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  • November 9, 2016

Can one company’s patents help its competitors?


When the patent on a blockbuster drug expires, it’s a sad day for the pharmaceutical company that developed it. But it can also be a sad day for that company’s competitors, because their similar drugs might also face new competition from cheap, generic equivalents. The cholesterol medication Lipitor was the best-selling drug ever, but analysts worried that demand would drop off once the patent on rival cholesterol medication Zocor expired in 2006.

The figure below from a study appearing in the October issue of the American Economic Journal: Applied Economics offers some evidence that these fears were well-founded. Panel A shows that Lipitor’s revenues began declining right around the time Zocor generics entered the market, presumably as insurance companies pushed patients with high cholesterol and their doctors to switch to the cheaper versions.


Figure 1 from Gilchrist (2016)


Panel B shows a generalized version of the same chart, averaging across hundreds of drugs whose competitors saw their patents expire between 1989 and 2011. Lipitor’s experience looks very typical.

Duncan Gilchrist, author of the study, finds that strong patent protections for one drug create an incentive for new drugs in the same class, but that most or all of the induced entry are “me too” drugs that don’t offer a significant upgrade to consumers. He believes this issue is important not only because the pharmaceutical industry itself is so huge and drives so much government spending, but also because of what it teaches us about the nuanced effects of intellectual property protections.