Innovation Options and Profitability of Pharmaceutical Brand Manufacturers

Abstract

Much research exists covering clinical development success rates, development costs of new drugs, and market launch impact on stock market valuation of companies, but little systematic work has been done to establish the impact of research input on new product launches and, in turn, their impact on profitability of drug manufacturers. This article investigates these relations using data from the world’s largest pharmaceutical brand manufacturers and their product launches in the US over a period of more than 25 years. The objective is to determine the impact of innovation intensity on innovation output intensity and of innovation output intensity on profitability. It is shown that there is a complete lack of evidence that launches of New Molecular Entities (NMEs) necessarily lead to higher profitability, suggesting that many launches of NMEs are not particularly successful from an economic point of view. Furthermore, it was found that intangible knowledge assets acquired by company mergers and acquisitions do often not live up to their valuation. This leads to the conclusion that such intangible assets seem to be overpriced on average. The more and more frequently used strategy of launching new drugs without NMEs like combination drugs or extension of indications increased short-term profitability making this a valid approach to avoid setbacks when patent protection of blockbuster drugs expires.