Article

Market Size and Pharmaceutical Innovation

Pierre Dubois, Olivier de Mouzon, Fiona Scott Morton, and Paul Seabright

Abstract

This paper quantifies the relationship between market size and innovation in the pharmaceutical industry using improved, and newer, methods and data. We find positive significant elasticities of innovation to expected market size with a point estimate under our preferred specification of 0.23. This suggests that, on average, $2.5 billion is required in additional revenue to support the invention of one new chemical entity. This magnitude is plausible given recent accounting estimates of the cost of innovation of 800 million to one billion per drug, and marginal costs of manufacture and distribution near 50%. An elasticity below 1 is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult over time, as costs of regulatory approval rise and as the industry runs out of "low-hanging fruit".

Keywords

Innovation; Market Size; Elasticity; Pharmaceuticals;

JEL codes

  • O31: Innovation and Invention: Processes and Incentives
  • L65: Chemicals • Rubber • Drugs • Biotechnology
  • O34: Intellectual Property and Intellectual Capital

Replaces

Pierre Dubois, Olivier de Mouzon, Fiona Scott Morton, and Paul Seabright, Market Size and Pharmaceutical Innovation, TSE Working Paper, n. 11-232, April 2011, revised March 2014.

Reference

Pierre Dubois, Olivier de Mouzon, Fiona Scott Morton, and Paul Seabright, Market Size and Pharmaceutical Innovation, The RAND Journal of Economics, vol. 46, n. 4, Winter 2015, pp. 844–871.

Published in

The RAND Journal of Economics, vol. 46, n. 4, Winter 2015, pp. 844–871