Perspective: The Evolution of R&D Conduct in the Pharmaceutical Industry

During the past three decades, a series of changes in the market environment have altered the structure of the pharmaceutical industry. While these changes have benefitted the generic drug sector, the effect on the branded drug sector has been detrimental. In sum, these changes have shortened the product life cycles for branded drugs by shifting market share to generic drugs sooner. As a result, it is more challenging for branded drugs to meet return on investment expectations because sales revenue has decreased. This study examines change in the pharmaceutical industry through the lens of the Structure-Conduct-Performance paradigm. While research and development intensity has remained stable during the past three decades, new product introductions have shifted to favor brand extension drugs over new, innovative drugs. This change in conduct, reflecting the structural changes that have impacted the industry, indicates a transformation in managers' expectations for returns from investment in new drug development. From a performance standpoint, in the latter part of the period studied, we find a positive relationship between stock return and the introduction of brand extensions reflecting the stock market's approval of the change in product strategy. Our discussion concludes that emerging structural changes may help offset the challenges faced by the branded drug sector and ultimately drive additional changes in the branded sector's conduct.