Effects of profit‐reducing policies on firm survival, financial performance, and new drug introductions in the research‐based pharmaceutical industry

Abstract We introduce a computational model of the evolution of a value‐maximizing research‐based pharmaceutical firm and parameterize it using estimates of R&D costs, profit distributions, and candidate attrition rates. We use the model to estimate how the probability of surviving and covering the costs of R&D depends on R&D scale and the policy regime. In the model, even small reductions in profitability have substantial impacts on firm success and innovation, but the effects may not be visible to consumers for many years. Smaller and newer firms are most vulnerable to reductions in the rewards for innovation. Copyright © 2007 John Wiley & Sons, Ltd.