Regulatory Incentives for Pharmaceutical Innovation: The FDA's Breakthrough Therapy Designation

Incentives for biopharmaceutical firms to innovate are reduced by longer approval periods and other forms of regulatory and market uncertainty. The nature of the drug approval process therefore profoundly shapes private innovation and commercialization incentives. This paper considers a recent policy change to incentives for new drug development in the United States, the introduction of the FDA’s Breakthrough Therapy Designation (BTD). The BTD creates a pathway to new drug commercialization that is intended to make the process faster and more transparent for innovator firms. Using a synthetic control group, we consider the benefits (faster time-to-market) and cost (safety risks to patients) of the BTD program. We quantify the impact of BTD on time-to-market for new drugs and find that time spent in regulatory approval decreased by nearly four months on average. A back-of-the-envelope calculation suggests that this is likely to be valuable for pharmaceutical firms, which face large opportunity costs of capital on investment projects, and patients, who can access these therapies sooner. We then consider the implications for patient safety by considering adverse events and black-box warnings reported by the FDA. We observe a slightly higher rate of adverse events among BTD drugs and calculate the trade-offs between time-to-market and patient safety in this context