3 - The Economics of Research and Development in the Pharmaceutical Industry

Summary

Introduction

In this chapter I return to the topic of my doctoral dissertation, completed in 1963 under the same title. My purpose then as now was to explore the importance of research and development (R&D) for new products in the pharmaceutical industry. Such products embody new medical advances and have a major impact on mortality and morbidity rates.

The structure of discovering and developing new drugs has shifted greatly over the past 20 years. In the early years of this industry, from its rebirth following the Second World War through roughly the end of the 1970s, the major pharmaceutical companies developed “in house” most of their primary products, largely by testing large numbers of available compounds. Scientific knowledge was obtained primarily from freely available sources. There were perhaps 40 highly integrated firms worldwide that contributed to this effort.

Since then, the process of drug development and discovery has become increasingly complex. A new technology appeared, termed “biotechnology,” which placed this process on a more scientific basis. A new set of firms appeared: smaller and interposed between the scientific community and the major pharmaceutical firms. It is reported that between 25% and 40% of sales by the major pharmaceutical companies currently are from products that originated in the biotech sector.

In this chapter I review the expanding economic literature that describes and explains the new structure for research.