| Abstract: | An indirect effect of increased regulation of the pharmaceutical industry in the USA has been a reduction in the effective patent life for a new drug. The reason is that the average time to develop a new chemical entity and gain regulatory approval far exceeds the time necessary to obtain a patent. The period of patent protection now averages only 10 years compared to the legal life of 17 years. In this article we describe a sensitivity analysis which sheds some light on the relationship between product life and profitability. Based upon a number of important assumptions, we show, for example, that at a 10% real rate of return the average 1970–1976 new drug required 19 years to break even. At an 8% real rate of return, 12 years would permit the firm to break even. |
