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| Image: Pills by Laura Gilmore |
We often observe that when the first of a new class of drug is patented it does not halt the development of further drugs of the same class resulting in a number of drugs with similar efficacy and price well above production costs. We construct a life-cycle analysis of the welfare gains from a policy for pharmaceutical patenting where society grants and purchases the patent of the first of a new class of drug (instead of purchasing the drug), awarding no further patents to runner-up drugs, and producing or licensing production with price set to maximise welfare subject to covering costs. We show that under such a policy society could substantially reduce the cost of duplicated R&D and the price of the drug benefiting more patients and producing large health gains. The results are generated based upon a number of stylised facts regarding R&D in the pharmaceutical industry.