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.

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