The pharmaceutical industry

This Handbook chapter surveys the extensive body of research on the economics of the pharmaceutical industry (with peripheral attention paid also to regulated medical devices). Pharmaceuticals is one of the world's most research-intensive industries, generating a continuing steam of new products that save lives and raise the quality of life. The discovery of new drugs has evolved over time from a decidedly empirical process to one based to a considerable degree upon fundamental scientific knowledge. Rich linkages have emerged between profit-seeking manufacturers and basic research performers such as universities and national laboratories. The safety and efficacy of new pharmaceutical products are stringently regulated in most industrialized nations, adding to clinical testing costs. Because of high expenditures on research, development, and clinical testing and because new products, once proven, might be imitated easily, patent protection is unusually important. The extension of patent protection to third-world nations under Uruguay Round Treaty mandates has precipitated vigorous policy debates. Patents, first-mover advantages, and the lack of good substitutes for significant new drugs often give rise to substantial monopoly power, against which many national governments have counterpoised a diverse panoply of price control mechanisms. When patents expire, however, generic substitutes often introduce vigorous price competition. The extent to which generics capture market share from the branded original drugs depends upon government regulatory policies, the reimbursement strategies of health care insurers, and the organization of health care provider institutions.