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Drug Patent Expirations: Potential Effects on
Pharmaceutical Innovation
Wendy H. Schacht
Specialist in Science and Technology Policy
March 2, 2012
Congressional Research Service
7-5700
www.crs.gov
R42399
CRS Report for Congress
Pr
epared for Members and Committees of Congress
c11173008
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Drug Patent Expirations: Potential Effects on Pharmaceutical Innovation
Summary
Congress has exhibited a strong and ongoing interest in facilitating the development of new,
innovative pharmaceuticals for the marketplace while reducing the cost of drugs to consumers.
Policies pertaining to funding for research and development (R&D), intellectual property
protection, and cooperative ventures have played an important role in the economic success of the
pharmaceutical sector. Industry-specific legislation, including the Drug Price Competition and
Patent Term Restoration Act of 1984, commonly known as the “Hatch-Waxman Act,” also work
to encourage innovation in the pharmaceutical sector while facilitating the entry of lower cost
generic competition.
A critical component of many of these federal efforts concerns patents. Patent ownership can
provide an economic incentive for companies to take the results of research and make the often
substantial investment necessary to bring new goods and services to the marketplace. In the
pharmaceutical industry, patents are perceived as particularly important to innovation due, in part,
to the ease of duplicating the invention.
Recently, patents on a significant number of “blockbuster” drugs have expired. Lipitor, the
world’s best selling medicine lost patent protection a the end of 2012 and immediately faced
generic competition. Between 2012 and 2016, branded pharmaceuticals with an estimated $117.2
billion in U.S. sales are expected to go off patent. Once these drugs are no longer patent protected
they are expected to lose up to 80% of the revenue generated for the innovator companies.
Brand firms depend on funds from sales of blockbuster pharmaceuticals for investments in
additional research and development leading to new products that can improve the health and
welfare of the public. The effect of blockbuster patent expirations on company revenues and
R&D funding can be dramatic, particularly when there are insufficient products in the
development pipeline to replace these drugs. Some experts point to indications that productivity is
declining in this sector as revenues available for additional investment appear to be decreasing.
While many factors contribute to innovation in the brand pharmaceutical industry and its ability
to bring new and inventive products to the marketplace, this sector is facing significant issues
associated with the loss of revenue available for additional R&D due to patent expirations and
generic competition. Generic versions of brand pharmaceuticals benefit the public due to their
lower cost and greater availability. However, experts point out that without the research,
development, and testing performed by the brand name pharmaceutical companies, generic drugs
would not exist. Thus, there is ongoing congressional interest in striking the proper balance
between lower cost drugs and maintaining an innovative domestic pharmaceutical sector.
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Drug Patent Expirations: Potential Effects on Pharmaceutical Innovation
Contents
Introduction...................................................................................................................................... 1
The Pharmaceutical Industry ........................................................................................................... 2
Role of Patents................................................................................................................................. 4
The Hatch-Waxman Act................................................................................................................... 7
Patent Expirations............................................................................................................................ 9
Innovation Issues ........................................................................................................................... 10
Blockbuster Drugs and the Innovation Pipeline ...................................................................... 10
Drug Approvals ....................................................................................................................... 13
Productivity Issues................................................................................................................... 13
Concluding Observations............................................................................................................... 16
Contacts
Author Contact Information........................................................................................................... 18
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Drug Patent Expirations: Potential Effects on Pharmaceutical Innovation
Introduction
Congress has exhibited a strong and ongoing interest in facilitating the development of new,
innovative pharmaceuticals for the marketplace while reducing the cost of drugs to consumers. To
date, the U.S. system of research, development, and commercialization has had a clear impact on
the pharmaceutical and biotechnology industries. Policies pertaining to funding for research and
development (R&D), intellectual property protection, and cooperative ventures have played an
important role in the economic success of these sectors.1 Industry-specific legislation, including
the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the
“Hatch-Waxman Act,” also work to encourage innovation in the pharmaceutical sector while
facilitating the entry of lower cost generic competition.2
A critical component of many of these federal efforts concerns patents.3 Patent ownership can
provide an economic incentive for companies to take the results of research and make the often
substantial investment necessary to bring new goods and services to the marketplace. The grant of
a patent provides the inventor with a mechanism to capture the returns to his invention through
exclusive rights on its practice for a limited time. In the pharmaceutical industry, patents are
perceived as particularly important to innovation due, in part, to the ease of duplicating the
invention.
Recently, patents on a significant number of “blockbuster”4 drugs have expired. At the end of
2011, Lipitor, with 2010 retail sales in the U.S. of $5.8 billion5 and the world’s best selling
medication, lost patent protection. Between 2012 and 2016, branded pharmaceuticals with an
estimated $117.2 billion in U.S. sales are expected to go off patent.6 Once these drugs lose patent
protection they are expected to lose up to 80% of the revenue generated for the innovator
companies. “In the case of the top selling drugs, generics are capturing most of the market within
weeks of their launch.”7
Innovator companies depend on the funds generated from sales of blockbuster drugs to invest in
additional R&D leading to new products that can improve the health and welfare of the public. At
the same time, generic versions of these pharmaceuticals benefit the public due to their lower cost
1 Iain Cockburn, Rebecca Henderson, Luigi Orsenigo, and Gary P. Pisano, “Pharmaceuticals and Biotechnology,” U.S.
Industry in 2000 (National Academy Press, Washington, 1999), 365.
2 See CRS Report R41114, The Hatch-Waxman Act: A Quarter Century Later, by Wendy H. Schacht and John R.
Thomas.
3 See CRS Report RL32076, The Bayh-Dole Act: Selected Issues in Patent Policy and the Commercialization of
Technology, by Wendy H. Schacht, and CRS Report RL32324, Federal R&D, Drug Discovery, and Pricing: Insights
from the NIH-University-Industry Relationship, by Wendy H. Schacht.
4 A “blockbuster” drug is defined as a drug product having in excess of $1 billion (2000 deflated dollars) in U.S. annual
sales. Ernst R. Berndt and Murray L. Aitken, Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals
in the Quarter Century After the 1984 Waxman-Hatch Legislation, National Bureau of Economic Research, October
2010, available at http://www.nber.org/papers/w16431, 3.
5 Medco Health Solutions, Inc., Estimated Dates of Possible First Time Generic/Rx-to-OTC Market Entry, July 2011,
available at http://www.medcohealth.com/art/corporate/anticipatedfirsttime_generics.pdf.
6 EvaluatePharma, Patent Storm Gathering Strength, January 28, 2011, available at http://www.evaluatepharma.com/
Universal/View.aspx?type=Story&id=235841&isEPVantage=yes.
7 Henry Grabowski, “Competition Between Generic and Branded Drugs,” in Frank A. Sloan and Chee-Ruey Hsieh,
eds., Pharmaceutical Innovation, Incentives, Competition, and Cost-Benefit Analysis in International Perspective
(Cambridge University Press, 2007), 160.
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Drug Patent Expirations: Potential Effects on Pharmaceutical Innovation
and greater availability; according to one estimate, over the 10 years between 2001 and 2010,
generic drugs “saved the U.S. health care system more than $931 billion.”8 However, “while
consumers and companies [that] provide health benefits could gain from the substantial slashes in
costs, big pharma has to look at new ways and strategies to fill the [revenue] gap” created by the
unprecedented number of patent expirations on blockbuster drugs. 9
The Pharmaceutical Industry
The pharmaceutical industry is highly innovative and “stands as one of our nation’s leading
industries in high quality job creation ... and global competiveness.”10 American pharmaceutical
firms have “consistently maintained a competitive edge in international markets” 11 and lead in
new drug discoveries.12 A review of the 75 best selling drugs in 2009 determined that more than
half originated in the United States.”13 In 2010, 7 of the top 20 global drug companies were based
in the United States.14
Estimates of employment in the pharmaceutical sector differ. A study by the Milken Institute
found that “private-sector employment in the U.S. biomedical industry in 2009 was 1,219,200,”
including 283,700 biopharmaceutical jobs and “526,300 in related R&D, testing, and labs.”15
Research by the Battelle Technology Partnership Practice indicated that “the biopharmaceutical
sector is responsible for more than four million jobs in the U.S. economy (674,000 direct jobs and
an additional 3.4 million indirect and induced jobs) in 2009” which generated “$258 billion in
wages and benefits.”16 Despite these different figures, it is clear that the wages paid to
pharmaceutical sector employees are significantly higher than in other industries. According to
the Milken Institute report, wages in the biomedical sector average 70% more than the national
average wage.17 Battelle found that the average total compensation per employee in the
biopharmaceutical sector is more than twice that of the average wage in the U.S. private sector.18
8 IMS Healthcare Institute and IMS Health, Savings, An Economic Analysis of Generic Drug Usage in the U.S.,
Executive Summary, Generic Pharmaceutical Association, September 2011, 1, available at http://www.gphaonline.org/
sites/default/files/GPhA%20IMS%20Study%20WEB%20Sep20%2011.pdf.
9 Pharmaceutical Technology, The Patent Cliff: Rise of the Generics, October 5, 2011, available at
http://www.pharmaceutical-technology.com/features/featurethe-patent-cliff-rise-of-the-generics/.
10 Battelle Technology Partnership Practice, The U.S. Biopharmaceuticals Sector: Economic Contribution to the
Nation, July 2011, 1, available at http://www.phrma.org/sites/default/files/159/2011_battelle_report_
on_economic_impact.pdf.
11 Department of Commerce, International Trade Administration, U.S. Industry &Trade Outlook 2000 (McGraw-Hill,
2000), 11-16.
12 Yali Friedman, “Location of Pharmaceutical Innovation: 2000-2009,” Nature Reviews/Drug Discovery, November
2010, 835, available at http://www.nature.com/nrd/journal/v9/n11/full/nrd3298.html.
13 Ross C. DeVol, Armen Bedroussian, and Benjamin Yeo, The Global Biomedical Industry: Preserving U.S.
Leadership, Milken Institute, September 2011, 16, available at http://www.milkeninstitute.org/publications/
publications.taf?function=detail&ID=38801285&cat=resrep.
14 Ibid., 16.
15 Ibid., 1.
16 The U.S. Biopharmaceuticals Sector: Economic Contribution to the Nation, 5.
17 The Global Biomedical Industry: Preserving U.S. Leadership, 1.
18 The U.S. Biopharmaceuticals Sector: Economic Contribution to the Nation, 8.
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Estimates on global pharmaceutical 2010 R&D funding range from $120 billion and $133
billion.19 In the United States, research and development spending by the biopharmaceutical
industry totaled between $67.4 billion and $68.0 billion.20 This U.S. investment in health-related
R&D exceeds all other countries and is one reason for the leadership of American pharmaceutical
firms. In addition, U.S. companies have demonstrated a pattern of R&D support that has
increased at a faster rate than R&D in Europe. In 1990, investments in the European
biopharmaceutical industry were 50% above those in the United States; by 2006, investments in
the U.S. biopharmaceutical industry were 40% more than in Europe.21
According to a study undertaken by Burrill & Co., 2010 R&D funding by members of the
Pharmaceutical Researchers and Manufacturers Association (PhRMA) was 2.3% more than the
previous year and a record high for the industry.22 Other analysis revealed that the average annual
growth rate in U.S. R&D expenditures between 2000 and 2007 is largest in the pharmaceutical
sector when compared to all industries that produce products that can be imported or exported.
This R&D support is almost twice as much per employee than the next closest industry included
in the study.23 Similarly, the National Science Foundation found that in 2008, the pharmaceutical
and medicine industries invested over twice the amount of funding for R&D ($70 million) than
the nearest R&D intensive sector (semiconductor and electronic components).24
In 2010, domestic R&D spending for members of PhRMA totaled an estimated $37.4 billion,
with 20.3% of domestic sales reinvested in research and development.25 This figure does not
include the 5% reduction in spending by Roche, which ended its membership in PhRMA in
2009.26 Four of the five PhRMA members with the largest R&D funding increased their spending
in 2010. These five companies contributed approximately 56.6% of the $67.4 billion in total
pharmaceutical industry R&D support.27
19 International Federation of Pharmaceutical Manufacturers & Associations, The Pharmaceutical Industry and Global
Health: Facts and Figures, 2011, 15, available at http://www.ifpma.org/fileadmin/content/Publication/2011_
The_Pharmaceutical_Industry_and_Global_Health_low_ver2.pdf, and Battelle, “2011 Global R&D Funding Forecast,”
R&D Magazine, December 2010, 12, available at http://www.battelle.org/aboutus/rd/2011.pdf.
20 2011 Global R&D Funding Forecast, 9 and Pharmaceutical Research and Manufacturers of America,
Pharmaceutical Industry 2011 Profile, inside cover, available at http://www.phrma.org/sites/default/files/159/
phrma_profile_2011_final.pdf, and CMR International, “2011 Pharmaceutical R&D Factbook,” as noted in Drug
Dropout in Clinical Trials is at Unsustainable Levels, According to Thomson Reuters, CMR International, June 27,
2011 Press Release, available at http://thomsonreuters.com/content/press_room/science/R+D-CMR-factbook-2011.
21 The Global Biomedical Industry: Preserving U.S. Leadership, 20.
22 Alex Philippidis, “Restructuring and Cuts Threaten to Lower Industry R&D Spending Next Year,” Genetic
Engineering & Biotechnology News, April 4, 2011 available at http://www.genengnews.com/analysis-and-insight/
restructuring-and-cuts-threaten-to-lower-industry-r-d-spending-next-year/77899389/. See also, PhRMA, R&D
Investments by U.S. Biopharmaceutical Companies Reached Record Levels in 2010, March 15, 2011, available at
http://www.phrma.org/media/releases/rd-investment-us-biopharmaceutical-companies-reached-record-levels-2010.
23 Nam D. Pham, The Impact of Innovation and the Role of Intellectual Property Rights on U.S. Productivity,
Competitiveness, Jobs, Wages, and Exports, ndp consulting, April 2010, 16 and 13, available at
http://www.theglobalipcenter.com/sites/default/files/reports/documents/NDP_IP_Jobs_Study_Hi_Res.pdf.
24 National Science Foundation, “U.S. Businesses Report 2008 Worldwide R&D Expense of $330 Billion: Findings
from New NSF Survey,” InfoBrief, NSF 10-322, March 2010, 3, available at http://www.nsf.gov/statistics/infbrief/
nsf10322/nsf10322.pdf.
25 Pharmaceutical Industry 2011 Profile, inside front cover and 50.
26 Restructuring and Cuts Threaten to Lower Industry R&D Spending Next Year.
27 Ibid.
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However, other studies indicate that that R&D spending is declining. An analysis of the top 50
global pharmaceutical companies (as determined by their 2010 healthcare revenue) found that 18
of these firms, including AstraZeneca and GlaxoSmithKline, decreased their annual R&D
spending from the previous year.28 Similarly, research performed by CMR International noted that
“R&D expenditure continued to drop in 2010 to an estimated three year low of $68 billion, which
is in stark contrast to the growth rate leading up to 2008.”29 According to one report, the world’s
largest pharmaceutical company, Pfizer, plans to reduce its R&D funding by 25% between 2010
and 2012 while other firms are expected to make less substantial cuts.30 Analysis by Battelle
indicated that:
Some of the largest cuts still coming are from Merck ... , which is closing eight global R&D
facilities as part of a larger operational consolidation effort. Pfizer ... is signaling cuts of up
to $3 billion in its R&D budget over the next few years. AstraZeneca has announced plans to
reduce R&D budgets by $1 billion in the next four years, and Abbott Laboratories ... has
announced plans for big cuts in R&D among more than 3,500 job cuts globally. Roche also
recently announced plans to cut 4,800 jobs globally.31
Role of Patents
Experts widely believe that patents encourage invention and innovation by simultaneously
protecting the inventor and fostering competition. They provide the inventor with a right to
exclude others, temporarily, from use of the invention without compensation. Patents give the
owner an exclusive right for (typically) 20 years from date of filing to further develop an idea,
commercialize a product or process, and potentially realize a return on the initial investment.
Concurrently, the process of obtaining a patent places the concept in the public arena. As a
disclosure system, the patent can, and often does, stimulate other firms or individuals to invent
“around” existing patents to provide for parallel technical developments or meet similar market
needs.32 This may form the basis for technological progress as patents are used to create an
environment of competitiveness with multiple sources of innovation. The value of widespread
invention is reinforced by research performed by Professors Robert Merges and Richard Nelson
which demonstrated that when only “a few organizations controlled the development of a
technology, technical advance appeared sluggish.”33
Innovation produces new knowledge but is often costly and resource intensive. One characteristic
of this knowledge is that it is a “public good,” a good that is not consumed when it is used. If
discoveries were universally available without a means for the inventor to realize a return on
investment, most commentators are convinced that there would result a “much lower and indeed
28 Top 50 Pharmaceutical Companies and Their Pipelines 2011, PharmaLive.com Special Report, September 2011, 1
and 4, available at http://www.pharmalive.com/special_reports/sample.cfm?reportID=359.
29 Drug Dropout in Clinical Trials is at Unsustainable Levels, According to Thomson Reuters, CMR International.
30 Ben Hirschler, “Drug R&D Spending Fell in 2010, and Heading Lower,” Reuters, June 26, 2011, available at
http://www.reuters.com/article/2011/06/26/pharmaceuticals-rd-idUSL6E7HO1BL20110626.
31 2011 Global R&D Funding Forecast, 12 – 13.
32 For more information, see CRS Report RL32324, Federal R&D, Drug Discovery, and Pricing: Insights from the
NIH-University-Industry Relationship, by Wendy H. Schacht.
33 Robert P. Merges and Richard R. Nelson, “On the Complex Economics of Patent Scope,” Columbia Law Review,
May 1990, 908.
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suboptimal level of innovation.”34 Thus, the patent process is designed to resolve the problem of
appropriability; patents permit novel concepts or discoveries to become “property” when reduced
to practice and therefore allow for control over their use.
Article I, Section 8, Clause 8 of the U.S. Constitution states: “The Congress Shall Have Power ...
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and
Inventors the exclusive Right to their respective Writings and Discoveries....” Codified in Title 35
of the United States Code, one who “invents or discovers any new and useful process, machine,
manufacture, or any composition of matter, or any new and useful improvement thereof, may
obtain a patent therefore, subject to the conditions and requirements of this title.”35 Patents are
issued by the United States Patent and Trademark Office (USPTO). To be afforded patent rights,
an invention must be judged to consist of patentable subject matter, possess utility, and be novel
and nonobvious. The application must fully disclose and distinctly claim the invention for which
protection is sought.
The grant of a patent does not provide the owner with an affirmative right to market the patented
invention. Pharmaceutical products are also subject to marketing approval by the Food and Drug
Administration (FDA).36 Federal laws typically require pharmaceutical manufacturers to
demonstrate that their products are safe and effective in order to bring these drugs to the
marketplace. USPTO issuance of a patent and FDA marketing consent are distinct events that
depend upon different criteria.37
However, not everyone agrees that the patent system is a particularly effective means to stimulate
innovation. Some observers believe that the patent system encourages industry concentration and
presents a barrier to entry in some markets.38 They suggest that the patent system often converts
pioneering inventors into technological suppressors, who use their patents to block subsequent
improvements and thereby impede technological progress.39 Others believe that the patent system
too frequently attracts speculators who prefer to acquire and enforce patents rather than engage in
socially productive activity such as bringing new products and processes to the marketplace.40
Some experts argue that patents do not work as well in reality as in theory because they do not
confer perfect appropriability. In other words, they allow the inventor to obtain a larger portion of
the returns on his investment but do not permit him to capture all the benefits. Patents can be
circumvented and infringement cannot always be proven. Thus, patents are not the only way, nor
necessarily the most efficient means, for the inventor to protect the benefits generated by his
efforts. A study by Yale University’s Richard Levin and his colleagues concluded that lead time,
34 Kenneth W. Dam, “The Economic Underpinnings of Patent Law,” Journal of Legal Studies, January 1994, 247.
35 35 U.S.C.§101.
36 For more information see CRS Report R41114, The Hatch-Waxman Act: A Quarter Century Later, by Wendy H.
Schacht and John R. Thomas, and CRS Report RL30756, Patent Law and Its Application to the Pharmaceutical
Industry: An Examination of the Drug Price Competition and Patent Term Restoration Act of 1984 (“The Hatch-
Waxman Act”), by Wendy H. Schacht and John R. Thomas.
37 For more information see CRS Report RL33288, Proprietary Rights in Pharmaceutical Innovation: Issues at the
Intersection of Patents and Marketing Exclusivities, by John R. Thomas.
38 See John R. Thomas, “Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties,”
University of Illinois Law Review, 2001, 305.
39 On the Complex Economics of Patent Scope, 839.
40 Elizabeth D. Ferrill, “Patent Investment Trusts: Let’s Build a Pit to Catch the Patent Trolls,” 6 North Carolina
Journal of Law and Technology, 2005, 367.
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learning curve advantages (e.g., familiarity with the science and technology under consideration),
and sales/service activities were typically more important in exploiting appropriability than were
patents. That was true for both products and processes. However, patents were found to be better
at protecting products than processes. The novel ideas associated with a product often can be
determined through reverse engineering—taking the item apart to assess how it was made. That
information then could be used by competitors if not covered by a patent. Because it is more
difficult to identify the procedures related to a process, other means of appropriation often are
seen as preferable to patents, with the attendant disclosure requirements.41
An analysis of the literature in this area performed for the World Intellectual Property
Organization42 highlights several conclusions concerning the use of patents that mirror much of
the above discussion. The research surveyed indicates that “lead time and secrecy seem to be the
most relevant appropriability devices for most sectors” and that while patents may not be the
most effective means to protect inventions, they are still utilized by firms in all industries. There
is a consensus that “disclosure and ease of inventing-around are the most important reasons for
not patenting.” At the same time, “patents are more relevant as an appropriability mechanism for
product than for process innovations and for some sectors such as chemicals (especially
pharmaceuticals), some machinery industries and biotechnology.”
While studies show that the value of patents differs across industries and between firms of
different maturation levels within a sector,43 the pharmaceutical industry perceives patents as
critical to protecting innovation. Several studies over the years have demonstrated the important
role patents play in the pharmaceutical sector. Of the 18 major manufacturing industries analyzed
by Richard Levin and his colleagues, only drug companies rated product patents the most
effective means of ensuring that firms can capture the profits associated with their innovations.44
Later research by Professor Wesley Cohen and his colleagues demonstrated that patents were
considered the most effective method to protect inventions in the drug industry, particularly when
biotechnology is included.45 A recent paper by several professors at the Berkeley School of Law,
University of California, found that there were “substantial differences between the health-related
sectors (biotechnology and medical devices), in which patents are more commonly used and
considered important, and the software and Internet fields, in which patents are reported to be less
useful.”46 These studies reinforce earlier work by the late Professor Edwin Mansfield that
indicated 65% of pharmaceutical inventions would not have been brought to market without
patent protection in contrast to the 8% of innovations made in other industries.47
41 Richard C. Levin, Alvin K. Klevorick, Richard R. Nelson, and Sidney G. Winter. “Appropriating the Returns for
Industrial Research and Development,” Brookings Papers on Economic Activity, 1987, in The Economics of Technical
Change, eds. Edwin Mansfield and Elizabeth Mansfield (Vermont, Edward Elgar Publishing Co., 1993), 254.
42 Andres Lopez, “Innovation and Appropriability, Empirical Evidence and Research Agenda,” in The Economics of
Intellectual Property, World Intellectual Property Organization, January 2009, 21, available at http://www.wipo/int/
export/sites/www/ip-development/en/economics/pdf/wo_1012_e.pdf.
43 Stuart J.H. Graham, Robert P. Merges, Pam Samuelson, and Ted Sichelman, “High Technology Entrepreneurs and
the Patent System: Results of the 2008 Berkeley Patent Survey,” Berkeley Technology Law Journal, April 16, 2010,
1255, available at http://www.btlj.org/data/articles/24_feature.pdf.
44 Appropriating the Returns for Industrial Research and Development, 255 and 257.
45 Wesley M. Cohen, Richard R. Nelson, and John P. Walsh, Protecting Their Intellectual Assets: Appropriability
Conditions and Why U.S. Manufacturing Firms Patent (or Not), NBER Working Paper 7552, Cambridge, National
Bureau of Economic Research, February 2000, available at http://www.nber.org/papers/w7552.
46 High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey, 1255.
47 Edwin Mansfield, “Patents and Innovation: An Empirical Study,” Management Science, February 1986, 173-181.
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Patents may be particularly important in the pharmaceutical sector because of the relative ease of
replicating the finished product. Imitation costs vary among industries. For example, while it is
expensive, complicated, and time consuming to duplicate an airplane, it is relatively simple to
chemically analyze a pill and reproduce it.48 The degree to which industry perceives patents as
effective has been characterized as “positively correlated with the increase in duplication costs
and time associated with patents.”49 Early research in this area by Mansfield indicated that, in
certain industries, patents significantly raise the costs incurred by nonpatent holders wishing to
use the idea or invent around the patent—an estimated 40% in the pharmaceutical sector, 30% for
major new chemical products, and 25% for typical chemical goods—and are thus viewed as
significant. However, in other industries, patents have much smaller impact on the costs
associated with imitation (e.g., in the 7%-15% range for electronics), and may be considered less
successful in protecting resource investments.50
The Hatch-Waxman Act
P.L. 98-417, the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly
known as the Hatch-Waxman Act), as amended, made significant changes to the patent laws as
they apply to pharmaceutical products in an attempt to balance the need for innovative new drugs
and increased availability of less expensive generic products.51 The act created several practices
intended to facilitate the marketing of generic drugs while permitting brand name companies to
recover a portion of their intellectual property rights lost during the pharmaceutical approval
process. Among the legislative provisions are methods for extending the term of a patent to reflect
regulatory delays encountered in obtaining marketing consent from the FDA; a statutory
exemption from patent infringement for activities associated with regulatory marketing approval
for a generic version of a patented drug; establishment of mechanisms to challenge the validity of
a pharmaceutical patent; and a reward for disputing the validity, enforceability, or infringement of
a patented and approved drug. The act affords the FDA certain authority to offer periods of data
and marketing exclusivity for a pharmaceutical independent of the rights conferred by patents.
The provisions in the Hatch-Waxman Act differ from traditional infringement procedures
associated with other patented products and processes. The company making a generic product is
permitted to rely upon data paid for and compiled by the original manufacturer to establish the
drug’s safety and efficacy necessary to obtain FDA marketing approval. As described by Patricia
Danzon of the Wharton School, University of Pennsylvania, and Michael Furukawa, W.P. Carey
School of Business, Arizona State University, “generics can largely free-ride on the R&D and
informational investments made by originator firms, thereby realizing much lower cost
structures.”52 This expedited approval process may allow a bioequivalent drug to reach the market
as soon as the patent on the original pharmaceutical expires. Nowhere else in U.S. patent law
does such a robust “experimental use” exemption exist.
48 Federic M. Scherer, “The Economics of Human Gene Patents,” 77 Academic Medicine, December 2002, 1350.
49 Appropriating the Returns for Industrial Research and Development, 269.
50 Edwin Mansfield, Mark Schwartz, and Samuel Wagner, “Imitation Costs and Patents: An Empirical Study,” The
Economic Journal, December 1981, in The Economics of Technical Change, 270.
51 For a detailed discussion of this legislation see The Hatch-Waxman Act: A Quarter Century Later.
52 Patricia M. Danzon and Michael F. Furukawa, Cross-National Evidence on Generic Pharmaceuticals: Pharmacy vs.
Physician-Driven Markets, National Bureau of Economic Research, July 2011, 3, available at http://nber.org/papers/
w17226.
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Many commentators agree that the Hatch-Waxman Act has had a significant effect on the
availability of generic substitutes for brand name drugs. Prior to the law, 35% of top-selling drugs
had generic competitors after patent expiration; now almost all do.53 The Generic Pharmaceutical
Association (GPhA) points out that of 12,751 drugs listed in the Orange Book,54 10,072 have
generic versions available to consumers.55 Concurrently, the time to market for these generic
products has decreased substantially. According to the Congressional Budget Office (CBO), prior
to passage of the act in 1984, the average time between the expiration of a brand name patent and
the availability of a generic was three years. Today, upon FDA approval, a generic may be
introduced immediately after patents on the innovator drug expires as companies are permitted to
undertake clinical testing during the time period associated patents are in force. “By streamlining
the approval process for a generic drug form, the Hatch-Waxman Act reduced the average delay
between patent expiration and generic entry into the consumer market from greater than three
years to less than three months for top-selling drugs.”56 In cases where the generic manufacturer
is the patent holder, a substitute drug may be brought to market before the patent expires.
The use of generic drugs has expanded dramatically since passage of the act. CBO found that in
1980, 13% of prescriptions for multi-source drugs were filled by generic prescriptions.57 Another
analysis indicated that in 1984, the year the Hatch-Waxman Act became law, 18.6% of U.S.
prescriptions were written for generic products. 58 By 2009, GPhA maintains that 74.2% of
prescriptions were filled by generics (65.6% by unbranded generics, 8.6% by generics produced
or licensed by the brand name company).59 The latest information from IMS Health demonstrates
that in 2010, 78% of all retail prescriptions were filled by generics.60
While generics fill over two-thirds of written prescriptions, they represent a much smaller portion
of the sales in the United States. According to GPhA, in 2009 unbranded generics generated
10.5% of U.S. pharmaceutical sales in dollars, branded generics generated 12.4% of sales, and
brands generated 77.1 of total U.S. sales.61 Projecting into the future, IMS Institute for Healthcare
53 Michael A. O’Shea and Christopher M. Mikson, “The Hatch-Waxman Act: Still Critical, Still in Flux,” The National
Law Journal, January 23, 2006.
54 Each holder of an approved new drug application (NDA) is required to list patents it believes would be infringed if a
generic drug were marketed before the expiration of these patents. The FDA maintains this list of patents in its
publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange
Book.” The Orange Book provides generic pharmaceutical manufacturers with an accessible list of approved drugs that
are potentially eligible for an “Abbreviated New Drug Application” (ANDA) or a “paper NDA” (a 505(b)(2)
application). An ANDA or paper NDA permits the generic manufacturer to rely upon the safety and efficacy data of the
original manufacturer when applying to the FDA for approval of a generic drug.
55 Generic Pharmaceutical Association, Facts at a Glance, available at http://www.gphaonline.org/about-gpha/about-
generics/facts.
56 David A. Holdford and Bryan A. Liang, The Growing Influence of Generic Drugs: What it Means to Pharmacists
and Physicians, Power-Pak C.E., December 2006, available at http://www.centad.org/seminar/4.%20Generics/
GrowingInfluencePowewrPak2006.pdf.
57 Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected Prices and Returns in
the Pharmaceutical Industry, (Washington, DC, July 1998), available at http://www.cbo.gov.
58 Richard G. Frank, “The Ongoing Regulation of Generic Drugs,” The New England Journal of Medicine, November
15, 2007, 1993.
59 Generic Pharmaceutical Association, Generics, A Steady Course in a Sea of Change, 2010, 17, available at
http://www.gphaonline.org/sites/default/files/Annual%20Report%202010.pdf.
60 IMS Institute for Healthcare Informatics, The Use of Medicines in the United States: Review of 2010, April 2011, 22
available at http://www.theimsinstitute.org.
61 Ibid.
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Informatics argues that by 2015, 21%-22% of spending in the U.S. market will be for generic
drugs.62
Patent Expirations
Patents on a number of major selling drugs recently have expired and additional blockbuster
pharmaceuticals are expected to go off patent in the near future. According to recent estimates,
more than 80 blockbuster drugs are set to expire between 2011 and 2015.63 IMS Institute for
Healthcare Informatics predicts that patent expirations during this time are anticipated to reduce
worldwide spending on brand drugs by $120 billion.64 “Globally, market share for branded
medicines, which fell from 70 percent in 2005 to 64 percent in 2010, is expected to decline
further through 2015, to 53 percent.”65 The United States will experience the greatest increase in
purchases of generic drugs as new ones come available in the marketplace due to patent
expiration.66 Research by Medco found that “[m]ore than $50 billion in U.S. brand drugs,
accounting for about 20% of current plan drug spending, will open to generic competition from
late 2011 through 2013....”67 EvaluatePharma puts the amount of U.S. sales affected by patent
expirations between 2011 and 2016 at $133 billion; 2012 is expected to be the most severe with
$33.2 billion in sales affected.68
The number one selling drug in the United States, Lipitor, with 2010 sales of $7.2 billion, lost
patent protection at the end of 2011.69 Zyprexa, with 2010 U.S. sales of $3.0 billion,70 and Keppra
XR, with 2010 U.S. sales of $130 million,71 also went off patent in 2011. That same year, an
authorized generic version of Caduet (2010 U.S. sales of $296 million) became available as well
as a generic version of Combivir (2010 U.S. sales of $252 million).72
Among the top selling drugs (2010) in the U.S. market that are expected to go off patent in 2012
are Plavix (number three at $6.1 billion), Seroquel (number six at $4.4 billion), Singulair (number
seven at $4.1 billion), Actos (number nine at $3.5 billion), and Lexapro (number 19 at $2.8
billion). Cymbalta (number 13 at $3.2 billion) is anticipated to lose patent protection in 2013 and
Copaxone (number 24 at $2.2 billion) in 2014. Patents on Nexium, the number two best selling
62 IMS Institute for Healthcare Informatics, The Global Use of Medicines: Outlook Through 2015, May 2011, 11,
available at http://www.theimsinstitute.com.
63 Ken Krizner, “Major Brand-Name Drugs Face Patent Expiration,” Drug Topics, March 15, 2011, available at
http://drugtopics.modernmedicine.com/drugtopics/Modern+Medicine+Now/Major-brand-name-drugs-face-patent-
expiration/ArticleStandard/Article/detail/711836.
64 The Global Use of Medicines: Outlook Through 2015, 3.
65 Gary Balyas, “IMS Institute Forecasts Global Spending on Medicines to Reach Nearly $1.1 Trillion by 2015,” IMS
Health, May 18, 2011, available at http://www.imshealth.com/portal/site/ims/
menuitem.d248e29c86589c9c30e81c033208c22a/?vgnextoid=01146b46f9aff210VgnVCM100000ed152ca2RCRD.
66 The Global Use of Medicines: Outlook Through 2015, 11.
67 Medco, 2011 Drug Trend Report, Executive Summary, 5, available at http://www.drugtrendreport.com/Medco-2011-
Drug-Trend-Report-Executive-Summary.pdf.
68 Patent Storm Gathering Strength.
69 The Use of Medicines in the United States: Review of 2010, 32.
70 Ibid.
71 Estimated Dates of Possible First time Generic/Rx-to-OTC Market Entry.
72 Estimated Dates of Possible First time Generic/Rx-to-OTC Market Entry.
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drug in the U.S., with 2010 sales of $6.3 billion, are expected to expire in 2014, while Abilify
(number five at $4.6 billion) and Crestor (number eight at $3.8 billion) are expected to be open
for generic competition in 2015.73
Innovation Issues
Blockbuster Drugs and the Innovation Pipeline
The effect of patent expirations on the sale of brand name pharmaceuticals can be dramatic. If
generic versions of the brand pharmaceutical are easy to produce, multiple competitors often
come to market at prices that are up to 80% below the innovator drug.74 In 2010, spending on
branded products declined 0.7% at the same time spending for unbranded generics increased
21.7% and 4.5% for branded generics.75 Studies have demonstrated that in the late 1980s, an
innovator drug that went off patent would lose between 15% and 30% of sales volume within the
first two years; in 2001 when Prozac faced generic competition, more than 70% of the market
was lost within two months.76 Today, one report finds that average sales of a brand drug drop 72%
within six months of generic competition;77 other research finds that “more than 80 percent of a
brand’s prescription volume is replaced by generics within six months of patent loss.”78
In addition to the rapid loss of market share, recent analysis has demonstrated that the monthly
erosion of the innovator drug’s share of the market over the 12 months following entry of the first
generic has significantly accelerated over the past 10 years.79 An earlier study by Duke
University’s Henry Grabowski and Margaret Kyle of the London Business School indicated that
between 1995 and 2005, generic competition intensified.80 During this time period, not only have
blockbuster drugs faced increasing generic competition, but “even very modest selling drugs”
have generic equivalents.81
The effects of blockbuster drug patent expirations on companies can be amplified when they have
no other products in development to replace lost sales. Research and development “pipelines and
new drug introductions have been insufficient to replace the loss of sales revenues to generic
73 Data derived from Estimated Dates of Possible First time Generic/Rx-to-OTC Market Entry, and The Use of
Medicines in the United States: Review of 2010, 32.
74 Herman Saftlas, “Industry Surveys, Healthcare: Pharmaceuticals,” Standard & Poor’s, June 4, 2009, 29, available at
http://www.standardandpoors.com.
75 The Use of Medicines in the United States: Review of 2010, 6.
76 Richard G. Frank, “Regulation of Generic Drugs,” The New England Journal of Medicine, August 30, 2007, 842.
77 Major Brand-Name Drugs Face Patent Expiration.
78 Gary Gatyas, “IMS Institute Reports U.S. Spending on Medicines Grew 2.3 Percent in 2010, to $307.4 Billion,” IMS
Health, April 19, 2011, available at http://www.imshealth.com/portal/site/imshealth/
menuitem.a46c6d4df3db4b3d88f611019418c22a/?vgnextoid=1648679328d6f210VgnVCM100000ed152ca2RCRD&v
gnextchannel=41a67900b55a5110VgnVCM10000071812ca2RCRD&vgnextfmt=default.
79 Henry G. Grabowski, Margaret Kyle, Richard Mortimer, Genia Long, and Noam Kirson, “Evolving Brand-Name and
Generic Drug Competition May Warrant a Revision of the Hatch-Waxman Act,” Health Affairs, November 2011,
2160.
80 Henry G. Grabowski and Margaret Kyle, “Generic Competition and Market Exclusivity Periods in Pharmaceuticals,”
Managerial and Decision Economics, 2007, 500-501.
81 Ibid.
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competition over the past decade, and this is likely to continue.”82 According to an analysis by
PriceWaterhouseCoopers, only four of the ten major pharmaceutical companies have drugs in
clinical trials that are “sufficiently valuable to offset these losses.”83 As described by Grabowski,
there are also fewer products that appear capable of achieving blockbuster levels of sales
revenues.... As a consequence, many of the large pharma firms are facing an R&D pipeline
replacement problem, with the sales of new product introductions unable to replace pending
losses from generic competition as their leading products face patent expiration and patent
challenges.”84
It has been noted that at the time Lipitor lost patent protection in 2011, the drug comprised 20%
of Pfizer’s total revenue, yet the company does not appear to have sufficient new products in the
pipeline that could replace the funds lost to generic versions of the drug.85 Compounding this,
analysis by EvaluatePharma found that within three years, 68% of the total Pfizer portfolio will
be at risk due to patent expirations on pharmaceuticals which include Protonix, Viagra, and
Geodon in 2012.86 Other companies expected to lose more than half of their brand drug portfolios
to patent expirations include Eli Lilly (66%), Bristol-Myers Squibb (58%), and Johnson &
Johnson (52%).87 A similar situation is anticipated to affect Sanofi-Aventis. With Lovenox and
Plavix expected to go off patents in 2012, Sanofi-Aventis may “lose $9 billion in revenue owing
to competition from generic versions of these products” over the next 10 years.88 Efforts to
replace the income stream generated by these two drugs have not been as successful as expected
according to one analysis.89
Concurrent with the significant number of blockbuster drugs that have or are expected to lose
patent protection, the sales generated by these products has declined: “the share of total U.S.
pharmaceutical sales accounted for by blockbusters increased from 12 to 42% between 1997-
2006, fell to 38% in 2007, and has remained relatively stable since then.”90 Similarly, a study by
the global management consulting firm Oliver Wyman found a decreasing number of blockbuster
drugs. This analysis indicated that while the average number of new blockbuster pharmaceuticals
marketed each year between 1996-2004 was 12, that number declined to an average of 6 per year
between 2005-2010. This “drop in blockbusters, in turn, is partly the result of an industry shift
from large primary care categories to specialty markets.”91
82 Evolving Brand-Name and Generic Drug Competition May Warrant a Revision of the Hatch-Waxman Act, 2163.
83 PriceWaterhouseCoopers, Pharma 2020: Virtual R&D, June 2008, 2, available at http://www.pwc.com.
84 Henry Grabowski, “The Evolution of the Pharmaceutical Industry Over the Past 50 Years: A Personal Reflection,”
International Journal of the Economics of Business, July 2011, 173.
85 Charlotte Harrison, “The Patent Cliff Steepens,” Nature Reviews/Drug Discovery, January 2011, 12.
86 EvaluatePharma, Pfizer Patent Cliff Dwarfs Peers as Loss of Lipitor Looms, February 1, 2011, available at
http://www.evaluatepharma.com/Universal/View.aspx?type=Story&id=236194&isEPVantage=yes.
87 Ibid.
88 The Patent Cliff Steepens, 12.
89 Ibid.
90 Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century After the 1984
Waxman-Hatch Legislation, 3.
91 Jeff Hewitt, J. David Campbell, and Jerry Cacciotti, “Beyond the Shadow of a Drought, The Need for a New Mindset
in Pharma R&D,” Oliver Wyman Health & Life Sciences, 2011, 3, available at http://www.oliverwyman.com/
media/OW_EN_HLS_Publ_2011_Beyond_the_Shadow_of_a_Drought%282%29.pdf.
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Companies appear to be moving away from the development of drugs that address large patient
populations, but for which they cannot charge high prices, toward more specialized medicines,
primarily biologics, that may be used by fewer patients, but for which high prices can be secured.
In 2007, 55 blockbuster drugs were considered specialized products, up from 12 in 2001.92 More
than half of the new drugs approved by the FDA in 2010 were specialty drugs. “Thus, the
specialty category continues to be a major focus of new drug development and comprises a
significant percentage of new approvals.”93
The loss of blockbuster drug sales revenue may result in a significant reduction in funds to invest
in R&D and, thus, fewer new pharmaceuticals. Even beyond the value of these new products
“from a therapeutic standpoint,” innovator companies “are critically dependent on the revenues
from these top decile compounds to earn a positive return on their overall portfolios.”94 Terry
Hisey, Deloitte US Life Sciences Leader vice chairman, commented that the loss of revenue is
expected to negatively affect the level of R&D investment: “We’re going to see scores of
products that have the potential to improve the quality of life, and in effect save lives that will not
make it to market because of the lack of available investment funds.”95 Without branded drugs,
there are no generics. Fewer blockbuster drugs may detrimentally affect generic companies and
the public in the long run as there may be fewer innovator drugs to replicate.96
“With blockbuster sales slowing and expected to remain sluggish for the foreseeable future,
pharma already feels the economic pinch of weak innovation,” according to the report published
by Bain & Company.97 This is compounded by an environment in which the cost of developing a
drug has doubled since the early 1980s when the Hatch-Waxman Act was legislated;98 it now
takes over $1 billion to bring a new drug to market. 99 This is in contrast to the approximately $1
to $2 million necessary to bring a new generic to market.100 The number of clinical trials
necessary to file a new drug application also has doubled while the number of participants in
92 PriceWaterhouseCoopers, Pharma 2020: Marketing the Future, February 2009, 13, available at
http://www.pwc.com/pharma.
93 Medco, 2011 Drug Trend Report, 42, available at http://www.drugtrendreport.com/2011-report.
94 Generic Competition and Market Exclusivity Periods in Pharmaceuticals, 496.
95 Quoted in The Patent Cliff: Rise of the Generics.
96 Melly Alazraki, “The 10 Biggest-Selling Drugs That are About to Lose Their Patent,” Daily Finance, February 27,
2011, available at http://www.dailyfinance.com/2011/02/27/top-selling-drugs-are-about-to-lose-patent-protection-
ready/.
97 Patrick O’Hagan and Charles Farkas, “Bringing Pharma R&D Back to Health,” Bain & Company, 2009, 1, available
at http://www.bain.com/Images/BB_Managing_RandD_HC.pdf.
98 Michael A. O’Shea and Christopher M. Mikson, “The Hatch-Waxman Act: Still Critical, Still in Flux,” The National
Law Journal, January 23, 2006.
99 Christopher Paul Adams and Van Vu Brantner, “Spending on New Drug Development,” Health Economics
(published online Feb. 26, 2009) Epub ahead of print.
100 Henry Grabowski, “Patents, Innovation and Access to New Pharmaceuticals,” Journal of International Economic
Law, 2002, 852, available at http://jiel.oxfordjournals.org/cgi/reprint/5/4/849, and Henry Grabowski, “Patents and New
Product Development in the Pharmaceutical and Biotechnology Industries,” in Science and Cents: Exploring the
Economics of Biotechnology, Proceedings of a 2002 Conference sponsored by the Federal Reserve Bank of Dallas, 90,
available at http://www.dallasfed.org/research/pubs/science/grabowski.pdf.
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these trials has tripled.101 Thus, the rate of return from investment in a new drug is seen as
dropping by 12% over this time period.102
Drug Approvals
Most analysts agree that “new drug approvals peaked in the mid- to late 1990s and have declined
to a much lower level of annual introductions ... even though R&D expenditures continue to
escalate upward at a fairly rapid rate of real growth.”103 Assessing the FDA data on new
molecular entities (NMEs), a report from Medco found that “New drug approvals over the past
few years have slowed considerably from the pace of approval in the late 1990s.”104 Since 1997,
the annual number of new pharmaceuticals marketed decreased 44% despite increasing amounts
of R&D spending according to CMR International.105 While the number of new products that
received FDA approval increased in 2011, many experts feel that this is an anomaly rather than
the beginning of a trend.106
A recent study of the 450 new drugs approved by the FDA between 1996 and 2010 performed by
the consulting firm Oliver Wyman indicates a significant demarcation between the years 1996-
2004, a period when new drug approvals were “robust” and return on investment strong, and the
years 2005-2010, when approvals declined, sales weakened, and return on investment was low.107
The number of drug approvals fell 40% from the first time period to the second. This analysis
also determined that each approved pharmaceutical generated fewer sales in the 2005-2010 time
frame while R&D spending doubled.108
Productivity Issues
Many experts claim that the loss of patent protection on these drugs is occurring at a time when
innovation and productivity have stalled in the pharmaceutical industry. Murray Aiken, Executive
Director of the IMS Institute for Healthcare Informatics, noted that while R&D investments are
increasing, raising productivity associated with this spending “continues to be a struggle.”109
In recent years, the R&D productivity challenge has become particularly difficult to
overcome in the pharmaceutical sector. The cost of developing a new drug has increased, as
have total R&D expenditures, while the rate of introduction of new molecular entities
101 Gregory J. Glover, “The Influence of Market Exclusivity on Drug Availability and Medical Innovations,” The AAPS
Journal, August 3, 2007, E313.
102 The Hatch-Waxman Act: Still Critical, Still in Flux.
103 The Evolution of the Pharmaceutical Industry, 172.
104 Drug Trend Report, 42.
105 Ben Hirschler, “Last Chance for Sickly Pharma to Deliver on R&D,” Reuters, February 10, 2011, available at
http://www.reuters.com/article/2011/02/10/pharmaceuticals-rd-idUSLDE71912R20110210.
106 Beyond the Shadow of a Drought, The Need for a New Mindset in Pharma R&D, 2.
107 Ibid.
108 Ibid., 2-3.
109 As quoted in Pat Wechsler and Alex Nussbaum, “Drug Spending Growth Drops as Brands are Replaced by
Generics,” Bloomberg.com, May 18, 2011, available at http://www.bloomberg.com/news/2011-05-18/drug-spending-
growth-drops-as-brands-are-replaced-by-generics.html.
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(NMEs) has at best remained constant and attrition rates have risen sharply, especially in
late-phase clinical trials.110
According to Jean-Pierre Garnier, Chief Executive Officer of GlaxoSmithKline, the value of “Big
Pharma” is diminishing because of declining R&D productivity.111 As evidence of this, one study
found that in 2010, domestic spending on drugs that were on the market for less than 24 months
comprised 2.8% of brand spending, down from 5.0% in 2006. In addition, “The number of
products in this group totaled 69 in 2010, down from 96 in 2006, reflecting the decline in
products emerging from research and development laboratories and receiving regulatory
approval.”112
The pharmaceutical industry is particularly research intensive. In 2009, total pharmaceutical
industry investment in R&D was estimated to be $65.3 billion;113 domestic research and
development spending for members of PhRMA in 2009 was an estimated $45.8 billion, with 19%
of domestic sales reinvested in R&D.114 The Congressional Budget Office reported that
“pharmaceutical firms invest as much as five times more in research and development, relative to
their sales, than the average U.S. manufacturing firm.”115 However, while pharmaceutical R&D
expenditures have increased substantially over the past 15 years, drug approvals have remained
relatively flat.116 Analysis by Standard & Poors found that there is
a relative dearth of innovative new products launched in recent years relative to funds
invested in R&D. According to the Pharmaceutical Research and Manufacturers Association
... US drug industry R&D spending expanded 30% from 2004 through 2008. Yet, the number
of FDA-approved new molecular entities (NMEs) and novel biologics declined to 24 from
36 over the same period. This attrition occurred despite important advances in R&D
technology platforms, such as rational drug design and genomics, that occurred earlier in the
decade.117
Addressing R&D productivity, an August 2011 report by KPMG LLP stated that “industry
success rates in bringing a drug from research to market was just 4% between 2005 and 2009.
This is clearly an unsustainably low rate.”118 Research by analysts from McKinsey & Company
found that “the internal rate of return (IRR) on small-molecule R&D is now ~7.5%, which is less
than the industry’s cost of capital.”119 Additional analysis by Bain & Company indicated that
110 Fabio Pammolli, Laura Magazzini, and Massimo Riccaboni, “The Productivity Crisis in Pharmaceutical R&D,”
Nature Reviews Drug Discovery, June 2011, 428.
111 Jean-Pierre Garnier, “Rebuilding the R&D Engine in Big Pharma,” Harvard Business Review, May 1, 2008, 70.
112 The Use of Medicines in the United States: Review of 2010, 18.
113 Pharmaceutical Industry Profile 2010, inside front cover.
114 Ibid., inside front cover and 45.
115 Congressional Budget Office, Research and Development in the Pharmaceutical Industry, October 2006, 9,
available at http://cbo.gov/sites/default/files/cbofiles/ftpdocs/76xx/doc7615/10-02-drugr-d.pdf.
116 Ernst & Young, Beyond Borders, Global Biotechnology Reports 2008, 18, available at http://www.ey.com/
beyondborders.
117 Industry Surveys, Healthcare: Pharmaceuticals, 16.
118KPMG, Future Pharma, Five Strategies to Accelerate the Transformation of the Pharmaceutical Industry by 2020,
August 2011, 12, available at http://www.kpmg.com/CH/en/Library/Articles-Publications/Documents/Sectors/pub-
20111017-future-pharma-en.pdf.
119 Eric David, Tony Tramontin, and Rodney Zemmel, “Pharmaceutical R&D: The Road to Positive Returns,” Nature
Reviews/ Drug Discovery, August 2009, 609.
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“The return on invested capital (ROIC) for new-drug development has dropped from 9 percent in
1995-2000 to an anemic 4 percent today.”120 In another Bain & Company study, the authors
argued that “the pace of innovation remains anemic.... Despite R&D spending at a high 18
percent of revenues, Big Pharma’s R&D productivity declined by 20 percent between 2001 and
2007.”121
Similarly, the authors of the Oliver Wyman report determined that “R&D productivity declined
by more than 70 percent between 1996-2004 and 2005-2010.”122 Looking at the 20 largest
pharmaceutical companies, the study found that 17 of these firms experienced reduced
productivity.123 Research on the top 12 pharmaceutical firms, measured by R&D spending,
conducted by the Deloitte Centre for Health Solutions also indicated that there were decreasing
returns to investments between 2010 and 2011.124 Thus, according to David Redfern, head of
strategy at GlaxoSmithKline, “I am absolutely convinced that this will be the last generation of
R&D spending unless a decent return is generated.”125
Many of the studies on pharmaceutical productivity count the number of NMEs approved by the
FDA. However, other experts maintain that calculating new drug approvals is not an accurate
measure of productivity. It is argued that the number of NME approvals has remained stable over
the long term despite year to year changes. While R&D investments have increased, between
25%-30% of R&D spending is directed at finding new indications for existing products. Basing
an assessment of decreased productivity on the number of new NMEs may not be accurate since a
significant portion of the R&D spending has led to increased use of already approved drugs.126
An additional explanation for the slowdown in new drug approvals may be that the “easy” drugs
have been developed. The targets of new pharmaceuticals are more complex and chronic diseases
that require more complicated clinical trials.127 The time frame between research and the
introduction of a product in the marketplace tends to be particularly long in the pharmaceutical
arena. Experts maintain that it generally takes 12 to 15 years to bring a new drug from discovery
to market.128 The basic research leading to the new product may even begin many years prior to
the actual discovery, thus, any productivity gap is short-term as new drugs move toward
approval.129 According to Boston University’s Iain Cockburn:
120Bringing Pharma R&D Back to Health, 1.
121 Nils Behnke and Norbert Hueltenschmidt, “Changing Pharma’s Innovation DNA,” Bain & Company, 2010, 1,
available at http://www.bain.com/Images/BAIN_BRIEF_Changing_pharmas_innovation_DNA.pdf.
122 Beyond the Shadow of a Drought, The Need for a New Mindset in Pharma R&D, 3.
123 Ibid.
124Deloitte Centre for Health Solutions, Measuring the Return from Innovation, Is R&D Earning its Investment?, 2011,
1, available at http://www.deloitte.com/assets/Dcom-Switzerland/Local%20Assets/Documents/EN/LSHC/
ch_en_measuring_the_return_from_innovation_2011.pdf.
125 “Last Chance” for Sickly Pharma to Deliver on R&D.
126 William S. Comanor, “The Economics of Research and Development in the Pharmaceutical Industry, “ in Frank A.
Sloan and Chee-Ruey Hsieh, eds., Pharmaceutical Innovation, (Cambridge University Press, 2007), 66-67.
127 Beyond Borders, Global Biotechnology Report 2008, 18.
128 John A. Vernon, Testimony at Hearings on Prescription Drug Price Inflation: Are Prices Rising Too Fast?, House
Committee on Energy and Commerce, December 8, 2009, 4, and Congressional Budget Office, “Pharmaceutical R&D
and the Evolving Market for Prescription Drugs,” Economic and Budget Issue Brief, October 26, 2009, 4.
129 Boston Consulting Group, Rising to the Productivity Challenge, A Strategic Framework for Biopharma, July 2004,
4, available at http://www.bcg.com/documents/file14392.pdf.
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These concerns about productivity are almost surely overblown: if past experience is any
guide, the recent surge in R&D spending should generate a commensurate increase in new
drug approvals of the next three to ten [years].... Today’s new drugs are the result of R&D
expenditures stretching back decades into the past, and undertaken by many different
institutions.130
Other commentators point out that any perceived decline in productivity is partially a result of
pharmaceutical companies’ investments in high risk areas. It is argued
that the number of NMEs is an imperfect measure of R&D outcomes, as it does not reflect
changes in the quality of the output. In addition, the productivity crisis might be a temporary
phenomenon, as radical technological changes, such as the genomic revolution, could
initially increase the time lag between investment and outcome, thereby reducing R&D
productivity in the short term.131
Concluding Observations
Companies have developed certain strategies for addressing the issues associated with the loss of
patent protection on those pharmaceuticals that contribute significantly to the companies’ bottom
line. Among these are branded generics,132 reformulations of the original brand product, price
increases, or “deals” with insurance companies to lower the cost of the drug. Manufacturers are
spending R&D dollars to develop new and improved forms of the original pharmaceutical or new
delivery methods (for example extended release tablets, liquid formulations) as related patents
expire. The new version of the drug can be patented and users encouraged to switch to the new
product.133 According to PriceWaterhouseCoopers, “In 2007, only eight of the 27 new therapies
launched worldwide were the first of their kind.... More than half were ‘me-too’ treatments with
at least three predecessors.”134 Another study found that
in 2004, more than 20% of the money 10 of the [world’s] largest pharmaceutical companies
invested in R&D went to line extensions and other work, as distinct from new development
projects. In smaller companies, the percentage was over 40%.135
However, according to Danzon and Furukawa, the majority of these defensive strategies do not
work in the United States, with the exception of delayed release formulations that act to deter
generic penetration in the domestic market.136 Similar findings were reported on by Bain &
Company: “Mergers and acquisitions and the creation of mega-companies have not compensated
for the slowdown in innovation.” Nor will “geographic expansion and diversification into new
areas like consumer health.”137 Thus, as stated by analyst Michael Hay,
130 Iain Cockburn, Blurred Boundaries: Tensions Between Open Scientific Resources and Commercial Exploitation of
Knowledge in Biomedical Research, April 30, 2005, 2, available at http://people.bu.edu/cockburn/cockburn-blurred-
boundaries.pdf.
131 The Productivity Crisis in Pharmaceutical R&D, 428.
132 See CRS Report RL33605, Authorized Generic Pharmaceuticals: Effects on Innovation, by John R. Thomas.
133 Ibid.
134 Pharma 2020: Marketing the Future, 11.
135 PriceWaterhouseCoopers, Pharma 2020: The Vision, June 2007, 8, available at http://www.pwc.com/pharma.
136 Cross-National Evidence on Generic Pharmaceuticals: Pharmacy vs Physician-Driven Markets, 6.
137 Changing Pharma’s Innovation DNA, 1.
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if companies are unable to bring new drugs to market they will either need to cut spending to
maintain profit or acquire new drugs that are generating sales, through mergers and
acquisitions. But given the scale of revenue being lost, it is difficult and expensive to gain
enough revenue through the latter route.138
Deloitte’s Terry Hisey argues that the loss of patent protection on branded drugs is both a “threat
and an opportunity.” For brand-name firms, despite the steep decrease in price and the resulting
loss of revenue,
innovator companies have a well-established brand and product and there is an opportunity
to leverage that, to expand into other markets and to continue to do a certain level of
promotion. Even though it’s off-patent it’s got a clear clinical history and a well-known track
record with people.139
For the consumer, prices for generic drugs themselves tend to fall over time.140 As noted by
Danzon and Furukawa, “Expiry of patent barriers to entry also makes generic markets potentially
more competitive than originator markets.”141 Analysis indicates that within the past five years,
the rapid and extensive generic entry has caused prices for these drugs to decline rapidly:
The generic price index [indexed at 100 at month zero] falls to a level of about 78 at month
six [after launch of the first generic], with an average number of generic entrants at seven. At
months 12 and 24, the average generic price index falls to about 50 and 23, respectively, and
then stabilizes at about -6 after month 25, even as the average number of generic
manufacturers gradually increased to about 10, 11, and 12, respectively.142
In the absence of the research, development, and testing performed by the brand name
pharmaceutical companies, generic drugs would not exist. However, as argued by Hans Poulsen,
head of life sciences consulting at Thomson Reuters, “For the first time, drug companies are
reducing costs in their R&D organizations and I believe we will see that trend continue.”143 There
appears to be a declining number of new products in the clinical pipeline as well as “sharply
diminishing returns in drug R&D.”144
Many factors contribute to innovation in the pharmaceutical industry and its ability to bring new
and inventive products to the marketplace, including the cost of capital, FDA approval
requirements, and insurance coverage. At the same time, this sector is facing significant issues
associated with the loss of revenue available for additional R&D as blockbuster drugs lose patent
protection and are subject to generic competition. It appears that “Big Pharma (the large-
capitalization pharmaceutical sector) remains in transition.”145 As such, Congress may act to
138 The Patent Cliff Steepens, 13.
139 Quoted in The Patent Cliff: Rise of the Generics.
140 Henry G. Grabowski and John M. Vernon, “Brand Loyalty, Entry, and Price Competition in Pharmaceuticals After
the 1984 Act,” Journal of Law and Economics, October 1992, 347.
141 Cross-National Evidence on Generic Pharmaceuticals: Pharmacy vs Physician-Driven Markets, 3.
142Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century After the 1984
Waxman-Hatch Legislation, 9.
143 Drug R&D Spending Fell in 2010, and Heading Lower.
144 Fabio Pammolli and Massimo Riccaboni, “Market Structure and Drug Innovation,” Health Affairs,
January/February 2004, 49.
145 Industry Surveys, Healthcare: Pharmaceuticals, 13.
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explore ways to incentivize firms to increase innovation in the pharmaceutical industry through
changes to data and/or marketing exclusivities for new and improved drugs, reevaluating patent
term extension, patent reform, and/or other regulatory mechanisms associated with intellectual
property ownership. Yet, while the “data show a subtle relative decrease in pharmaceutical
innovation in the United States, ... the United States remains the single-largest location of
pharmaceutical invention.”146 At issue are what congressional actions, if any, may be necessary to
maintain this innovative environment.
Author Contact Information
Wendy H. Schacht
Specialist in Science and Technology Policy
wschacht@crs.loc.gov, 7-7066
146 Location of Pharmaceutical Innovation: 2000-2009, 836.
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