The Impact of Public Basic Research on Industrial Innovation: Evidence from the Pharmaceutical Industry

While most economists believe that public scientific research fuels industry innovation and economic growth, systematic evidence supporting this relationship is surprisingly limited. In a recent study, Acemoglu and Linn (2004) identified market size as a significant driver of drug innovation in the pharmaceutical industry, but they did not find any evidence supporting science-driven innovation from publicly funded research. Their results are troubling for at least two reasons. First, a significant body of qualitative evidence suggests publicly funded biomedical research contributes to new drug innovation. Second, it calls into question the rationale supporting the enormous public investments into biomedical research. This paper generalizes existing case study research by examining the evidence for a systematic relationship between the U.S. National Institutes of Health (NIH) investments into biomedical research performed in academic laboratories and pharmaceutical industry innovation. Novel data on NIH biomedical research awards from 1955 through 1996 are combined with the pharmaceutical industry’s own R&D investment and a market size proxy to estimate a panel data model of pharmaceutical innovation by therapeutic market over time. The statistical analysis shows that NIH funded basic research, potential market size, and industry R&D all have economically and statistically significant effects on the entry of new drugs. The elasticity estimate in the preferred model implies that a 1% increase in the stock of public basic research ultimately leads to a 1.8% increase in the number new molecular entities (NMEs), an important category of new drug therapies defined by the U.S. Food and Drug Administration (FDA). For an average NME, the results also indicate the lag between public investment and NME applications to the FDA is seventeen to twenty-four years. The primary contribution of public basic research to new technological opportunities seems to occur in the years preceding private drug discovery. The analysis also finds a positive return to public investment in basic biomedical research. Using market sales data for an average NME, the direct return for the six therapeutic markets analyzed is about forty-three percent. One must interpret the magnitude of this estimate cautiously. The estimate does not reflect the plurality or totality of channels through which basic biomedical research is likely to impact social outcomes. It is limited to the contribution of basic research to NME innovation and represents only a fraction of the social return to public basic research.

Toole, Andrew (2011), The Impact of Public Basic Research on Industrial Innovation: Evidence from the Pharmaceutical Industry, ZEW Discussion Paper No. 11-063, Mannheim.