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Faculty Research Working Paper Series
F.M. Scherer
Professor of Public Policy and Corporate Management in the Aetna Chair, Emeritus
phone: 617-497-4345
Pharmaceutical Innovation.
Scherer, F.M. "Pharmaceutical Innovation." KSG Faculty Research Working Paper Series RWP07-004, February 2007.
Abstract
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.
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