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Returns on R&D for 1990s New Drug Introductions

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  • Henry Grabowski
  • John Vernon
  • Joseph DiMasi

Abstract

Previously published research by two of the authors found that returns on R&D for drugs introduced into the market in the 1970s and 1980s were highly skewed and that the top decile of new drugs accounted for close to half the overall market value. In the 1990s, there have been significant changes to the R&D environment for new medicines--the rapid growth of managed care organizations; indications that R&D costs are rising at a rate faster than overall inflation; new market strategies of major pharma firms; increased alliances with the emerging biotech sector; and, the increased attention focused on the pharmaceutical industry in the political arena. Nevertheless, analysis of new drugs entering the market from 1990-1994 resulted in findings similar to the earlier researchópharmaceutical R&D is characterized by a highly skewed distribution of returns and a mean industry internal rate of return modestly in excess of the cost-of-capital. These findings provide support for a model of intensive R&D competition by pharmaceutical firms to gain economic advantage through product innovation and differentiation.
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Suggested Citation

  • Henry Grabowski & John Vernon & Joseph DiMasi, 2003. "Returns on R&D for 1990s New Drug Introductions," Levine's Working Paper Archive 618897000000000666, David K. Levine.
  • Handle: RePEc:cla:levarc:618897000000000666
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    File URL: http://www.dklevine.com/archive/grabow-randd_returns.pdf
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    References listed on IDEAS

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    1. Henry Grabowski & John Vernon, 2000. "The determinants of pharmaceutical research and development expenditures," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 201-215.
    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. Baily, Martin Neil, 1972. "Research and Development Costs and Returns: The U. S. Pharmaceutical Industry," Journal of Political Economy, University of Chicago Press, vol. 80(1), pages 70-85, Jan.-Feb..
    4. 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.
    5. 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.
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    Cited by:

    1. Ashish Arora & Alfonso Gambardella & Laura Magazzini & Fabio Pammolli, 2009. "A Breath of Fresh Air? Firm Type, Scale, Scope, and Selection Effects in Drug Development," Management Science, INFORMS, vol. 55(10), pages 1638-1653, October.

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