Do firms underinvest in long-term research? Evidence from cancer clinical trials

Abstract

We investigate whether private research investments are distorted away from long-term projects. Our theoretical model highlights two potential sources of this distortion: short-termism and the fixed patent term. Our empirical context is cancer research, where clinical trials -and hence, project durations -are shorter for late-stage cancer treatments relative to early-stage treatments or cancer prevention. Using newly constructed data, we document several sources of evidence that together show private research investments are distorted away from long-term projects. The value of life-years at stake appears large. We analyze three potential policy responses: surrogate (nonmortality) clinicaltrial endpoints, targeted R&D subsidies, and patent design.Over the last five years, eight new drugs have been approved to treat lung cancer, the leading cause of US cancer deaths. 1 All eight drugs targeted patients with the most advanced form of lung cancer, and were approved on the basis of evidence that the drugs generated incremental improvements in survival. A well-known example is Genentech's drug Avastin, which was estimated to extend the life of late-stage lung cancer patients from 10.3 months to 12.3 months. 2 In contrast, no drug has ever been approved to prevent lung cancer, and only six drugs have ever been approved to prevent any type of cancer. While this pattern could solely reflect market demand or scientific challenges, in this paper we investigate an alternative hypothesis: private firms may invest more in late-stage cancer drugs -and "too little" in early-stage cancer and cancer prevention drugs -because late-stage cancer drugs can be brought to market comparatively quickly, whereas drugs to treat early-stage cancer Correspondence to: Heidi Williams. 1 See the lists of US Food and Drug Administration (FDA) approved hematology/oncology drugs by year: http://www.fda.gov/drugs/ informationondrugs/approveddrugs/ucm279174.htm. 2 Specifically, Avastin was approved for "unresectable, locally advanced, recurrent or metastatic non-squamous NSCLC [non-small cell lung cancer]" patients and the clinical trial effectiveness estimate is posted on the Genentech website: http://www.gene.com/ media/product-information/avastin-lung. As noted on the website, this is the first drug to extend median survival time for this patient population beyond one year. HHS Public Access Author Manuscript Author Manuscript Author ManuscriptAuthor Manuscript and to prevent cancer require a much longer time to bring to market. More broadly stated, we investigate whether private firms differentially underinvest in long-term research, by which we mean technologies with long time lags between the initial spark of an idea and the availability of a commercially viable product. We document evidence that such underinvestment is quantitatively significant in an important context -treatments for cancer -and analyze potential policy responses.The idea that companies may be excessively focused on behaviors with short-run payoffs is an old one. A...

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