We first construct a company-specific measure of the amount of competition that each incumbent pharmaceutical firm faces through Paragraph IV generic drug entry filings. We utilise detailed data on public pharmaceutical firms and their drug development portfolios from 2005 to 2016 to examine the impact of this legal mechanism on innovation. How do such agreements affect innovation? These agreements effectively provide a tool through which incumbent firms can reduce the competition that they face. To continue their monopoly over marketed drugs, incumbent pharmaceutical firms regularly enter ‘pay-for-delay’ agreements (also known as ‘reverse payments’) with generic manufacturers that seek to enter the market, whereby the generic firm agrees to delay product launch in exchange for a cash amount. Figure 1 depicts the timeline of this process.įigure 1 The timeline of generic drug entry But after marketing exclusivity expires, other firms may enter the market by launching generic versions of the specific drug (through a process called Paragraph IV filing). In this industry, firms that are first to pass clinical trials and obtain US Food and Drug Administration (FDA) approval for their products enjoy marketing exclusivity for a number of years (typically three to seven years), during which no other firm can directly compete against that drug. This setting also provides data that permit us to explore innovation activity using actual drug clinical trial actions, rather than relying solely on measures of patents, which many have noted may not accurately reflect innovation activity (van Pottelsberghe de la Potterie and de Rassenfosse (2008), Freilich (2019)). We do so in the setting of the pharmaceutical industry – an important sector in the economy that focuses on developing innovative products through its research and development (R&D) investments. In our study, we shed light on a legal mechanism through which innovative firms may maintain their market power, and its ramifications for innovation and policies that seek to increase innovation through competition (Li et al. Legal mechanisms to maintain market power in the pharmaceutical industry As a result, understanding the interaction between these forces is crucial for determining the effect of policies aimed at increasing innovation by changing the degree of competition in a market. While measures such as limiting competition through greater patent protection may encourage more innovation by firms seeking to reap monopoly profits, incumbent firms with existing products under such protection may not feel the need to innovate further if they can already rely on guaranteed revenues. Lo and Thakor (2015), Thakor and Lo (forthcoming)).īut the relationship between competition and innovation is not clear-cut (Aghion et al. Hall (2018)) to laws and regulations aimed at increasing the number of innovative firms through increased competition (e.g. These policy tools have ranged from providing protections to firms that successfully innovate through patent protection (e.g. To increase innovation incentives, policymakers have used changes to the level of competition as a key tool. Innovation has long been viewed as a critical driver of economic growth.
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