Pharmaceutical Innovation

59 Pages Posted: 6 Feb 2007

See all articles by Frederic M. Scherer

Frederic M. Scherer

Harvard University - Harvard Kennedy School (HKS)

Date Written: July 2007


This article, written for the forthcoming Handbook of the Economics of Technical Change, surveys the costs, risks, and challenges encountered in the discovery and development of superior new pharmaceuticals. The changing methods by which drugs are discovered, the links between companies and academic science, the changing character of public regulation, and the sharp rise in the cost per new approved drug are analyzed. Determining which new drugs are both efficacious and safe poses classic statistical decision theory problems. Why patents are so important to drug developers is explored. A rent-seeking theory of new drug development is proposed to rationalize the high gross margins but only slightly supra-normal returns on investment realized by pharmaceutical companies, and the economic welfare implications are investigated.

Keywords: Welfare, Health Care, Social Policy

Suggested Citation

Scherer, Frederic M., Pharmaceutical Innovation (July 2007). KSG Working Paper No. RWP07-004; AEI-Brookings Joint Center Working Paper No. 07-19. Available at SSRN: or

Frederic M. Scherer (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1154 (Phone)
617-496-0063 (Fax)

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