Examining Firm Responses to Innovation Policy: An Analysis of Pediatric Exclusivity

This paper examines how firm innovation strategies were affected by the FDA’s Pediatric Exclusivity Provision.  The innovation policy, which offers firms extensions of market exclusivity in return for conducting clinical studies of existing drugs in children, was a response to the absence of pediatric data in most drug labels to inform pediatric prescribing.  Although the number of pediatric studies increased after the policy, little is known about the strategic decisions by firms about which drugs to study and when to conduct the studies.  Since pediatric patients represent a minority of prescriptions for most drugs and since the value of the exclusivity (to firms) increases with the size of total sales in adult and pediatric markets, we hypothesize that the policy may distort firm incentives to under-invest in pediatric studies for drugs with small adult markets and over-invest in pediatric studies for drugs with large adult markets, even if those drugs offered limited value to children. 

We empirically examine the effects of a drug's total U.S. sales and its medical importance to children on firms' supply and the FDA's demand for pediatric studies among drug approvals in 1990 to 2007.  We use the FDA’s written requests for pediatric studies to measure demand and the receipt of pediatric exclusivity to measure supply.  We also use U.S. sales data from IMS Health and pediatric disease prevalence estimates from the Medical Expenditure Panel Surveys to proxy for a drug's medical importance to children.  Our analysis exploits the fact that a drug's total sales primarily reflects adult use and has little correlation with pediatric disease prevalence to identify the effects of each variable. 

We find evidence of a distortion in incentives due to the exclusivity policy.  Results show that a 10% increase in a drug's total U.S. sales leads to 76% increase in the probability of pediatric exclusivity, while pediatric disease prevalence has no significant impact on this probability.  The results suggest that pediatric studies are skewed toward drugs having large sales markets.  We find no evidence of a link between the supply of pediatric studies and the social value of those studies, as reflected by pediatric demand for the drug. 

We also find that the FDA is not effectively using its discretion (in terms of issuing written requests) to limit the incentive distortions. FDA written requests fail to increase the prospects that pediatric studies for diseases affecting more children are conducted.  FDA is more likely to issue written requests for drugs with higher revenue in adult and pediatric markets, even though the revenue in adult markets is unrelated to the social value of conducting pediatric studies.  In addition, firms prioritized pediatric studies for older drugs whose patents were due to expire within five years. This implies that pediatric clinical data for newer, more medically important drugs may have been delayed.  

These findings raise new cautions about the use of exclusivity policies to incentivize research.  There are predictable incentive distortions that emerge from such policies that may cause outcomes to diverge from what is efficient.