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Market Size and Pharmaceutical Innovation

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  • de Mouzon, Oliver
  • Dubois, Pierre
  • Scott Morton, Fiona
  • Seabright, Paul

Abstract

This paper quantifies the relationship between market size and innovation in the pharmaceutical industry. We estimate the elasticity of innovation, as measured by the number of new chemical entities appearing on the market for a given disease class, to the potential market size represented by the willingness of sufferers of diseases in that class (and others acting on their behalf such as insurers and governments) to spend on their treatment during the patent lifetime. We find positive significant elasticities with a point estimate under our preferred specification of 25.2%. This suggests that at the mean market size an additional $1.8 billion is required in additional patent life revenue to induce the invention of one additional new chemical entity. An elasticity substantially and significantly below one-half is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult and expensive over time, as costs of regulatory approval rise and as the industry runs out of "low hanging fruit."

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8367.

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Date of creation: Apr 2011
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Handle: RePEc:cpr:ceprdp:8367

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Keywords: elasticity; innovation; market size; pharmaceuticals;

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References

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  1. Arthur Lewbel & Oliver Linton, 2000. "Nonparametric Censored and Truncated Regression," Econometric Society World Congress 2000 Contributed Papers 1237, Econometric Society.
  2. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G. & Lasagna, Louis, 1991. "Cost of innovation in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 10(2), pages 107-142, July.
  3. Panle Gia & Pinelopi K. Goldberg & Shubham Chaudhuri, 2006. "Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India," American Economic Review, American Economic Association, vol. 96(5), pages 1477-1514, December.
  4. Kurt R. Brekke & Astrid L. Grasdal & Tor Helge Holmås, 2007. "Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?," CESifo Working Paper Series 2059, CESifo Group Munich.
  5. Mathias Dewatripont & Lars Peter Hansen & Stephen Turnovsky, 2003. "Advances in economics and econometrics: the eighth world congress," ULB Institutional Repository 2013/9557, ULB -- Universite Libre de Bruxelles.
  6. Rodrigo Cerda, 2007. "Endogenous innovations in the pharmaceutical industry," Journal of Evolutionary Economics, Springer, vol. 17(4), pages 473-515, August.
  7. Mark Duggan & Fiona Scott Morton, 2008. "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," NBER Working Papers 13917, National Bureau of Economic Research, Inc.
  8. Berry, Steven & Waldfogel, Joel, 2005. "Product Quality and Market Size," Working Papers 1, Yale University, Department of Economics.
  9. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
  10. Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2008. "Regulation, generic competition and pharmaceutical prices: Theory and evidence from a natural experiment," NIPE Working Papers 01/2008, NIPE - Universidade do Minho.
  11. John Mullahy, 1997. "Instrumental-Variable Estimation Of Count Data Models: Applications To Models Of Cigarette Smoking Behavior," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 586-593, November.
  12. Richard Blundell & James Powell, 2001. "Endogeneity in nonparametric and semiparametric regression models," CeMMAP working papers CWP09/01, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  13. Yin, Wesley, 2009. "R&D policy, agency costs and innovation in personalized medicine," Journal of Health Economics, Elsevier, vol. 28(5), pages 950-962, September.
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Citations

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Cited by:
  1. David Dranove & Craig Garthwaite & Manuel Hermosilla, 2014. "Pharmaceutical Profits and the Social Value of Innovation," NBER Working Papers 20212, National Bureau of Economic Research, Inc.
  2. Tirole, Jean & Weyl, Glen, 2010. "Materialistic Genius and Market Power: Uncovering the best innovations," IDEI Working Papers 629, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
  4. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers 13-001, Stanford Institute for Economic Policy Research.
  5. Eric Budish & Benjamin N. Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," NBER Working Papers 19430, National Bureau of Economic Research, Inc.

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