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Active Ingredients: Exploring the Key Factors Affecting the Rising Cost of Developing New Drugs

Listed author(s):
  • Fossett, Sarah J.

    ()

    (Credit Suisse)

  • Wunnava, Phanindra V.

    ()

    (Middlebury College)

Registered author(s):

    What makes prescription drugs cost so much? The media and Congress say it is corporate greed, while pharmaceutical firms blame federal regulations and an expensive drug development process. This study focuses on R & D (R&D) expenditures at global pharmaceutical firms and explores the driving factors behind what makes R&D for prescription drugs so costly. By combining variables that represent the news media's claims (i.e. CEO compensation) and the pharmaceutical firms' rebuttals (i.e. late-stage drug development), this study attempts to add empirical evidence to the growing debate surrounding the high and rising cost of prescription drugs. The results suggest that there is some truth to both sides of the argument- specifically; both CEO compensation and phase II development are positively correlated with R & D expenditures. However, we have reason to believe that CEO compensation is more of an indicator of business strategy than greed. Finally, this study proposes possible research extensions for continued study.

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    File URL: http://ftp.iza.org/dp10817.pdf
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    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10817.

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    Length: 31 pages
    Date of creation: Jun 2017
    Handle: RePEc:iza:izadps:dp10817
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    1. DiMasi, Joseph A. & Grabowski, Henry G. & Hansen, Ronald W., 2016. "Innovation in the pharmaceutical industry: New estimates of R&D costs," Journal of Health Economics, Elsevier, vol. 47(C), pages 20-33.
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    10. Jie Chen & John A Rizzo, 2010. "Who Pays for Drug Quality?," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 36(2), pages 239-254, Spring.
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    12. John A. Vernon & Joseph H. Golec & Joseph A. Dimasi, 2010. "Drug development costs when financial risk is measured using the Fama–French three‐factor model," Health Economics, John Wiley & Sons, Ltd., vol. 19(8), pages 1002-1005, August.
    13. Joseph Dimasi & Henry Grabowski & John Vernon, 1995. "R&D Costs, Innovative Output and Firm Size in the Pharmaceutical Industry," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 2(2), pages 201-219.
    14. Schnee, Jerome E, 1972. "Development Cost: Determinants and Overruns," The Journal of Business, University of Chicago Press, vol. 45(3), pages 347-374, July.
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