Economies of Scope in Prescription Drug Development

Alexander Olssen, Health Care Management, The Wharton School, and Mert Demirer, MIT

Abstract: The pharmaceutical industry is one of the most innovative industries in the US. An important driver of innovation in the pharmaceutical industry is research & development (R & D). How do the portfolios of drugs being developed by pharmaceuticals affect the success rates of innovation? In this project, we will quantify the extent of economies of scope in prescription drug development. There is remarkably little evidence on economies of scope in drug development (Cockburn and Henderson 2001 provided some evidence from a survey of 10 large firms). However, the presence and size of economies of scope is critical for optimal resource allocation across R & D projects. In this project, we intend to write two scholarly articles that we hope to publish in top economics journals. The first paper will provide descriptive evidence on the existence and size of economies of scope in prescription drug development. The second paper will estimate a structural model of pharmaceutical manufacturers’ drug development decisions to study the counterfactual effects of mergers on optimal project portfolios the presence of economies of scope.