by Joan Costa-Font

A relatively disregarded question in the political economy of pharmaceuticals is the impact of regulatory changes that ease administration costs acting as barrier to the entry of new medicines. In Varol et al. (2012) we examine 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 found that legal transaction costs have a significant impact on the timing of the launch of new products. 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.

Read the full paper:
Varol N, Costa-Font J, McGuire AJ (2012) Does adoption of pharmaceutical innovation respond to changes in the regulatory environment? Applied Economic Perspectives and Policy, Published online 16 August 2012.