Are the Economics of Pharmaceutical R&D Changing? Productivity, Patents and Political Pressures
Abstract
Pharmaceutical R&D competition in the 1980s and 1990s was characterized by rising
R&D expenditures, favorable returns to innovators, and the introduction of many new
classes of drugs with high social benefits. However in the past three years the number
of new drug introductions has been below the historical trend, while costs per new
drug continue to increase. Another important concern affecting the industry is the
fact that many leading drugs under patent are being challenged by generic firms. Under
the 1984 Hatch-Waxman Act, generic firms have strong incentives to be the first to
challenge a patent given the 180 day exclusivity provision. Many generic firms have
developed a business model which involves prospecting in patent suit challenges. Congress
is currently considering legislative changes to the 1984 Act, but is not addressing
this important issue. Looking forward, a key issue will be how the pending Medicare
Rx drug benefit is implemented. Initially Congress is likely to structure the Medicare
benefit using traditional PBM and managed care competition to keep costs in check.
However, Medicaid programs recently have become more aggressive in their cost containment
programs. Many states have adopted preferred drug lists with prior authorization and
thirteen states now have quantity limits on the number of prescriptions per month.
Over time Medicare will likely confront similar budgetary problem to the states’ and
experience pressures to expand the scope of the program. A long term dynamic toward
more aggressive cost containment would have particularly adverse consequences for
innovation.
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Henry G. Grabowski
Professor Emeritus of Economics
Professor Grabowski specializes in the investigation of economics in the pharmaceutical
industry, government regulation of business, and the economics of innovation. His
specific interests within these fields include intellectual property and generic competition
issues, the effects of government policy actions, and the costs and returns to pharmaceutical
R&D. He has over one hundred peer reviewed articles analyzing the economics of pharmaceuticals
and also several books and monograph publica

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