Media Releases

Speedy generic approval may not benefit consumers as much as expected, Rotman model shows

February 8, 2011

TORONTO, ON – Faster approval times for generic drugs will get them into consumers’ hands quicker, but may not make the price any better, a pricing and marketing researcher has found.

A mathematical model created by Andrew Ching shows that fewer firms enter the marketplace because the chances of getting there first and commanding the best profits are dramatically smaller when drug approval times are shorter. Ching is an associate professor of marketing at the University of Toronto’s Rotman School of Management.

Using the drug clonidine, Prof. Ching’s model showed the number of firms in the marketplace dropped by 25 percent, from 12 to nine, under a shortened approval time scenario.

“Potentially, for the consumer, the price may not drop as much as you’d hope,” said Prof. Ching.

Under the current situation it takes companies an average of more than 20 months to get U.S. Food and Drug Administration (FDA) approval for generic versions of established drugs. That makes approval times uncertain and companies often must go through several rounds of review. Companies also pay several million dollars when they apply for FDA approval. Given these as well as other development costs, firms making it to the marketplace last sometimes experience losses.

The FDA in recent years has talked about reducing its approval times in order to benefit consumers, and has proposed strategies for how it could do so, including spending more money in order to bring on extra staff to do the reviews.

Prof. Ching says his results, which were published in International Economic Review, suggest the FDA should think twice before going that route.

“Even if the government spends a large amount of resources to improve the efficiency of the FDA in approving generic drugs, it does not necessarily achieve the goal of enhancing welfare,” Prof. Ching’s paper concludes.

The complete study is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1146222

For the latest thinking on business, management and economics from the Rotman School of Management, visit www.rotman.utoronto.ca/NewThinking.

The Rotman School of Management at the University of Toronto is redesigning business education for the 21st century with a curriculum based on Integrative Thinking. Located in the world’s most diverse city, the Rotman School fosters a new way to think that enables the design of creative business solutions.  The School is currently raising $200 million to ensure Canada has the world-class business school it deserves. For more information, visit www.rotman.utoronto.ca.

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Ken McGuffin
Manager, Media Relations
Rotman School of Management
University of Toronto
Phone: 416-946-3818
mcguffin@rotman.utoronto.ca
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