Drugs, Market Size and Population

This paper addresses the upward trend in new drugs introduced by pharmaceutical firms, during the second half of the 20th century. We indicate that the continuous increases in population, and thus in the market size of this sector, will play a fundamental role in explaining these phenomena. We also argue that population and market size can be endogenously determined by drugs through the impact of drugs over the mortality rate. Hence, these two effects reinforce each other, producing decrements in the mortality rate and increments in the stock of drugs over time. We obtained the set of new molecular entities approved by the FDA during the second half of the 20th century and we decomposed the data in a panel of 15 therapeutic categories over time. Using this data, we tested our hypotheses using different econometric methods (FE, GLS, IV, Tobit). The results support the hypothesis and are consistent across methods. The results indicate that an exogenous increase in market size increases initially the number of new drugs. It is notable how this effect is amplified through the feedback effect of drugs over the mortality rate. In the long run, the initial increase on drugs and market size are both amplified in 25 per cent.