Studies on Drug Substitution, Patent Policy and Innovation in the Pharmaceutical Industry

摘要

Results are presented of research undertaken to investigate the interdependencies between patent, product substitution, and regulatory policies, and to consider their joint effects on the drug substitution process. The returns on pharmaceutical research and development (R&D) for 37 new drug discoveries introduced during the period 1970 to 1976 are analyzed, and alternative scenarios on drug substitution, patent terms, and regulatory review times are considered. Results are reported of a statistical analysis of the determinants of R&D expenditures in the pharmaceutical industry and of an exploratory computer simulation analysis of the drug innovation process. The distribution of returns to pharmaceutical R&D is shown to be highly skewed; thus, R&D is subject to high levels of uncertainty and above average riskiness. Analysis of breakeven product life-times indicates that it takes 19 years for the average new drug to cover R&D at a real interest rate of 10 percent. The effect of declining patent life on the returns to innovation is shown to depend critically on the degree of product substitution and competition in the period after patent expiration. Reviewer comments and a response from the principal investigator are appended to the report.