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Why trash don’t pass? pharmaceutical licensing and safety performance of drugs

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Abstract

This paper examines how asymmetric information in pharmaceutical licensing affects the safety standards of licensed drugs. Pharmaceutical companies often license potential drug molecules at different stages of drug development from other pharmaceutical or biotechnology companies and complete the remaining of research stages before submitting the new drug application(NDA) to the food and drug administration. The asymmetric information associated with the quality of licensed molecules might result in the molecules which are less likely to succeed to be licensed out, while those with greater potential of success being held internally for development. We identify the NDAs submitted between 1993 and 2004 where new molecular entities were acquired through licensing. Controlling for other drug area specific and applicant firm specific factors, we investigate whether drugs developed with licensed molecules face higher probability of safety based recall and ultimate withdrawal from the market than drugs developed internally. Results suggest the opposite of Akerlof’s (Q J Econ 84:488–500, 1970) lemons problem. Licensed molecules rather have less probability of facing safety based recalls and ultimate withdrawal from the market comparing to internally developed drug molecules. This suggests that biotechnology and small pharmaceutical firms specializing in pharmaceutical research are more efficient in developing good potential molecules because of their concentrated research. Biotechnology firms license out good potential molecules because it increases their market value and reputation. In addition, results suggest that both the number of previous approved drugs in the disease area, and also the applicant firms’ total number of previous approvals in all disease areas reduce the probability that an additional approved drug in the same drug area will potentially be harmful.

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Notes

  1. The pharmaceutical and biotechnology licensing is rising at an increasing rate from 1990 and between 1996 and 2000 it had increased to an average of 616 a year [3].

  2. http://www.skyworksinc.com/downloads/press_room/published_articles/Les_Nouvelles_122013.pdf.

  3. Though it is true that the true magnitude of the safety problem is not revealed until the drug is on the market but the licensors can predict the potentiality and safety profile through drug research and while passing through the different phases of research. Hidden data is a problem of the pharmaceutical industry and licensors do not necessarily disclose all the information related to the drug to the licensee or to the public. One example is the drug Tamiflu and the safety problem associated with it. The safety issues were known to the NDA applicant but not to public. Please see detail here http://www.fda.gov/ohrms/dockets/ac/06/briefing/2006-4254b_09_01_Tamiflu%20AE%20Review%202006%20Redacted_D060309_092.pdf.

  4. We thank Recombinat Capital for providing the database.

  5. http://people.hmdc.harvard.edu/~dcarpent/fdaproject.html.

  6. http://www.fda.gov/Drugs/DevelopmentApprovalProcess/DrugInnovation/ucm20025676.htm.

  7. Please see http://people.hmdc.harvard.edu/~dcarpent/fdaproject.html for a detailed description.

  8. http://www.pharmaprojects.com/research_development_analysis.

  9. As collected by Daniel Paul Carpenter’s FDA project.

  10. We use multiple dummy variables for post-marketing safety problems because they are very different in nature and objective. The FDA codes these safety issues separately. Safety based withdrawals are complete withdrawal of drugs from the market and the BBW is a warning about the drug specified on drug label. After BBW physicians can still prescribe the drug after informing the patients about the warning. On the other hand the dosage-form discontinuation is a change in dosage or an approved version of NDA. Dosage-form discontinuation may or may not be related to same safety issues as BBW or recall. Therefore, separate dummy variables are required to test different post marketing safety problems. Please see [9] for a detailed discussion.

  11. The stage of the licensing is available for each contract signed in the licensing database.

  12. This result matches with [8] result though our data sets are different.

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Authors and Affiliations

  1. Department of Economics, Auburn University, Auburn, AL, USA

    Tannista Banerjee

  2. Stetson School of Business and Economics, Mercer University, Atlanta, GA, USA

    Arnab Nayak

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  1. Tannista Banerjee
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Correspondence to Tannista Banerjee.

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Banerjee, T., Nayak, A. Why trash don’t pass? pharmaceutical licensing and safety performance of drugs. Eur J Health Econ 18, 59–71 (2017). https://doi.org/10.1007/s10198-015-0758-x

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