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The Option Value of New Therapeutics

19 Pages Posted: 12 Nov 2004  

Anup Malani

University of Chicago - Law School; University of Chicago Pritzker School of Medicine; Resources for the Future; National Bureau of Economic Research (NBER)

Feifang Hu

University of Virginia - Statistics Department

Date Written: October 25, 2004

Abstract

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

Malani, Anup and Hu, Feifang, The Option Value of New Therapeutics (October 25, 2004). Available at SSRN: https://ssrn.com/abstract=617382 or http://dx.doi.org/10.2139/ssrn.617382

Anup Malani (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9602 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/malani/

University of Chicago Pritzker School of Medicine

Chicago, IL 60637
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Feifang Hu

University of Virginia - Statistics Department ( email )

Kerchof Hall
Charlottesville, VA 22904-4135
United States

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