Pharma's Most Important Product

Celexa, Duragesic, Allegra, Prevacid, Biaxin, Zithromax, Zocor . . . The list goes on and on. Over the next few years, a remarkable number of major drugs are due to go off patent and face generic competition. That's a problem for the industry, of course, but it's also, in a way, a tremendous success story.

Patrick Clinton

The challenges of patent expirations are obvious. Generic competitors drain revenue from brand-name products at a shocking pace. Medco has estimated that between 2004 and 2006, the annual sales of drugs facing patent expiration totals roughly $30 billion, a substantial hit even in a $400 billion industry. Almost all of that revenue will be lost to the originator companies. At the same time, as consultant Ira Studin points out in this month's issue, the portfolios of generic companies get stronger and stronger.

But there's another side of patent expirations that doesn't get talked about enough. Each time a drug goes off patent, another valuable, proven product is placed in the public domain, to be used for the benefit of all. And the costs to society? Basically none. The originator company has made its bet and done its best to profit by its discovery. Now it belongs to the world, free and clear. It becomes part of our shared public wealth.

It's true that pharma isn't the only industry to transfer intellectual property into the public domain this way, but it's hard to think of another industry where the transfer has such clear benefit for society. In some ways, from the public perspective, off-patent medicines are pharma's most important product.

The wealth of a country is partly a matter of what products—especially what life-sustaining products—citizens can obtain cheaply and easily. By that standard, over the next few years, the United States is going to get richer as more people can afford a truly stunning array of pharma products. (I say the United States rather than the world, because, as Mark McClellan points out in this issue, much of the rest of the world artificially inflates the price of generics through price controls.)

Will the newfound wealth make people happy? Probably not. Pharma in the meantime will be doing its best to replace those fine products with better ones. People will want them instead of the old ones, as they should, and they'll be just as unhappy about paying the price of innovation as they are now. But the fact is, they'll be better off. Their healthcare dollar will buy them more. And when they complain about not being able to afford drugs, they'll be complaining about better drugs. In the real world, that's what progress looks like: Not less argument and complaint but greater societal wealth and health, complaints or not.

These days, as critics spend more and more time picking apart pharma's faults, it's especially important to remember what works well. The current patent system creates an unforgiving competitive landscape. It ruthlessly focuses pharma companies on innovation by robbing them of almost any hope of profit from older products. It frees resources to fund innovation. And it gives society valuable gifts.

There might be flaws in the way our society discovers medicines and brings them to patients, but this piece of the system, at least, seems to be working just fine. It may not be pretty, it may not make it easier to run your business, but it makes us all a little richer. And that, after all, is just what it was supposed to do.