This article (joint with Pierre Dubois, Olivier de Mouzon and Fiona Scott Morton), has now appeared in the Rand Journal of Economics, and is available under Open Access.
Abstract:
This article quantifies the relationship between market size and innovation in the pharmaceutical industry using improved, and newer, methods and data. We find significant elasticities of innovation to expected market size with a point estimate under our preferred specification of 0.23. This suggests that, on average, $2.5 billion is required in additional revenue to support the invention of one new chemical entity. This magnitude is plausible given recent accounting estimates of the cost of innovation of $800 million to $1 billion per drug, and marginal costs of manufacture and distribution near 50%.