Market Size and Pharmaceutical Innovation

56 Pages Posted: 4 May 2011  

Oliver de Mouzon

affiliation not provided to SSRN

Pierre Dubois

University of Toulouse 1 - Toulouse School of Economics (TSE)

Fiona M. Scott Morton

Yale School of Management; National Bureau of Economic Research (NBER)

Paul Seabright

University of Toulouse I - Industrial Economic Institute (IDEI); Centre for Economic Policy Research (CEPR)

Date Written: April 2011

Abstract

This paper quantifies the relationship between market size and innovation in the pharmaceutical industry. We estimate the elasticity of innovation, as measured by the number of new chemical entities appearing on the market for a given disease class, to the potential market size represented by the willingness of sufferers of diseases in that class (and others acting on their behalf such as insurers and governments) to spend on their treatment during the patent lifetime. We find positive significant elasticities with a point estimate under our preferred specification of 25.2%. This suggests that at the mean market size an additional $1.8 billion is required in additional patent life revenue to induce the invention of one additional new chemical entity. An elasticity substantially and significantly below one-half is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult and expensive over time, as costs of regulatory approval rise and as the industry runs out of "low hanging fruit."

Keywords: elasticity, innovation, market size, pharmaceuticals

JEL Classification: L65, O31, O34

Suggested Citation

de Mouzon, Oliver and Dubois, Pierre and Scott Morton, Fiona M. and Seabright, Paul, Market Size and Pharmaceutical Innovation (April 2011). CEPR Discussion Paper No. DP8367. Available at SSRN: https://ssrn.com/abstract=1830985

Oliver De Mouzon (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

Pierre Dubois

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Fiona M. Scott Morton

Yale School of Management ( email )

New Haven, CT 06520
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul Seabright

University of Toulouse I - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 61 12 86 17 (Phone)
+33 5 61 12 86 37 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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