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A New Look at the Returns and Risks to Pharmaceutical R&D

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Author Info

  • Henry Grabowski

    (Department of Economics, Duke University, Durham, North Carolina 27706)

  • John Vernon

    (Department of Economics, Duke University, Durham, North Carolina 27706)

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    Abstract

    This study investigates the returns to R&D for 100 new drugs introduced into the United States during the decade of the 1970s. In contrast to prior studies, it incorporates several significant structural changes that have occurred in the pharmaceutical industry during the 1980s. These include higher real drug prices and a greater degree of generic competition. A major finding is that the return on R&D for the average new drug is approximately equal to the 9 percent industry cost of capital. However, the performance of new drugs introduced during the latter half of the 1970s was markedly better than that of early 1970s introductions. This latter finding is consistent with the more rapid rate of industry growth in real R&D expenditures. The study also finds that the variation in returns is highly skewed, with only the top 30 drugs covering mean R&D costs on a fully allocated basis. Finally, it is shown that real drug price increases in the 1980s were necessary for the average new drug introduction to recover its R&D costs.

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    File URL: http://dx.doi.org/10.1287/mnsc.36.7.804
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 36 (1990)
    Issue (Month): 7 (July)
    Pages: 804-821

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    Handle: RePEc:inm:ormnsc:v:36:y:1990:i:7:p:804-821

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    Keywords: pharmaceuticals; drugs; R&D; returns; risk;

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    Cited by:
    1. Grabowski, Henry & Vernon, John & DiMasi, Joseph, 2002. "Returns on R&D for 1990s New Drug Introductions," Working Papers 02-21, Duke University, Department of Economics.
    2. Andreas Sturm & Michael J. Dowling & Klaus Röder, 2007. "FDA Drug Approvals: Time Is Money!," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 12(2), pages 23-54, Fall.
    3. Martzoukos, Spiros H & Zacharias, Eleftherios, 2008. "Real Option Games with R&D and Learning Spillovers," MPRA Paper 12686, University Library of Munich, Germany.
    4. Lynne G. Zucker & Michael R. Darby, 1995. "Present at the Revolution: Transformation of Technical Identity for a Large Incumbent Pharmaceutical Firm After the Biotechnological Breakthrough," NBER Working Papers 5243, National Bureau of Economic Research, Inc.
    5. Haeussler, Carolin & Patzelt, Holger & Zahra, Shaker A., 2012. "Strategic alliances and product development in high technology new firms: The moderating effect of technological capabilities," Journal of Business Venturing, Elsevier, vol. 27(2), pages 217-233.
    6. Schwartz, Eduardo S., 2002. "Patents and R& D as Real Options," University of California at Los Angeles, Anderson Graduate School of Management qt86b1n43k, Anderson Graduate School of Management, UCLA.
    7. Catherine Matraves, 1998. "Market Structure, R&D and Advertising in the Pharmaceutical Industry," CIG Working Papers FS IV 98-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    8. Steven Casper & Catherine Matraves, 1997. "Corporate Governance and Firm Strategy in the Pharmaceutical Industry," CIG Working Papers FS IV 97-20, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    9. William Kingston, 2004. "Nelson's Concerns About Intellectual Property," Levine's Working Paper Archive 122247000000000461, David K. Levine.
    10. F.M. Scherer, 2007. "Uncertainty and choice: the challenges of pharmaceutical efficacy, safety, and cost," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 267-283.
    11. Eduardo S. Schwartz, 2003. "Patents and R&D as Real Options," NBER Working Papers 10114, National Bureau of Economic Research, Inc.

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