R&D EFFECTIVENESS IN THE PHARMACEUTICAL INDUSTRY

One of the challenges for the Big Pharma is finding the golden line in the tradeoff between innovation and pricing. This paper investigates the relationship between R&D expenditures, patents and gross profits, based on US pharmaceutical industry panel data. The initial hypothesis states that there is a positive relationship between the R&D expenditures, patents applied in a current year and the company's profitability measured in terms of gross profits. The study concludes that there is a significant positive relationship between the R&D spending and the number of the applied patents in a current year. However, the relationship between the patents applied and the profitability has proved to be negative. The incline in the total assets and sales volume leads to the increasing profitability, whereas the size of the firm measured by the number of employees has an opposite negative effect. Results are relevant to the ongoing discussions regarding the fairness of pharmaceutical industry pricing, since it provides an evidence on the relationship between R&D expenditures, patents and gross profits.