ON THE CAUSES OF THE HIGH RATE OF RETURN OF CAPITAL OF MAJOR JAPANESE DRUG COMPANIES

Abstract

The purpose of this paper is to analyze the causes of the high rate of return of capital of the major drug companies in Japan.
First, we examine empirically the industry spokesmen's explanation that it is the rewards for their intensive R & D activities, and we conclude that it is hardly convincing.
The majority of the important ethical drugs introduced in Japan after the World War II are discovered abroad and introduced by the major Japanese drug companies. Special attention is paid to this fact and the form of their patent licensing. With a simple economic analysis we reach the conclusion that, when patented drugs are licensed in such a way as is prevailing in this industry, the licensees always receive a part of the monopoly profits.
Using the cross-sectional data of the major drug companies for 10 years, we obtained the following conclusions.
(i) Throughout the period we studied, the amount each company received as the licensee's share of the monopoly profits explains significantly the differences of the rate of return of capital among the major companies.
(ii) Throughout this period, the licensees' share of the monopoly profits has been one of the major factors that explain the high rate of return of the major drug companies.