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Market Size and Pharmaceutical Innovation

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

Abstract

This paper quantifies the relationship between market size and innovation in the pharmaceutical industry using improved, and newer, methods and data. We find positive significant elasticities of innovation to expected market size with a point estimate under our preferred specification of 0.23. This suggests that, on average, $2.5 billion is required in additional revenue to support the invention of one new chemical entity. This magnitude is plausible given recent accounting estimates of the cost of innovation of 800 million to one billion per drug, and marginal costs of manufacture and distribution near 50%. An elasticity below 1 is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult over time, as costs of regulatory approval rise and as the industry runs out of "low-hanging fruit".

Suggested Citation

  • Dubois, Pierre & de Mouzon, Olivier & Scott Morton, Fiona & Seabright, Paul, 2011. "Market Size and Pharmaceutical Innovation," IDEI Working Papers 670, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2014.
  • Handle: RePEc:ide:wpaper:24352
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. What’s at stake if U.S. drug prices fall?
      by Jason Shafrin in Healthcare Economist on 2018-02-02 06:14:36

    Citations

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    Cited by:

    1. Dubois, Pierre & Sæthre, Morten, 2017. "On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector," Discussion Paper Series in Economics 3/2018, Norwegian School of Economics, Department of Economics.
    2. Iain M. Cockburn & Jean O. Lanjouw & Mark Schankerman, 2016. "Patents and the Global Diffusion of New Drugs," American Economic Review, American Economic Association, vol. 106(1), pages 136-164, January.
    3. repec:eee:respol:v:47:y:2018:i:5:p:980-991 is not listed on IDEAS
    4. Mark Pauly & Kyle Myers, 2016. "A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity," NBER Working Papers 22720, National Bureau of Economic Research, Inc.
    5. repec:eee:jhecon:v:54:y:2017:i:c:p:56-65 is not listed on IDEAS
    6. Frank, Richard G. & Zeckhauser, Richard J., 2018. "Excess Prices for Drugs in Medicare: Diagnosis and Prescription," Working Paper Series rwp18-005, Harvard University, John F. Kennedy School of Government.
    7. Lemarié, Stéphane & Parenty, Sébastien, 2016. "Research incentives and tradeoff for improving productivity of different crops," 149th Seminar, October 27-28, 2016, Rennes, France 245161, European Association of Agricultural Economists.
    8. Stern, Ariel Dora, 2017. "Innovation under regulatory uncertainty: Evidence from medical technology," Journal of Public Economics, Elsevier, vol. 145(C), pages 181-200.
    9. repec:kap:revind:v:53:y:2018:i:1:d:10.1007_s11151-018-9630-3 is not listed on IDEAS
    10. Blume-Kohout, Margaret E. & Sood, Neeraj, 2013. "Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development," Journal of Public Economics, Elsevier, vol. 97(C), pages 327-336.
    11. Jeffrey Clemens, 2012. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," Discussion Papers 11-016, Stanford Institute for Economic Policy Research.
    12. Heidi L. Williams, 2016. "Intellectual Property Rights and Innovation: Evidence from Health Care Markets," Innovation Policy and the Economy, University of Chicago Press, vol. 16(1), pages 53-87.
    13. repec:nbr:nberch:13994 is not listed on IDEAS
    14. Eric Budish & Benjamin N. Roin & Heidi Williams, 2015. "Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials," American Economic Review, American Economic Association, vol. 105(7), pages 2044-2085, July.
    15. 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.
    16. repec:eee:respol:v:47:y:2018:i:2:p:440-461 is not listed on IDEAS
    17. 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.
    18. repec:kap:revind:v:53:y:2018:i:1:d:10.1007_s11151-018-9639-7 is not listed on IDEAS
    19. 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.
    20. Felipa de Mello-Sampayo & Sofia de Sousa-Vale & Francisco Camoes, 2015. "Substitutability Between Drugs, Innovation, and Fiscal Policy in the Pharmaceutical Industry," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 273-289, November.
    21. IIZUKA Toshiaki & UCHIDA Gyo, 2016. "Promoting Innovation in Small Markets: Evidence from the market for rare and intractable diseases," Discussion papers 16036, Research Institute of Economy, Trade and Industry (RIETI).
    22. Amitabh Chandra & Craig Garthwaite & Ariel Dora Stern, 2018. "Characterizing the Drug Development Pipeline for Precision Medicines," NBER Chapters,in: Economic Dimensions of Personalized and Precision Medicine National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Innovation; Market Size; Elasticity; Pharmaceuticals;

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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