Does Adoption of Pharmaceutical Innovation Respond to Changes in the Regulatory Environment?

This paper investigates how regulation impinged on the launch strategies of international pharmaceutical corporations for new molecules across the main OECD markets between 1960–2008. Comprehensive IMS data is used to analyze the international diffusion of 845 molecules from 14 different anatomic therapeutic categories using non-parametric survival analysis. The paper focuses on two main regulatory changes that substantially reshaped the barriers to entry: the U.S. Hatch-Waxman Act in 1984, and the establishment of the European Medicines Agency (EMA) in 1995. We find that legal transaction costs have a significant impact on timing of launch. Stringent market authorization requirements for new pharmaceutical products in the United States after 1962 resulted in a significant U.S. drug lag in the introduction of pharmaceutical innovation vis-à-vis Europe from 1960–1984. However, financial incentives stemming from the 1984 Hatch-Waxman Act proved effective in closing this lag. A more streamlined EMA regulatory approval process has reduced barriers to entry in Europe, thereby enabling quicker diffusion of pharmaceutical products, yet a marked pattern of delay in the adoption of innovation is still evident due to local differences in pricing regulations. Any new molecule launch strategically takes place first in higher-priced European Union (EU) markets as a result of the threat of arbitrage and price dependency across EU Member States.