Price and Profit Control, New Competitive Dynamics,and the Economics of Innovation in the Pharmaceutical Industry

The focus of this paper is the economics of the pharmaceutical R&D process. Major developments currently impacting the industry include the fact that R&D costs for new drugs are rising very rapidly. Product life cycles are also shortening, meaning there is less time to recover R&D costs and other investment expenditures. Firms are increasingly dependent on a small number of "blockbuster" products to finance future research and development. This paper provides an overview of several factors influencing the environment for pharmaceutical R&D: trends in costs and product life cycles, returns from new drug introductions, and the consequences of price and profit controls on incentives.