How changes in drug-safety regulations affect the way drug and biotech companies invest in innovation.

Changes in the economics of product development resulting from heightened safety regulations could have a sizable negative impact on drug and biotechnology companies' decisions about investing in innovation. We developed a model to compare the potential economic effects of pre- and postmarketing strategies to identify safety problems with new drugs. Although expanding Phase III clinical testing and postmarketing safety surveillance are not perfect substitutes, our findings suggest that even a large increase in funding for the latter will have a relatively small adverse impact on investment decisions by drug companies and venture capital firms, compared with the former.