Creative destruction in the pharmaceutical industry

Pharmaceutical firms usually patent any new innovation in terms of the chemicals they use. These innovations are then developed in to drugs which are marketed once approved by FDA. These patents have made and receive citations. Citations made by patents granted today are backward citations and citations a patent will receive in the future are forward citations. This research shows that these patent citations on have a positive effect on market value of Pharmaceutical firms related to the patent. Backward citations do not destroy company rents. In fact, backward citations, illustrate the importance of the cited patent. Multiple citations imply that other firms are trying to develop more competitive drugs and therefore reduce market share of the firm that owns the cited patent. However, more citations to the cited patent also imply that the patent may become a blockbuster drug. Overall, this research shows that extensive R&D is positively correlated with the firm's returns.