NCPA - National Center for Policy Analysis

Does Pharma Have a Productivity Problem?

April 7, 2015

The pharmaceutical industry is perceived to be in a "productivity crisis" because research spending has grown rapidly, while the number of new FDA-approved molecules has remained relatively flat over time. These trends have persisted since the 1950s; however, they have received growing attention in recent years, as the number of new molecules fell by 60 percent while research spending increased by more than 280 percent between 1996 and 2010.

According to this trend, the capital markets funding pharmaceutical R&D investments should have received lower returns on their investments. In actuality, valuations in capital markets rose rapidly during the same period, suggesting larger returns per R&D dollar funded by investors.

These opposing trends can be reconciled partially by using measures of productivity that capture patient improvements generated by industry output. There are two problems with current productivity measurements.

  • The output of pharmaceutical innovation should be measured by the value of the new health generated, not the FDA count of new molecules. That is, a single drug that cured all cancers would be immensely more valuable than 100 new molecules that treated acne.
  • The productivity crisis has been exaggerated because it does not include alternative or improved uses of previously discovered molecules.

Improving the use of existing molecules is sometimes referred to as "incremental", "follow-on", "cumulative", or "me-too" innovation, and the industry is often criticized for exploiting it. This type of innovation focuses on new treatments that modify or expand the use of already discovered molecules, rather than the development of new molecules.

The benefits of this innovation are numerous and include improved patient health, easier drug administration and subsequent improved adherence, and the expanded use of molecules across different disease areas.

Source: Thomas J. Philipson and Kristopher Hult, "Should investors pay attention to the alleged productivity crises in pharma?" American Enterprise Institute, April 3, 2015. 


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