This paper investigates the impact of market size on the entry of new drugs and pharmaceutical innovation, focusing on exogenous changes driven by U.S. demographic trends. The authors find that a 1% increase in the potential market size for a drug category leads to a 4 to 6% increase in the number of new drugs in that category, driven by both generic and non-generic drugs. The results are robust to controlling for various factors such as pre-existing trends, changes in healthcare coverage, and lagged FDA approvals. The study also examines the effects of current, past, and future market sizes on drug entry, finding that current market size and 5-10 year leads have the strongest effects. Additionally, the paper explores the response of pharmaceutical patents to market size, noting a positive but statistically insignificant relationship. The theoretical framework links innovation rates to current and future market size, and the empirical analysis uses data from the Food and Drug Administration to support the hypothesis.This paper investigates the impact of market size on the entry of new drugs and pharmaceutical innovation, focusing on exogenous changes driven by U.S. demographic trends. The authors find that a 1% increase in the potential market size for a drug category leads to a 4 to 6% increase in the number of new drugs in that category, driven by both generic and non-generic drugs. The results are robust to controlling for various factors such as pre-existing trends, changes in healthcare coverage, and lagged FDA approvals. The study also examines the effects of current, past, and future market sizes on drug entry, finding that current market size and 5-10 year leads have the strongest effects. Additionally, the paper explores the response of pharmaceutical patents to market size, noting a positive but statistically insignificant relationship. The theoretical framework links innovation rates to current and future market size, and the empirical analysis uses data from the Food and Drug Administration to support the hypothesis.