Date of this Version
Accepted for publication as: Xu Liang, Zhao Hui, Petruzzi C. Nicholas. 2020. Inducing Compliance with Post-market Studies for Drugs under FDA’s Accelerated Approval Pathway. Manufacturing & Service Operations Management, Articles in Advance.
Electronic copy available at: https://ssrn.com/abstract=3471632
Problem definition: In 1992, FDA instituted the accelerated approval pathway (AP) to allow promising drugs to enter the market based on limited evidence of efficacy, thereby permitting manufacturers to verify true clinical benefits through post-market studies. However, most postmarket studies have not been completed as promised. We address this non-compliance problem.
Academic/Practical Relevance: The prevalence of this non-compliance problem poses considerable public health risk, thus compromising the original purpose of a well-intentioned AP initiative. We provide an internally consistent and implementable solution to the problem through a comprehensive analysis of the myriad complicating factors and tradeoffs facing FDA.
Methodology: We adopt a Stackelberg framework in which the regulator, which cannot observe the manufacturer’s private cost information or level of effort, leads by imposing a post-market study deadline. The profit-maximizing manufacturer then follows by establishing its level of effort to invest in its post-market study. In establishing its deadline, the regulator optimizes the tradeoff between providing public access to potentially effective drugs and mitigating public health risks from ineffective drugs.
Results: We develop a deadline-dependent user fee menu as a screening mechanism that establishes an incentive for manufacturer compliance. We show that its effectiveness in inducing compliance depends fundamentally on the enforceability of sanction, a drug-specific measure that indicates how difficult it is to withdraw an unproven drug from the market, and the drug’s success probability: The higher is either, the higher is the probability that the mechanism induces compliance.
Managerial Implications: We synthesize and distill the salient tradeoffs and nuances facing FDA’s non-compliance problem and provide an implementable solution. We quantify the value of the solution as a function of a drug’s success probability and enforceability. From public policy perspective, we provide guidance for FDA to increase the viability and effectiveness of AP.
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