A Safety-First Drug Approval Sequence Leads to Drugs That Are Less Safe and More Efficacious

Abstract

The clinical stage of drug approval processes commonly starts with a safety test, and if it is successful, efficacy and further safety tests follow. This paper examines how the sequence of these tests affects pharmaceutical companies’ choice of drugs to develop. The safety-first testing sequence increases the incentive to develop low-safety, high efficacy drugs relative to high-safety, low-efficacy drugs with the same probability of approval. A company will develop the former if both have the same expected sales revenue, and may even develop a drug that is less likely to be approved, and offers less value to the company and patients if approved, than an alternative. The paper finds revised test sequences that do not incentivise the development of inferior drugs. Noting that these revised sequences may be difficult to implement, the paper presents test sequences that reduce adverse incentives while maintaining protection for test volunteers, by introducing a phase 1 test of an efficacy biomarker with a significance level adjusted for small sample size.

Keywords: drug development, drug approval, safety, efficacy, innovation

JEL Classification: I18, O31