• International Journal of Technology (IJTech)
  • Vol 13, No 4 (2022)

Innovation Options and Profitability of Pharmaceutical Brand Manufacturers

Innovation Options and Profitability of Pharmaceutical Brand Manufacturers

Title: Innovation Options and Profitability of Pharmaceutical Brand Manufacturers
Norman Hendrik Riedel, Miroslav Špacek

Corresponding email:

Cite this article as:
Riedel, N.H., Špacek, M., 2022. Innovation Options and Profitability of Pharmaceutical Brand Manufacturers. International Journal of Technology. Volume 13(4), pp. 890-899

Norman Hendrik Riedel University of Economics in Prague, Winston Churchill Sq. 4, 130 67, Praha 3, Prague, Czech Republic
Miroslav Špacek University of Economics in Prague, Winston Churchill Sq. 4, 130 67, Praha 3, Prague, Czech Republic
Email to Corresponding Author

Innovation Options and Profitability of Pharmaceutical Brand Manufacturers

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.

Drugs; Pharmaceutical industry; Product innovation; Profitability; Research and development


    The importance of pharmaceutical product innovation for human life has been demonstrated many times, e.g., by the factual elimination of many life-threatening diseases like the plague, tuberculosis and smallpox. Vaccine development during the recent pandemic once more showed the importance and the capabilities of pharmaceutical development as well as the enormous development costs and high risks of failure. There have been many investigations on how to create innovation (Berawi, 2021), improve certain drug formulations (Timotius et al., 2022), increase sustainability (Zaytsev et al., 2021), as well as improve drug supply chains (Goodarzian et al., 2021).  However, this vast amount of literature does not address the issue that therapeutic and economic success of a new drug are separate things, despite sometimes staggering prices for new drug therapies. Drug development has always been known to be notoriously difficult and time-consuming (Scherer, 2010). Recently there is a growing concern about the profitability of market introduction of new drugs originating from longer development times and shorter market exclusivity for companies developing such drugs (Berndt et al., 2015; Lietzan, 2018)On the other hand, consumers and politics complain about rising drug expenditures and high drug prices by far exceeding development costs (Costantini & Walensky, 2020; Fleming, 2019). Considering both perspectives and their potential implications corporate management needs to carefully access options and the related risks and potential business performance to adapt development direction and innovation strategy accordingly (Pisano, 2015). This work aims at providing guidance to this assessment by quantifying the impact of different choices for innovation on corporate profitability.


    The outcome of this investigation suggests a lack of sufficiency of product innovation in terms of NME drug launches for increased profitability. While successful innovation in terms of market launches of new products might be considered a necessary condition for increased profitability, other conditions must be fulfilled as well for economic success. Furthermore, the results show the limited prognostic power of companies or their employees and the high risk of technological and economic failure of drugs containing new molecular entities. From a management point of view, the main implication is that intangible assets acquired by company mergers and acquisitions, assets swaps, or licensing deals might be considerably overpriced, suggesting a more careful approach to intangible asset valuation. However, external acquisition of proprietary technology can still be beneficial or even necessary for product innovation. Launching drugs without NMEs can be considered as one measure to increase short-term profitability of brand manufacturers, making this a potential approach to avoid setbacks when patent protection of blockbuster drugs expires.


    The publication was supported by an internal grant for the research project VŠE IGS 58/2020.

Supplementary Material
R1-CE-5561-20220411033907.png Figure 2

Artz, K.W., Norman, P.M., Hatfield, D.E., Cardinal, L.B., 2010. A Longitudinal Study of The Impact Of R&D, Patents, and Product Innovation on Firm Performance. Journal of Product Innovation Management, Volume 27(5), pp. 725–740

Ball, G. P., Shah, R., Wowak, K. D., 2018. Product Competition, Managerial Discretion, and Manufacturing Recalls in the U.S. Pharmaceutical Industry. Journal of Operations Management, Volume 58-59, pp. 59–72

Berawi, M.A., 2021. Philosophy of Technology Design: Creating Innovation and Added Value. International Journal of Technology, Volume 12(3), pp. 291–319

Berndt, E.R., Nass, D., Kleinrock, M., Aitken, M., 2015. Decline in Economic Returns from New Drugs Raises Questions About Sustaining Innovations. Health Affairs, Volume 34(2), pp. 245–252

Bockova, N., Zizlavsky, O., 2016. Innovation and Financial Performance of a Company: A Study from Czech Manufacturing Industry. Transformations in Business & Economics, Volume 15(3), pp. 156–175

Costantini, S., Walensky, R.P., 2020. The Costs of Drugs in Infectious Diseases: Branded, Generics, and Why We Should Care. The Journal of Infectious Diseases, Volume 221(5), pp. 690–696

DiMasi, J.A., Grabowski, H.G., Hansen, R.W., 2016. Innovation in The Pharmaceutical Industry: New Estimates of R&D Costs. Journal of Health Economics, Volume 47, pp. 20–33

Drugs FDA., 2020. Food and Drug Administration. Available online at https://www.accessdata.fda.gov/scripts/cder/daf/index.cfm, Accessed on May 05, 2021

Dubois, P., Mouzon, O. de, Scott-Morton, F., Seabright, P., 2015. Market Size and Pharmaceutical Innovation. The RAND Journal of Economics, Volume 46(4), pp. 844–871

Ernst, H., 2001. Patent Applications and Subsequent Changes of Performance: Evidence from Time-Series Cross-Section Analyses on The Firm Level. Research Policy, Volume 30(1), pp. 143–157

Ernst, H., Conley, J., Omland, N., 2016. How To Create Commercial Value from Patents: The Role of Patent Management. R&D Management, Volume 46, pp. 677–690

Fazl?o?lu, B., Dalg?ç, B., Yereli, A.B., 2019. The Effect of Innovation on Productivity: Evidence from Turkish Manufacturing Firms. Industry and Innovation, Volume 26(4), pp. 439–460

Feyzrakhmanova, M., Gurdgiev, C., 2016. Patents and R&D Expenditure Effects on Equity Returns in Pharmaceutical Industry. Applied Economics Letters, Volume 23(4), pp. 278–283

Fleming, S., 2019. Drug Prices and Innovation. Forbes. Available online at https://www.forbes.com/sites/stanfleming/2019/06/20/the-relationship-between-drug-prices-and-innovation/?sh=45a9bbd84b11, Accessed on January 20, 2022

Garzón-Vico, A., Rosier, J., Gibbons, P., McNamara, P., 2020. The Impact of Failure and Success Experience on Drug Development. Journal of Product Innovation Management, Volume 37(1), pp. 74–96

Goodarzian, F., Wamba, S.F., Mathiyazhagan, K., Taghipour, A., 2021. A New Bi-Objective Green Medicine Supply Chain Network Design under Fuzzy Environment: Hybrid Metaheuristic Algorithms. Computers & Industrial Engineering, Volume 160, p. 107535

Leahy, A.S., 2011. The Determinants of Profitability in the Pharmaceutical Industry. American Journal of Health Sciences (AJHS), Volume 3(1), pp. 37–42

Lietzan, E., 2018. The Drug Innovation Paradox. Missouri Law Review, Volume 83(1), p. 39

Light, D.W., Warburton, R., 2011. Demythologizing the High Costs of Pharmaceutical Research. Bio Societies, Volume 6(1), pp. 34–50

Munos, B., 2009. Lessons from 60 Years of Pharmaceutical Innovation. Nature Reviews Drug Discovery, Volume 8(12), pp. 959–968

OECD, 2019. Health at a Glance 2019 (p. 243). Available online https://doi.org/10.1787/4dd50c09-en, Accessed on 07/26/2021

Pisano, G.P., 2015. You Need an Innovation Strategy. Harvard Business Review, Volume 93(6), pp. 44–54

Riedel, N.H., 2021. Impact of Strategic Changes on R&D Efficiency in Drug Development. In: International Society for Professional Innovation Management (ISPIM)

Robey, S., David, F.S., 2017. Drug Launch Curves in The Modern Era. Nature Reviews Drug Discovery, Volume 16(1), pp. 13–14

Saint-Hilary, G., Robert, V., Gasparini, M., 2018. Decision-making in Drug Development Using a Composite Definition of Success. Pharmaceutical Statistics, Volume 17(5), pp. 555–569

Scherer, F.M., 2010. Pharmaceutical Innovation. In B. H. Hall & N. Rosenberg (Eds.), Handbook of The Economics of Innovation, Volume 1, pp. 539–574, North-Holland

Schuhmacher, A., Gassmann, O., Hinder, M., 2016. Changing R&D Models in Research-Based Pharmaceutical Companies. Journal of Translational Medicine, Volume 14(1), pp. 1-11

Schuhmacher, A., Wilisch, L., Kuss, M., Kandelbauer, A., Hinder, M., Gassmann, O., 2021. R&D Efficiency of Leading Pharmaceutical Companies – A 20-year Analysis. Drug Discovery Today, Volume 26(8), pp. 1784–1789

Shaikh, M., Del Giudice, P., Kourouklis, D., 2021. Revisiting the Relationship Between Price Regulation and Pharmaceutical R&D Investment. Applied Health Economics & Health Policy, Volume 19(2), pp. 217–229

Sood, N., Mulligan, K., Zhong, K., 2021. Do Companies in The Pharmaceutical Supply Chain Earn Excess Returns? International Journal of Health Economics Management, Volume 21(1), pp. 99–114

Taalbi, J., 2017. What Drives Innovation? Evidence from Economic History. Research Policy, Volume 46(8), pp. 1437–1453

Tay-Teo, K., Ilbawi, A., Hill, S.R., 2019. Comparison of Sales Income and Research and Development Costs for FDA-Approved Cancer Drugs Sold by Originator Drug Companies. JAMA Network Open, Volume 2(1), p. 186875

Teramae, F., Makino, T., Sengoku, S., Lim, Y., Natori, T., Kodama, K., 2020. Research on Pharmaceutical Product Life Cycle Patterns for Sustainable Growth. Sustainability, Volume 12(21), p. 8938

Timotius, D., Kusumastuti, Y., Rochmadi, R., 2022. Characterization and Equilibrium Study of Drug Release of pH-Responsive Chitosan-graft-Maleic Film. International Journal of Technology, Volume 13(2), pp. 291–319

Visnjic, I., Wiengarten, F., Neely, A., 2016. Only the Brave: Product Innovation, Service Business Model Innovation, and Their Impact on Performance. Journal of Product Innovation Management, Volume 33(1), pp. 36–52

World Bank Open Data, 2020. World Bank. Available online at  https://data.worldbank.org/, Accessed on January 10, 2021

Zaytsev, A., Dmitriev, N., Rodionov, D., Magradze, T., 2021. Assessment of the Innovative Potential of Alternative Energy in the Context of the Transition to the Circular Economy. International Journal of Technology, Volume 12(7), pp. 1328–1338

Zeukeng, M.J., Seoane-Vazquez, E., Bonnabry, P., 2018. A comparison of new drugs approved by the FDA, the EMA, and Swissmedic: An Assessment of the international Harmonization of Drugs. European Journal of Clinical Pharmacology, Volume 74(6), pp. 811–818