FDA Regulation and Innovation in the Pharmaceutical Industry

Charu Gupta, Healthcare Management, The Wharton School

Abstract: Standard economic theory recognizes a trade-off inherent in intellectual property protection between increased incentives for firms to innovate due to potential monopoly rights and the deadweight loss from those rights. In the pharmaceutical industry, patent protection is considered necessary to incentivize firms to undertake the high costs of new drug development, and government policies offer additional regulatory exclusivity for existing drugs that are repurposed for new uses. In fact, repurposing existing drugs for additional disease indications is now a common strategy in pharmaceutical development. While offering firms the opportunity to improve profits from a given drug, the effects of such regulatory incentives on innovative activity more broadly and consumers are uncertain. In this research, I ask the following questions: What is the impact of FDA regulatory exclusivities on firms’ decisions to repurpose existing drugs or innovate anew? What are the resulting implications for consumers?