Some dynamic implications of pharmaceutical regulation

Abstract: The aim of this study is to analyse the impact of pharmaceutical regulation on welfare taking into account at least partially the dynamic nature of this industry. We create a simple benchmark model where R\&D investment and probability of successful innovations are related. We compare this with alternatives that consider generic entry and value-based pricing. We study how variations on patent duration, price and the value-based pricing factor affect welfare, consumer and producer surplus. To illustrate our results we simulate using a numerical example.

Our preliminary results indicate that the overall welfare optimising price lies between the consumer surplus (lower) and producer surplus (larger) optimal price and the relationship between welfare and patent life depends on the during-patent price levels. We also find that a homogeneous value-based price regulation where prices of all products are set as a fixed proportion of their associated health benefit may not yield welfare-optimal results. Our study may add in the search for a more informed of pharmaceutical regulation.