Ishan Phadke

Job market paper

Rewarding Incremental Innovation: Evidence from Pharmaceutical Line Extensions

The FDA grants a three-year market exclusivity for drug reformulations of original products (line extensions) upon approval. This policy may incentivize manufacturers to delay launching improved drugs until the original formulation's patent nears expiration, depriving patients of earlier access to better treatments. I develop a dynamic model to analyze manufacturer pricing and launch timing strategies under different policies, examining the welfare implications of approaches that eliminate the manufacturer’s delay incentives. I apply this model to the dementia drug market, focusing on Namenda, an original formulation, and its line extension, which was launched shortly before Namenda's patent expiration. I find that offering no protection for line extensions after the original formulation's patent expires (“no exclusivity”) improves consumer welfare, despite increasing the risk that the line extension is not developed. Alternatively, granting the full three years of exclusivity after the original formulation's patent expiration avoids this risk but significantly increases insurer drug expenditures with minimal consumer benefit. Expanding beyond Namenda, simulations suggest that line extensions offering only minor quality improvements are most at risk under “no exclusivity,” which limits consumer welfare losses if those line extensions are not developed.