Hurry Up or Wait?: Strategic Delay in the Introduction of Pharmaceutical Line Extensions
Pharmaceutical firm decisions on the timing of follow-on product introductions involve a strategic tradeoff. Follow-on drugs, termed line extensions, receive a fixed exclusivity period that starts upon approval. Thus, firms can choose to introduce a line extension earlier to attract new consumers, or delay introduction so the line extension's exclusivity extends beyond that of the original drug product. I show that the firm’s incentive for delayed introduction increases with the share of line extension sales that would cannibalize sales of the original drug. I test for this behavior empirically using a novel dataset of over 700 pharmaceuticals approved in the United States from 1985-2016, linked to all subsequent line extensions in that period. Consistent with strategic delay, an original product is almost twice as likely to have a line extension approved in the period leading up to expected generic entry than three or more years prior. Using Monte Carlo simulations, I find that line extensions that are more cannibalizing are delayed up to 2.5 years, compared to an average of five months for those that are less cannibalizing, reflecting nuanced firm responses to regulatory incentives. A separate analysis comparing line extensions under different regulatory regimes confirms these findings. Delays in the introduction of new products can create welfare losses for consumers and payers, and I consider implications for optimal innovation policy.