Drug Patents Not Driving Profits

According to Jim Bessen writing for Technological Innovation and Intellectual Property on December 27, 2007,

As economic theory predicts and as previous research has found, prices decline sharply when competing makers of generic versions of the previously-patented drug enter the market. Normally, lower prices increase demand for a product. However, Frank [Lichtenberg speaking at the Conference on the Economics of Competition and Innovation] found that the total quantity of patented drugs sold actually declines and this is true even when he controls for substitute drugs.

The explanation? Marketing.

. . . This suggests that much of the profit made by pharmaceutical firms is not, in fact, a return on their R&D, but is, instead, a return on their marketing investments. And if you ever harbored the illusion that the market for pharmaceuticals provided a model of well-informed consumers, think again.