The Option Value of New Therapeutics
19 Pages Posted: 12 Nov 2004
Date Written: October 25, 2004
Drug control agencies such as the U.S. FDA typically decide whether to approve a new therapeutic based upon the average treatment effect of the new therapeutic. Unless the mean effect of the new therapeutic is greater than a conventional treatment or placebo, the agency will not permits the new therapeutic's use. In the presence of ex post heterogeneity in treatment effects, however, average treatment effects fail to account for the full value a new therapeutic. Even if the new therapeutic is no better than placebo for the average patient, there may be a number of patients who are better off under the new therapeutic than any conventional treatment. If this is the case, prohibiting use of the new therapeutic imposes a welfare loss on these patients. This paper examines the major influences on this loss, which we call the option value of the new therapeutic. It proposes simple estimators for this value and calculates the option value of drugs examined in the Cardiac Arrhythmia Suppression Trial (CAST) I. Finally, the paper examines drawbacks of relying on option value to make drug approval decisions.
Keywords: food and drug law, averate treatment effects, option, pharmaceuticals, cardiology
JEL Classification: C40, C93, I12, K32
Suggested Citation: Suggested Citation