Drug research and development incentives under a changing exclusivity environment: An event study appproach

In this dissertation I explore the effect of marginal changes in the exclusivity environment on research incentives of firms involved in the process of drug manufacturing, and drug research and development. A model of copyright developed by Landes and Posner (2003) explaining the effect of varying levels of copyright protection on research incentives, is closely followed here and adopted in a patent and regulatory context. Exclusivity here is taken to refer to the intellectual property environment and the regulations of the Food and Drug Administration (FDA) pertaining to marketing exclusivity for approved drugs. Both these aspects determine the period of time that drugs get marketed exclusively with limited competition and the amount that markets enable them to appropriate in return for their research activity. Intellectual property debates regarding the scope of patents and determination of patentable subject matter would inadvertently affect research intensive of firms such as pharmaceutical and biotechnology firms. Besides obtaining patents, drug marketing also has to go through a long process of approval from the FDA governed by the Federal Food Drug and Cosmetic Act (FFDCA). The Hatch-Waxman Act of 1984 brought about some crucial amendments to the drug regulatory process by enabling easy entry to generic drug manufacturers. Since the passage of the Hatch-Waxman Act, to the amendments introduced to the Hatch-Waxman Act through the Medicare Prescription Drug Act (2003), various court decisions have been instrumental in recognizing the weak links in the Hatch-Waxman amendments to the FFDCA (1938). These cases were precursors to some of the eventual statutory amendments to the Hatch-Waxman Act which were passed through the Medicare Prescription Drug Act of 2003. In the current study, the reaction of three sets of firms-pharmaceuticals, biotechnology and generics drug manufacturers, are analyzed following some precedent-setting cases that changed the exclusivity available to new drugs entering the market. The event study methodology is used in evaluating their reaction to these changes. The study further determines whether these firms are affected consistently and significantly negatively or positively from these changes in exclusivity. As an extension to this study, the research behavior of pharmaceutical and biotechnology firms are also analyzed taking into account the abnormal returns obtained from these event studies.