Innovation Under Regulatory Uncertainty: Evidence from Medical Technology

This paper explores how the regulatory approval process affects incentives to innovate in medical technologies. In the United States, all medical technologies are regulated by a single agency, the U.S. Food and Drug Administration (FDA). The FDA regulates two trillion dollars worth of products every year, including all ethical drugs and medical devices.

Previous studies of medical innovation under FDA regulation have focused on the pharmaceutical drug industry, where early mover regulatory advantages have been documented. However, newer classes of medical technology such as medical devices, biologic drugs, nanomedicines, tissue-engineered products, and the use and applications of cellular and gene therapies are characterized by a larger degree of product heterogeneity and significant regulatory uncertainty, changing the context of new product regulation.

While prior studies of medical innovation under regulation have found an early mover regulatory advantage for drugs, I find the opposite to be true for medical devices. Using data spanning three decades of regulatory approvals (1977-2007), I show that pioneer entrants in new device product categories spend 34 percent (7.2 months) longer in the approval process than the first follow-on innovator in that category. Back-of-the-envelope calculations suggest that a delay of this length could translate to a loss of approximately 8 percent of expected lifetime product revenues.

I consider how different types of regulatory uncertainty affect approval times and find that a product's technological novelty is largely unrelated to time spent under review. In contrast, procedural uncertainty appears to play a large role: on average, approval times for subsequent entrants fall by approximately 40 percent when application content and evaluation procedures are made explicit through formal regulatory guidance.

Finally, I consider how the regulatory process affects firms' market entry strategies and find that financially constrained firms are less likely to enter new medical device markets as pioneers: the fraction of financially constrained firms among pioneer entrants into device markets is 25 to 52 percent lower than among follow-on entrants.