Product quality regulation and innovation in the pharmaceutical industry.

Abstract

This thesis examines the effect that federal regulation of the product quality of new drugs (through safety and efficacy requirements) has had on the flow of new drugs onto the market place. The approach is to econometrically estimate these effects using disaggregated therapeutic class data from the 1970's. There are two primary estimations. First, the current effects of regulation on the production function relation between introductions and research expenditures are estimated. Second, the indirect effects of regulation on research effort are estimated in a research expenditures equation. These estimates are then combined to estimate the overall effect of regulation on introductions in the current era. In addition to the basic estimations described above, several important subsidiary issues are treated in the thesis. One is a discussion of the decline in new drug introductions of the 1962 era in terms of its individual therapeutic class components. This discussion gives strong support to the position that nonregulatory factors precipitated that decline in the rate of product introductions. Also, the project selection process of major pharmaceutical companies is examined in great detail. That discussion, and some econometric tests of hypotheses generated, clearly demonstrates that in order to predict how firms will respond to changes in environmental factors affecting profitability, one must first understand how firms collect, evaluate, and apply information concerning those factors.