An exploratory study of FDA new drug review times, prescription drug user fee acts, and R&D spending

FDA approval times have declined significantly since the enactment of the Prescription Drug User Fee Act (PDUFA) in 1992. As a result, present value expected returns to pharmaceutical R&D have likely increased. In the current paper we employ a unique survey dataset, one which includes data from 1990 to 1999 on firm-level pharmaceutical R&D expenditures for 7 large, U.S.-based drug companies. We estimate the effect FDA approval times have on firm R&D spending. Controlling for other factors such as pharmaceutical profitability and cash flows, we estimate that a 10% decrease (increase) in FDA approval times leads to an increase (decrease) in R&D spending from between 1.4% and 2.0%. Combining this estimate with recent research on the link between PDUFA and FDA approval times, we calculate that for the firms in our sample, R&D spending in the 1990s increased by an additional 5.0-7.2% as a result of this legislation. This amounted to an additional $3.2 billion to $4.6 billion in pharmaceutical R&D expenditures (2005 $US), and possibly several new drugs. Because PDUFA continued to provide incentives for R&D after 1999, and because it is probable that firms not in our sample were similarly affected by PDUFA, our estimates may be conservative. Considering more industry-wide measures of R&D expenditures over a similar time period (1992-2001) we calculate PDUFA may have incentivized an additional $10.8 billion to $15.4 billion in pharmaceutical R&D. Recent economic research has shown that the social rate of return on pharmaceutical R&D is very high; therefore, the social benefits of PDUFA (over and above the benefits of more rapid consumer access) are likely to be substantial. (C) 2009 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.