Wednesday 5 April 2023

Peltzman Revisited

Casey Mulligan checks up on the old Peltzman work on the opportunity costs of FDA delays.

FDA shifts to encourage competition in generics added a lot of value. Mulligan runs some Cournot models showing that while the first generic's entry may reduce overall welfare, additional ones help. The basic intuition is that the first generic doesn't do a lot to reduce prices in a Cournot game, but does reduce the return to the initial innovation. Later entrants push down prices to consumers to provide net benefits. 

Scott Gottlieb seems to have been an excellent appointment:

Three related changes occurred in 2017. By May 9, Scott Gottlieb was nominated and confirmed to head the FDA. He had been an outspoken critic of the FDA’s slow approval process, which he described as “evading the law” (Gottlieb 2010). He immediately told Congress that his FDA would prioritize competition (US House 2017). In June, the FDA (2017a) announced the Drug Competition Action Plan with procedural details published in November (FDA 2017d). The FDA (2017c) immediately promulgated, and subsequently maintained, a list of drugs with no blocking patents or exclusivities but still no approved generics. Section 801 of GDUFA II, which became law in August 2018, instructs the FDA to prioritize the review of drugs with no blocking patents or exclusivities that have three or fewer ANDAs or NDAs already approved. On paper at least, the FDA appeared to be looking toward competition rather than purely bureaucratic metrics such as numbers of applications and approval times. 

Table 1, based on the FDA’s Orange Book listing of approved NDAs and ANDAs, shows approvals at a higher rate during Gottlieb’s tenure as compared with either the 2 years before it or the 2 years after it. Before Gottlieb’s leadership, and therefore also before GDUFA II, the FDA averaged 54 approvals per month (1,286 for the 24 months). The average was 73 per month during Gottlieb’s tenure (through April 2019) and 61 in the subsequent 24 months.7 Table 1 also shows that FDA approvals of new drugs were also high during his tenure. The corresponding approvals for biosimilars and biologics are from the FDA’s Purple Book; they are a large share of expenditures on physician-administered drugs but a small share of retail prescription drugs.8 

Drug market performance appears to reflect additional competition. Berndt, Conti, and Murphy (2018) find that, as of April 30, 2017, Teva Pharmaceutical owned 1,611 ANDAs of about 10,000 in existence. The second largest owner was Mylan Inc., with 668 ANDAs. Teva’s stock crashed in the summer of 2017, with its chief executive officer reporting that the company would henceforth be less profitable owing to “greater competition as a result of an increase in generic-drug approvals by the U.S. FDA” (Sheetz 2017). Real retail prescription drug prices fell 1.5 percent during Gottlieb’s tenure, as compared with a 3.7 percent increase in the prior 2 years and a 5.1 percent decrease in the subsequent 2 years.9 These findings are consistent with the hypothesis that GDUFA II, Gottlieb’s management, or some combination thereof increased drug-market competition by reducing entry barriers.

Mulligan also goes through the benefits of project Warp Speed. Every 6 months' delay in getting the vaccine out had social cost of just under half a trillion dollars - just on mortality. 

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