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Duke Economics Working Paper #95-16
R&D Costs, Innovative Output and Firm Size
in the Pharmaceutical Industry
Joseph A. Dimasi,
Henry G. Grabowski
and
John Vernon
Abstract
This study examines the relationships between firm size, R&D costs
and output in the pharmaceutical industry. Porject-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 sampel 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.
JEL: L65, 032
Published in International Journal of the Economics of Business,
Vol. 2, No. 2, 1995, pp. 201-219.