New Research Urges Caution in Expansion of Drug Development Incentive Program

May 4, 2016

Expanding the federal program set up to reward development of new treatments for tropical diseases could reduce the incentive for drug companies to use it, according to new research from a professor at Duke University's Fuqua School of Business who first proposed the program.

Professor David Ridley found that expanding the program could hurt it, by forcing down the monetary value of the program to drug developers.

"It could have the opposite of the intended effect," Ridley said. "While each individual expansion might make sense, it can be bad for incentives as a whole."

Ridley and his Duke colleagues Jeff Moe and Henry Grabowski proposed the priority review voucher system in a 2006 paper and it became law the following year. It encourages development of drugs for diseases that firms might otherwise neglect because the drugs are not likely to be profitable.

Under the program, the developer of an important new treatment for a tropical disease can get priority review from the FDA — six months instead of the standard 10 — plus a voucher for priority review of another drug of their choice. Firms can sell the extra voucher for a huge sum, because getting a profitable drug to market four months earlier can massively boost revenue.

The last voucher sold fetched $350 million in August 2015.

Congress and the FDA have expanded the program several times, adding Zika in April. But Ridley's latest research quantifies the value of the vouchers and found there is risk in offering vouchers too broadly.

"The voucher is subject to the forces of supply and demand," Ridley said. "Expanding the program increases the supply of vouchers which drives down the price, and a lower price means a diminished incentive."

Ridley, a member of the Duke-Margolis Center for Health Policy, worked with Stephane Régnier on the research. Their findings, "The Commercial Market for Priority Review Vouchers," are newly published in the May issue of the journal Health Affairs.

The researchers studied sales data for 44 new medications approved by the FDA between 2007 and 2009. They compared the top 10 treatments in different categories to identify the advantages enjoyed by the ones that got to market first.

They used the data to quantify the value of vouchers based on three factors: the value of earlier sales, the additional time on the market before the introduction of a generic alternative, and the extra market share captured from competitors.

"We found that if there's one voucher per year, the value is over $200 million," Ridley said. "But the value curve slopes downward steeply. The value could be below $100 million if we have four or more vouchers in a year."

Ridley said there are two ways to control the supply of vouchers: one is to limit the number of eligible diseases. The other is to limit the characteristics of eligible drugs. For example, Congress could add diseases, but then narrow the types of eligible drugs for those diseases, such as only drugs that have not been available anywhere else in the world.

"I'm delighted Congress sees the potential for the program to encourage development of drugs to help people who are suffering," Ridley said. "But we could have too much of a good thing. While it might make sense to expand for this or that disease, it might be harming all the existing voucher-eligible diseases. In short, too many in the lifeboat could sink it for everyone."

Contact Info

Gregory Phillips
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.7801
Email: gregory.phillips@duke.edu

Erin Medlyn
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.8090
Email: erin.medlyn@duke.edu