Private versus social incentives for pharmaceutical innovation

Area of Science:

• Pharmaceutical economics
• Health economics
• Innovation studies

Background:

• The pharmaceutical industry faces debate on R&D investment strategies.
• Companies are often perceived to favor developing "follow-on" drugs over novel, breakthrough medications.
• Understanding firm incentives is crucial for analyzing drug development pipelines.

Purpose of the Study:

• To develop a theoretical framework analyzing pharmaceutical firms' R&D investment decisions.
• To examine the incentives driving the development of breakthrough versus follow-on drugs.
• To contribute to the ongoing discussion on pharmaceutical R&D allocation.

Main Methods:

• A theoretical model was constructed with horizontally and vertically differentiated drugs.
• The model incorporates patient populations, physician prescription choices, and firm pricing strategies.
• Analysis focused on disentangling firm incentives for breakthrough versus follow-on drug R&D.

Main Results:

• The model analyzes physician prescription behavior and optimal pricing for innovative drugs.
• It characterizes the incentives for firms to pursue breakthrough versus incremental innovations.
• Results indicate that firms' R&D efforts are often directed towards incremental innovations.

Conclusions:

• The study provides theoretical support for the notion that pharmaceutical firms over-invest in incremental R&D.
• Findings align with conventional wisdom regarding the focus on "follow-on" drug development.
• The framework helps explain the observed tendencies in pharmaceutical R&D pipelines.