Returns on R&D for 1990s New Drug Introductions

Henry Grabowski, John Vernon and Joseph DiMasi ()

No 02-21, Working Papers from Duke University, Department of Economics

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.

Date: 2002
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