Market Size and Pharmaceutical Innovation

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."