FIGURE 1 FDA CLASIFICATION OF ANNUAL NEW DRUG APPROVALS BY DEGREE OF THERAPEUTIC IMPORTANCE, 1950 1973 by the shift from the existence of an impressive list of available, but not profitable, new drugs, to growing pressure for the federal government to act in one way or another to resolve at growing absence of "public service” drugs. Former Representative Holtzman of New York, for one, recently advocated a new office in the National Institute of Health to “assist in the development of drugs for diseases and conditions of low incidence.**** She, like many others, cited numerous factors other than small markets that contribute to the problem, including "issues of legal liability, complex and costly drug approval requirements, shortage of research funds, concerns over the patentability of certain compounds, lack of coordination of research and information on rare diseases, and the small size of the possible test population."'" Lasagna also has addressed the problem of orphan drugs. Among the factors he cites for "orphanization" include the 1962 Amendments, which he believes have greatly raised development costs. As a result, it is too costly to divert resources away from "large-market" drugs to an orphan drug, with the result that new public service drugs are becoming increasingly rare." In sum, the available studies suggest that the patterns of new drug development have changed significantly. While there are not a large number of such analyses, nor do they cover all facets of the patterns of R&D inputs and outputs, there seems to be strong agreement. Further, at the time the 1962 Amendments were adopted the trends in R&D costs already underway were not clearly recognized. The prospective effects of the Amendments on these changes, and ultimately on the pattern as well as the magnitude of new drug development, were not accurately identified. As a result, the most important long-run impacts of the 1962 Amendments, the effect on firms' R&D strategies, were not recognized until long after the Amendments were passed. VI. CONCLUSIONs, Implications, and Suggestions This final section serves three purposes. First, it sums up the findings on the drug lag in the United States by comparing the characteristics of this lag to what microeconomic theory would predict to be the results of legislation such as the 1962 Amend 41 Cf. PMA Newsletter, Vol. 22, No. 18, May 5, 1980. 42 Id. 43 Lewis Lasagna, "Who Will Adopt the Orphan Drugs?" Regulation, Nov./Dec. 1979, pp. 27-32. ments. Second, it offers lessons from the drug lag that are applicable to other industries. Finally, it suggests how the difficult problem of assessing the societal impacts of the lag may be resolved more adequately in the future. The Predicted and Actual Effects of Drug Regulations such as the 1962 Amendments raise a firm's costs of drug development, reduce its chances of R&D success, and delay the time of payoff for successful innovation. Economic theory has identified the effects of such cost increases. The first type of effect concerns R&D activity. Cost increases will alter the amount of R&D activity; firms finding it commercially infeasible to attempt to innovate will find that to be even more the case; those finding it marginally profitable to do so may well find it now to be unprofitable; and firms that are active innovators will find that fewer of the available projects will remain advantageous to pursue. Qualitative changes also can be expected. To the extent the R&D strategies and targets of smaller firms differ from larger ones, the mix of total R&D results will increasingly reflect the strategies and successes of the larger firms. Additionally, as all firms become more selective in allocating their R&D funds, the pattern of activity within the firm will shift in favor of the more profitable proj ects. These expanded results, as we have seen, have materialized in the drug industry. The evidence is quite clear that the 1962 Amendments accelerated the increase in R&D costs. These cost increases have influenced firm strategies, reducing the over-all rate of innovation. There also has been a shift in the pattern of R&D activity. That pattern, measured by inputs or outputs, has shifted toward the top four and eight firms in the industry. The rate of introduction of new drugs has declined most heavily in categories of drugs with little therapeutic advance and only slightly for important new drugs. There seem to be fewer simple modifications, new congener, (i.e., related within a chemical family) drugs, and public service drugs (because of their limited market potential and/or lack of therapeutic importance); additionally, there has been a shift in emphasis away from long-term therapies due to the higher R&D costs and to progress in epidemiology and biostatistics. A second type of effect of the Amendments predicted by economic theory that has materialized is a lengthened development and approval process. The lengthened pre-introduction period contributes to higher R&D costs and delays new drug introduction dates. In the sequential development process used for drugs, addi tional or expanded tests and longer approval periods will occur even under conditions of maximum operational efficiency. The data show that, on average, drugs are introduced later in the United States than in most other industrial nations. Lessons From the Drug Lag The first three lessons from the regulation of drug innovation for other industries follow directly from the above observations about drugs: (1) Regulation that requires more economic resource inputs into the R&D process will raise R&D costs, thus inhibiting R&D activity. (2) The increased costs of R&D activity are likely to be felt by all firms, but unevenly. The effects will be an absolute reduction in the rate of innovation and a change in its composition, in favor of the more commercially viable opportunities. Further, the slowing of the pace of innovation also causes time lags in the final success of those projects that continue to be pursued. (3) The prospective effects of the drug regulations were not carefully assessed, and thus provide no specific lessons for prospective impact studies in other situations. Retrospective benefit/cost studies have been attempted, but without noteworthy success, again providing little guidance for policy decisions in other areas. Yet a compelling implication does emerge: that prospective benefit/ cost analyses of proposed policy alternatives can provide very helpful guidance in the choice of policies, and retrospective benefit/cost monitoring can be equally helpful in the continuous shaping of policy. A second set of implications relates at a somewhat more detailed level to what this Article has called the pathways of interaction between regulation and firm innovation strategies. Above, we have dealt with the "regulation-cost of R&D-effect on R&D" pathway. Additionally, one should consider: (4) The effects of regulation on the structural variables in markets will affect the forms and degrees of market rivalry. Specifically, the effects of regulation on market concentration, size, product availability, and buyer power will have a strong influence on the incentives to compete in terms of innovation, price, and marketing. Thus, the firm's response to regulation will involve not only its "ceteris paribus" response to higher R&D costs, but its additional response to regulation-induced changes in its industial environment. These latter responses may be difficult to ascertain without careful study, since they are likely to be subtle, to be offsetting, and to be unique to the circumstances of each industry. (5) Regulation may not only affect many different static variables in an industry, but may also affect the dynamics of an industry's operations. The effects of regulation may set into motion a sequence of changes that ultimately impact on innovation, but may also run in opposition to, or in the same direction as, other forces of change already at work. It also is inaccurate to consider the effects of regulation merely as additive to these other effects. They may well be multiplicative or synergistic in their impacts on firm strategies. Thus, special attention must be given to the trends already underway or just emerging in an industry to accurately predict the likely effects of new regulatory policy. (6) Most importantly, regulation is more than rule making. It is an expression of philosophies and attitudes about the economy and about specific industries and groups. These philosophies and attitudes strongly influence the interpretation and administration of regulations, expanding or mitigating their impacts on the activities being regulated. In the case of drugs, the strict regulation in the United States is a paradigm for our attitudes toward medical care, science, and medical innovation. These are attitudes that pervade the administration and interpretation of the law as well as its language. These attitudes are not easily changed, and thus the strong commitment society has toward the regulation of drugs has not been shaken by the voluminous body of criticism of the ultimate effects of the 1962 Amendments. However, an evaluation of a specific regulation does not have to become a conflict between larger attitudes if shaped by clearly formulated performance objectives. The performance of the regulation can only be evaluated in relation to specific goals. The performance objectives for the drug industry are poorly drawn, for they are at best unsystematic static criteria such as "efficacy," "safety," "purity," and "good manufacturing practices." The philosophy and goals of regulation need to be articulated as clearly as the form of regulation, especially for industries that have a widespread impact on society, such as the drug industry. |