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Regulatory Approval and Expanded Market Size (WP-21-31)

Benjamin Berger, Amitabh Chandra, and Craig Garthwaite

Regulatory review of new medicines is often viewed as a hindrance to innovation by increasing the hurdle to bring products to market. However, a more complete accounting of regulation must also account for its potential market expanding effects through quality certification. The researchers combine data on FDA approvals for follow-on indications and patient-level data on utilization, and examine whether FDA approval of a follow-on indication increases the use of a drug for that indication. They find 5 facts for the market-expanding role of regulation: (1) follow-on approvals increase the share of patients taking a drug with that indication by 4.1 percentage points, or 40% increase over baseline use, at the time of approval; (2) there is little market learning prior to or following the approval of the follow-on indication, suggesting that such approvals fully certify the new use; (3) the effect of these approvals is larger for uses in a different disease area than previous indications, an increase equivalent to over 4 years of market-learning; (4) it is FDA approval, not the initiation of clinical trials that generate the expansion in market size; (5) the market expansion is consistent with physicians prescribing the medicines more because of higher perceived benefits, not reduced administrative costs.

Benjamin Berger, Harvard University

Amitabh Chandra, Ethel Zimmerman Wiener Professor of Public Policy, Harvard University

Craig Garthwaite, Professor of Strategy, Herman Smith Research Professor in Hospital and Health Services Management, and IPR Associate, Northwestern University

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