Does consumer demand pull scientifically novel drug innovation?

Abstract Prior literature shows that stronger consumer demand leads to increased pharmaceutical R&D. However, how strong these “demand‐pull” effects are for more scientifically novel drug innovation remains unknown. We address this question using comprehensive clinical trial data that include precise characterizations of the scientific approaches used in tested molecules. We characterize scientific novelty as the number of times each approach has been used in the past. Exploiting exogenous demand variation introduced by the introduction of Medicare Part D, we find strong evidence that demand‐pull effects are markedly skewed in favor of non‐novel or “follow‐on” drug R&D.