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R&D Costs, Innovative Output and Firm Size in the Pharmaceutical Industry

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  • Joseph Dimasi
  • Henry Grabowski
  • John Vernon

Abstract

This study examines the relationships between firm size, R&D costs and output in the pharmaceutical industry. Project-level data from a survey of 12 US-owned pharmaceutical firms on drug development costs, development phase lengths and failure rates are used to determine estimates of the R&D cost of new drug development by firm size. Firms in the sample are grouped into three size categories, according to their pharmaceutical sales at the beginning of the study period. The R&D cost per new drug approved in the US is shown to decrease with firm size, while sales per new drug approved are shown to increase markedly with firm size. Sales distributions are highly skewed and suggest that firms need to search for blockbuster drugs with above--average returns. The results are consistent with substantial economies of scale in pharmaceutical R&D, particularly at the discovery and preclinical development phases.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 2 (1995)
Issue (Month): 2 ()
Pages: 201-219

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Handle: RePEc:taf:ijecbs:v:2:y:1995:i:2:p:201-219

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Related research

Keywords: economies of scale; pharmaceutical R&D cost; sales-weighted output; JEL classifications: L65; 032;

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Cited by:
  1. Giuseppe Moscarini & Lones Smith, 1998. "Wald Revisited: The Optimal Level of Experimentation," Cowles Foundation Discussion Papers 1176, Cowles Foundation for Research in Economics, Yale University.
  2. Finn Valentin & Henrich Dahlgren & Rasmus Lund Jensen, 2006. "Research Strategies in Science-based Start-ups - Effects on performance in Danish and Swedish biotechnology," DRUID Working Papers 06-11, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  3. 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.

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