Academic journal article Contemporary Economic Policy

Risks to the Returns to Medical Innovation: The Case of Myriad Genetics

Academic journal article Contemporary Economic Policy

Risks to the Returns to Medical Innovation: The Case of Myriad Genetics

Article excerpt

We describe the broad range of uncertainties faced by the developers of medical technologies. Empirically, we estimate the asset market incidence of two realizations of uncertainties we classify as ex post policy risks. The events we analyze concern the intellectual property of Myriad Genetics, Inc., an American molecular diagnostics firm. In June 2013, the Supreme Court invalidated several of Myriad's intellectual property claims. Subsequently, the Center for Medicare and Medicaid Services (CMS) re-evaluated the reimbursements it pays for the services at issue in the Supreme Court's ruling. Each of these events moved Myriad's market capitalization by several hundred million dollars, or on the order of 20%. Myriad's exposure to the realization of these events reflected the concentration of its revenue streams among the affected services. We discuss the implications of the risks we analyze for the total volume of medical innovation and for its organization across firms. (JEL 118, 03, D8)

I. INTRODUCTION

Risk and expected returns shape the aggregate volume and organization of innovative activity. While the theory underlying these linkages has received ample attention, cataloging and quantifying the risks relevant in any particular industry require attention to institutional detail and empirical documentation. In this article, we consider the relevance of risks we term "ex post policy risks" for the returns to the development of medical technology.

In Section II, we organize the determinants of medical innovation's returns into a typology. First among our typology's broad categories are ex ante factors. This category, which has been widely studied, includes standard costs and uncertainties associated with product development and regulatory approval (e.g., Budish, Roin, and Williams 2015; Lipsky and Sharp 2001; Mullard 2014). Our second broad category encompasses ex post economic factors. These factors, also widely studied, include input costs, the prevalence of competing products, and, more broadly, standard determinants of a product's demand (e.g., Acemoglu and Linn 2004; Clemens 2013; Finkelstein 2004). A third category involves what we call ex post policy factors. This category includes the status of an innovator's intellectual property and other legal determinants of a product's reimbursement status within public and private insurers' payment systems. Uncertainties associated with each of these categories shape the risks with which medical innovators must reckon.

In Section III, we empirically assess the asset market incidence of two distinctive realizations of ex post policy risk. Specifically, we analyze the market capitalization of Myriad Genetics, Inc. (Myriad), a company known primarily for its development of the BRCA1 and BRCA2 molecular diagnostic tests for breast and ovarian cancer. As detailed in Section III, Myriad's case is noteworthy along multiple dimensions. Myriad's intellectual property was addressed by the Supreme Court, which ultimately invalidated some of its patent claims. Following the Supreme Court's decision, the Center for Medicare and Medicaid Services (CMS) re-evaluated its reimbursements for the affected services. Further, Myriad's finances were unusually reliant on the revenues generated by the affected product lines. The validity of the disputed patent claims and the generosity of Medicare's reimbursements thus had significant implications for Myriad's future profitability.

Using an event study approach (Fama et al. 1969), our analysis reveals that the resolution of these policy risks significantly affected Myriad's market capitalization. We estimate that the Supreme Court's invalidation of Myriad's intellectual property reduced its valuation by roughly 23%, or in excess of $500 million. Subsequent redetermination of Medicare's reimbursements for Myriad's tests similarly moved Myriad's market capitalization by several hundred million dollars. We observe that Myriad's capitalization exhibited high volatility throughout the time period in question, as did its trading volume. …

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