Economy of scales in R&D with block-busters

Abstract

Are large scale research programs that include many projects more productive than smaller ones with fewer projects? This problem of economy of scale is particularly relevant for understanding recent mergers in particular in the pharmaceutical industry. We present a quantitative theory based on the characterization of distributions of discounted sales S resulting from new products. Assuming that these complementary cumulative distributions have fat tails with approximate power law structure S^{-a}, we demonstrate that economy of scales are automatically realized when the exponent a is less than one. Empirical evidence suggests that the exponent a is approximately equal to 2/3 for the pharmaceutical industry.