CEPR

April 23, 2015

Contact: Alan Barber (202) 293-5380x115

Washington DC - Patent monopolies provide the pharmaceutical industry with incentives for innovation and research. However, they can also encourage a range of rent-seeking behaviors that impose significant costs.

A new report from the Center for Economic and Policy Research assesses the cost associated with one form of rent-seeking, the mismarketing of drugs. This can occur when a drug company seeks narrow Food and Drug Administration (FDA) approval of a drug then promotes its use for other purposes. In addition, companies may conceal evidence that their drugs are less effective than claimed or possibly even harmful. The authors of the report find that in the case of just five drugs, this form of rent-seeking has resulted in cumulative costs of morbidity and mortality of $382 billion.

The paper, "Patent Monopolies and the Costs of Mismarketing Drugs," examines the cases surrounding the prescription drugs Vioxx, Avandia, Bextra, OxyContin and Zyprexa. In each of these cases, there was either a court ruling against the company or a large settlement paid by the company, evidence that the maker of the drug misrepresented their research to preserve and/or expand the market for the drug in question.

For example, the authors' estimates indicate that excess cases of cardiovascular disease and premature death due to the use of Vioxx resulted in lifetime costs of $96 billion. For OxyContin, a drug both aggressively promoted and misbranded as "mildly habit forming," the costs for premature death and abuse-related costs came to $102 billion. In the case of the antipsychotic Zyprexa, drug-maker Eli Lilly downplayed the known side effects of diabetes and obesity while marketing it to children and the elderly—patient groups that were not approved by the FDA. This resulted in 42,600 excess cases of diabetes at a cost of almost $4 billion. Cumulatively, all five cases examined in the paper were estimated to cost $382 billion from 1994 to 2008, or roughly $27 billion a year. This is roughly the same amount the pharmaceutical industry spent on research at the time.

These costs represent a small fraction of the total costs of mismarketing drugs. However, the cases cited in the report suggest that the damage done by mismarketing is quite significant compared to the amount of research induced by patents. This is an indication that there are likely more efficient alternatives to patent-monopoly-supported drug research. An avenue such as publicly financed research could reduce the incentives for harmful rent-seeking behaviors and the consequent social and financial costs.

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