Pharmaceutical high profits: the value of R&D, or oligopolistic rents?

Pharmaceutical firms attribute high prices and high profits to costs associated with researching and developing the next generation of life-saving drugs. Using data from annual reports, this article tests the validity of this claim. We find that while pharmaceutical firms do invest in R&D, they also enjoy strong rents; between 1988 and 2009, pharmaceuticals enjoyed profits of 3 to 37 times the all-industry average, depending on the years, while investing proportionately less in R&D than other high-R&D firms.