The Effect of R&D Scale on the Probability of Long-term Financial Success in the Research-Based Pharmaceutical Industry

We introduce a computational model of the evolution of a research-based pharmaceutical firm and parameterize it using existing estimates of R&D costs, profit distributions, and candidate attrition rates. We use the model to estimate how the probability of continuously covering the capitalized costs of R&D from new product revenues depends on R&D scale. In the model, even small reductions in profitability have substantial impacts on firm success and innovation, but it may take over ten years for such effects to become visible to consumers. Smaller and newer firms are most vulnerable to reductions in the rewards for innovation. JEL Codes: C41: Duration Analysis; C61: Dynamic Computational Models; G31: Investment Policy; L65: Pharmaceutical Industry; O32: Management of R&D