Generic competition and the incentives for early-stage pharmaceutical innovation

What impact has rising generic competition had on the nature and direction of pharmaceutical innovation? We find broad-based, strong evidence that pharmaceutical companies have diverted their new drug development efforts away from therapeutic markets already well-served by generic drugs. We also find that increasing generic competition induces firms to shift their R&D activity towards more biologic-based products and away from chemical-based products. We conclude by discussing potential implications of our results for long-run innovation policy.