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In several key aspects, the Public

tion. In fact, the pharmaceutical industry is

Citizen approach deviates from stan-

remarkably open and competitive, compris-

dard methodologies adopted by pre-

ing 650 companies, none of which holds

vious research and the financial and

more than 11 percent of the worldwide mar-

ket.83 The top 10 firms account for no more

accounting communities. On many

than 60 percent of sales.84 Competition does

issues, the report presents selective

evidence and ignores strong evidence

indeed lag in certain diagnostic areas, where

to the contrary. These shortcomings

a few drugs tend to dominate the market. In

understate the report's estimated

the top 30 drug categories, the leading drug

costs of pharmaceutical R&D.78

averages 33.5 percent of the market, and the

top four drugs account for 68.1 percent.85

Even such substantial investments by the

No Rest for the Successful

drug firms do not guarantee results. Of every

5,000 to 10,000 substances reviewed, only

Not even the best company can rest on its

about 250 make it to the animal-testing

laurels. Pharmaceutical firms holding exclu-

stage. Around 5 of them go on to human

sive patent rights remain subject to generic

clinical trials. Only one, on average, makes it

competition when their patents expire, and

into the market. Even at that point, only 3 of

they also face the more immediate threat of

10 new drugs actually make money. Indeed,

therapeutic competition from other brand-

Duke's Grabowski figures that only 10 per-

name manufacturers.

cent of drugs generate a return on invest-

Actual price increases, in contrast to high-

ment.79 Those few must pay for everything--

er usage, are likely to be tempered in coming

research, administration, regulatory delays,

years by the aging of patents. For example,

and failures.80 Thus, the small marginal cost

Business Week estimated in December 2001

of making an extra pill is irrelevant, because

that drugs that were then worth $35 billion

no drugs would be developed at all and no

per year in U.S. sales could fall off patent and

companies would survive if that cost alone

face price competition from generics by

2005.86 For example, Eli Lilly has profited

determined the price.

The traditional incentive used to attract

greatly from its anti-depression drug Prozac.

capital for running the arduous, costly, and

With the patent for Prozac expiring, however,

Michael Arndt of Business Week reported in

risky enterprise of drug development has

been the granting of exclusive patent rights

July 2001 that "Lilly will no longer be pro-

by the federal government. Patents provide

tected from cheaper generics. Within weeks,

monopoly rights to sell and license innova-

the company could see two-thirds of its glob-

A drug company

tive drug products for a limited number of

al market for Prozac--and much of its prof-

typically spends

it--vanish."87 After Eli Lilly's earnings for the

years. Winners in the race to innovate count

$802 million over

on the potentially high profits protected by

first quarter of 2002 fell 22 percent, the com-

patents to cover their sunk costs of R&D and

pany responded by ramping up R&D, greatly

the course of 10 to

to replenish their capital for future rounds of

improving its future prospects. It even creat-

15 years for each

drug discovery efforts.81 Patents play a dis-

ed a subsidiary, InnoCentive, to award grants

to scientists.88

proportionately important role in the drug

new prescription

industry. The share of inventions introduced

Generics can provide vigorous competition

medicine.

because of patent protection is eight times

against brand-name drugs that have expired

higher in pharmaceuticals than in a set of 11

patents. After the 1984 Hatch-Waxman

other industries.82

Amendments to the Federal Food, Drug, and

Of course, some critics contend that the

Cosmetic Act dispensed with duplicative safe-

market really doesn't work because exclusive

ty and efficacy testing requirements for gener-

patent rights last too long, limit competition,

ics firms, the role of generics exploded.

and lead to excessive economic concentra-

Generic drugs now make up more than 47

10