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

Author

Listed:
  • Henry Grabowski

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

  • John Vernon

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

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.

Suggested Citation

  • Henry Grabowski & John Vernon, 1990. "A New Look at the Returns and Risks to Pharmaceutical R&D," Management Science, INFORMS, vol. 36(7), pages 804-821, July.
  • Handle: RePEc:inm:ormnsc:v:36:y:1990:i:7:p:804-821
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    File URL: http://dx.doi.org/10.1287/mnsc.36.7.804
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    Keywords

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

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