Pharmaceuticals, Incremental Innovation and Market Exclusivity

This paper assesses the welfare gains from incremental innovation in pharmaceuticals. Such innovation can yield consumer gains through improved quality, but the additional market exclusivity granted to innovators may also delay generic entry, a practice referred to as ``evergreening", and reduce consumer surplus. Quantifying this tradeoff is vital in determining the optimal patent policy and regulatory treatment of incremental innovation. To shed light on this problem, I focus on incremental innovations in selective serotonin reuptake inhibitor (SSRI) anti-depressant drugs. I estimate the patients' demands for antidepressants with a random coefficient logit model, based on individual-level prescription drug data. By comparing scenarios of either withdrawing or allowing market exclusivity for incremental innovations with scenarios of withdrawing or retaining incremental innovations, I found that the consumer benefits from incremental innovation are overwhelmed by the consumer surplus loss due to market exclusivity when considering a single incremental innovation, whereas the consumer benefits from innovation outweigh the consumer losses from exclusivity when considering the counterfactual of withdrawal of all incremental innovations and market exclusivities.  This result suggests that innovation benefits are primarily driven not by the quality improvements of products but by the competition effect of the introduction of several incremental innovation products in the market.