Incentives and disincentives for research and development of new drugs by the pharmaceutical industry

The authors present a model with factors that influence research and development decisions by the pharmaceutical industry: risk of disease transmission and possibility of control; case-fatality and the presence of cure or treatments; income; number of persons who demand the medicine; and opportunity costs for the company. Companies tend to invest in markets with inelastic demand (highly contagious diseases with no possibility of controlling transmission and/or very lethal diseases without treatment) and/or where there is a large population or high per capita income. Companies tend not to invest in markets where marginal costs exceed marginal income, particularly when costs increase permanently as a consequence of rising opportunity costs generated by foregoing profit in other markets. In such cases, policies to subsidize R&D are not effective, and policies must be orientated towards strengthening basic and applied research by public institutions.