speaker: Peng Sun | Prof., Duke University
TALK ABSTRACT:
New prescription drugs require regulatory approval before drug makers can sell them. In some countries, regulators may conditionally approve a drug, which allows sales to begin before the developer has proven the drug’s efficacy. After further testing, the regulator may either grant final approval or reject the drug. We show that conditional approval not only speeds access to drugs but also encourages the development of drugs that would not have been pursued otherwise. Using mechanism design principles, we show that regulators should conditionally approve a drug even if it is ex-ante less likely to prove efficacious, under certain conditions. The regulator should approve the drug to encourage investment, especially when only the firm knows the testing cost. However, drugs that are less likely to prove efficacious should only be conditionally approved for a portion of the patient population if that is enough to motivate testing. Additionally, the impact of conditional approval is greater when the firm’s revenue increases over time. Finally, a regulator should sometimes commit that in the future it will grant final approval for a drug that narrowly misses the efficacy threshold in return for the firm testing an otherwise unprofitable drug.