology, R&D input inflation through demand generation, and higher R&D outlay opportunity costs by increas ing the development and approval times. There is no conclusive evidence on the effects of the 1967 Amendments. Yet the evidence that does exist, and the plausible hypotheses connecting regulation to increasing costs of development, create some foundation for not rejecting the view that the 1962 Amendments have had a significant effect on the costs and timing of new drug development. IV. IMPACTS On the Structure of Drug Markets Increased Concentration of New Drug Development. Whether or not the 1962 Amendments have been the major contributing factor, the rising costs of drug development have had important effects on competition in drug markets. The increases in R&D efforts behind successful drug discovery and introduction described in the preceding section influence the rate and pattern of such success; it may also move the line of demarcation between those research intensive firms that in large part characterize the ethical drug industry and those whose R&D efforts are sufficiently modest to represent a sizeable difference in kind. To the extent that R&D efforts have become concentrated among fewer firms, then R&D outcomes, particularly NCES with their large therapeutic and economic impacts, can be expected to show increasing concentration. In turn, sales concentration in these markets and rates of turnover among dominant firms may also be affected. In economic terms, the hypothesis is that the rising cost barriers to effective R&D competition have resulted in increasing concentration of new drug discovery, introduction, and of market shares among fewer, larger firms. Jadlow" has argued that cost increases in R&D fall disproportionately on smaller drug firms, and as these costs have escalated these firms have moved from being the most efficient researchers (as measured by "annual R&D performance cost per R&D scientist or engineer") in 1957 and 1958 to the least efficient in 1965 and 1966. A response to Jadlow is that raw measures of resource support per R&D scientist or engineer are poor indicators of R&D efficiency; morcover, the great expansion of the industry during the period examined by Jadlow may have generated highly uneven 23 Jadlow, Competition and “Quality,” supra note 10. growth patterns among firms, with the more successful R&D performers becoming the larger firms, rather than vice versi. Nonetheless, Jadlow contends that we have seen a substantial "reduction in the proportion of new drugs originated by the relatively smaller firms." First, he cites the decline in the number of drug firms "originating” NCEs, from 108 in 1962 to 48 in 1969 and 70 in 1970. This decline, he states, has been in firms at the "lower end of the size spectrum." Second, he makes the same point regarding the “marketing” (i.e., introduction) of NCEs: the share of the smaller firms has declined substantially between the mid-1950s and 1970. Jadlow's specific findings on these trends are presented in Tables 5 and 6. aFirm size-rankings are according to assets in 1958 for the 1955-1958 and 1959-1962 periods and assets in 1964 for the 1963-1966 period. *Firm size rankings are according to assets in 1958 for the 1955-1958 and 1959-1962 periods and assets in 1964 for the 1963-66 and 1967-1970 periods. 24 Id. (Table 5 (corrected). Columns (3) and (4) added). 25 Id. (Table 6 (corrected). Columns (3) and (4) added). The data in Tables 5 and 6 show the following phenomena: (1) for both NCE origination and marketing, the shares of the smallest 98% of firms were at a much lower level after 1962 than before; (2) the 99th percentile of small firms (2nd percentile of large firms) experienced a sizeable increase in its share of both NCEs originated and marketed between 1955-58 and 1963-66; for NCES marketed, however, this share dropped greatly between 1967-70. (Data for NCEs originated in 1967-70 are not included.) (3) Correspondingly, the share of NCEs originated by the largest 1% of firms (their dominance is clearly shown by the absolute value) declined through 1962, after which it rose. For NCES marketed their share declined through 1966, after which it rose very substantially. In sum, Jadlow's data shows a shift in the smallest 98% of firms' shares of NCE discovery and development first to the remaining 2% of firms and eventually to the largest 1% during the mid 1960s. While the data obviously are too limited to establish post-1962 trends clearly or strongly, they offer considerable support that increasing concentration in drug discovery and development has occurred. Jadlow argues that these trends in R&D cause declining competition in drug markets, resulting in higher prices to consumers and higher profit rates to dominant firms. In his work in conjunction with Edwin Mansfield, Schnee" studied various aspects of drug innovation and discovery, including changes in the relationship between innovation and firm size. He has analyzed this relationship at two levels. At the simpler level, he has measured the proportions of total sales and total innovations for the periods 1935-1949 and 1950-1962. Schnee's findings are reproduced in the Table 7 below: The essential conclusions from these data are that, for the four largest firms as a unit, (1) their share of unweighted (ie., absolute) 30 satyana sir ungt, wan, Jese than their thare of market sales in both time periods, (2) but when using a “medically weighted" measure of innovation, their share was almost equal to that of sales in 1935-1949 and considerably above it in 1950-1962; (3) using "economic weights,” the shares of innovations and sales of the four firms were equal in both time periods; and (4), perhaps most important, there was an increase in the innovative performance of the four firms (unweighted, or weighted by medical significance) relative to total market sales share from the earlier period to the latter (an increase in the innovation-sales ratios from .74 and .90 in 1935-1949 to .81 and 1.4 in 1940-1962). At a more detailed level, Schnee has analyzed the full range of firm sizes. He found that the largest firms improved their innovation records, weighted by therapeutic and economic significance, relative to other firms, from 1935-1949 to 1950-1962." Accordingly, the trends observed by Jadlow, showing an increased R&D output share for the top 1-2% of all firms are supported by Schnee's data. However, while Jadlow attributes this increase to the burdensome effects of the 1962 Amendments on smaller firms, Schnee has shown these trends existed before the Amendments were passed. Dramatic broadening and growth of drug markets, beginning in the late 1940s and accelerating throughout the 1950s, were generating changes in the relationship of the rate of innovation to size in the drug industry. Schnee's disaggregation of the pre-1962 period shows these incipient trends, while studies that lump together the entire pre-1962 data fail to reveal them. Trends in such R&D concentration have been strong into the 1970s, when the "broadening and growth" of drug markets slowed. Grabowski" presents evidence similar to Schnee's, but covering also the periods 1962-1966 and 1967-1971. Part of that evidence, reproduced in Table 8 below, shows the four-firm concentration of innovational output (NCEs) and total ethical drug sales for three periods between 1957 and 1971. These data indicate that concentration remained essentially stable into the 1960s, and then accelerated very sharply, while for sales the aggregate fourfirm concentration levels remained essentially unchanged throughout the entire period. Grabowski's data thus show a sharp 28. The only exception to the improved innovation record of the largest firms between the two periods occurs for "small size" firms, in terms of unweighted innovations. Schnee explains this in terms of the development of small, specialty markets (e.g., ophthalmics, dermatologicals) which the small firms had to themselves. 29 Grabowski, Vernon & Thomas, supra note 5. |