OBJECTIVES: To calculate a price index for pharmaceuticals in Sweden and to examine the effects of generic competition on patented pharmaceuticals. METHODS: Price and volume data for the period 2002-2005, for the 180 most selling substances were used to calculate a chain price index. A regression model was used to estimate the effects of analog substitution, i.e switches from one substance to another of the same class, for 5 major products whose patent expired during the period. RESULTS: The general price level of pharmaceuticals has fallen 15% during the period and off-patent drugs have experienced a 40% fall in price level. In addition to the direct effect on prices of a substance due to generic competition, there has also been analog substitution effect from patented drugs to off-patent drugs. For two groups of pharmaceuticals, statins and PPIs, there were significant substitution effects between substances due to the changes in relative prices. CONCLUSIONS: Generic substitution in Sweden has been effective in reducing prices of off-patent pharmaceuticals. Generic substitution has also had more farreaching effects than what has been previously believed. There has been a move from patented to off-patent products within the same therapeutic area.