R&D Costs,Innovative Output and Firm Size in the Pharmaceutical Industry |
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Authors: | Joseph A. Dimasi Henry G. Grabowski John Vernon |
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Affiliation: | 1. Tufts Center for the Study of Drug Development , Tufts University , 192 South Street, Suite 550, Boston, MA, 02111, USA;2. Department of Economics , Duke University , Durham, UC, 27706, USA |
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Abstract: | This study examines the relationships between firm size, R&D costs and output in the pharmaceutical industry. Project–level data from a survey of 12 US–owned pharmaceutical firms on drug development costs, development phase lengths and failure rates are used to determine estimates of the R&D cost of new drug development by firm size. Firms in the sample are grouped into three size categories, according to their pharmaceutical sales at the beginning of the study period. The R&D cost per new drug approved in the US is shown to decrease with firm size, while sales per new drug approved are shown to increase markedly with firm size. Sales distributions are highly skewed and suggest that firms need to search for blockbuster drugs with above–average returns. The results are consistent with substantial economies of scale in pharmaceutical R&D, particularly at the discovery and preclinical development phases. |
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Keywords: | economies of scale pharmaceutical R& D cost sales–weighted output JEL classifications: L65, 032 |
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