1. Effects of reimportation on new drug development Frank R. Lichtenberg frank.lichtenberg@columbia.edu Columbia University and National Bureau of Economic Research

2. Hypothesis Reimportation will reduce incentives to develop new drugs, which will slow the rate of increase of longevity and quality of life

3. New drug development: causes and consequences Expected market size Expected drug price Expected profits Number of drugs developed Patient Outcomes (e.g., survival)

4. Expected price and expected market size have similar effects on innovation incentives Profit = (P – c) Q – F P: price c: variable cost per unit (manu. & marketing cost) Q: quantity (market size) F: fixed cost Given c and F, Profit is reduced when either P or Q is reduced  evidence about the effect of market size on drug development can provide insight into the probable effect of reimportation (or price controls) on drug development

5. Previous evidence Scherer: link between profits and R&D investment in the pharmaceutical industry Lichtenberg: link between market value of pharma firms (which reflects PDV of expected future profits) and R&D investment Danzon, Wang, and Wang: drug launch decisions are affected by expected price and market size

6. Illustration Using data on 14 cancer sites, examine relationship between incidence and number of drugs to treat that type of cancer

7. Cancer site Incidence per 100,000 people, 1996-2000 Number of drugs labeled for use at site, 2004 breast73.926 prostate73.712 lung62.613 colon-rectum54.28 lymphoma21.827 skin-melanoma16.66 leukemia12.136 pancreas11.14 ovary9.112 brain and central nervous system6.44 esophagus4.51 testis2.67 bone0.90 eye0.80 Source: Incidence data: http://seer.cancer.gov/csr/1975_2000/results_single/sect_01_table.04_2pgs.pdfhttp://seer.cancer.gov/csr/1975_2000/results_single/sect_01_table.04_2pgs.pdf Drug data: Micromedex DRUGDEX DRUG EVALUATIONS

8. A 10% decrease in incidence is associated with a 10% decrease in the number of drugs

9. Implications A 10% decrease in incidence (market size) is associated with a 10% decrease in the number of drugs This suggests that a 10% decrease in drug price would result in at least a 10% decrease in the number of drugs Suppose that reimportation would reduce U.S. drug prices by 40% (Canadian drug prices may be about 40% lower than U.S. prices) This would substantially reduce the number of drugs developed in the future, and, consequently, the longevity and health of Americans and others

10. Conclusions Reimportation will reduce incentives to develop new drugs, which will slow the rate of increase of longevity and quality of life