Longer Patents For Lower Imitation Barriers : The 1984 Drug Act

On September 24, 1984, President Reagan signed into law the Drug Price Competition and Patent Term Restoration Act of 1984. This law, the first change in United States patent terms since 1861, restores part of the patent life lost during the premarket regulatory process for new pharmaceuticals (and also for medical devices and food additives). A second major provision of the law facilitates the entry of generic competitors after patent expiration. The adverse impacts on pharmaceutical R&D of the 1962 Kefauver Amendents to the Food, Drug, and Cosmetic Act have been well documented (for a survey, see our 1983 book). These regulations have been a significant factor underlying increasing R &D costs, longer gestation periods, and shorter patent terms in pharmaceuticals. At the present time, average effective patent life for new pharmaceuticals is approximately half of the statutory life of 17 years. The 1984 Act would increase patent life up to 5 years using a formula approach analyzed in Section II below. The adverse impacts of regulatory requirements on the entry of generic products in pharmaceuticals have not been well documented. In particular, generic products frequently could not rely on the safety and efficacy evidence submitted by the pioneer firms for post-1962 drug introductions. These data were accorded trade secret status. Consequently, unless the relevant data were publicly available in the scientific literature, an imitator had to duplicate many of the pioneer's tests to gain market approval. Under the new law, a generic drug company need only submit an "Abbreviated New Drug Application" (ANDA). This requires it only to demonstrate that the drug is bioequivalent to the pioneer's product, a relatively low cost experiment. The Drug Price Competition and Patent Term Restoration Act of 1984 has been termed the most important legislation for the pharmaceutical industry since the 1962 Kefauver Amendments. Essentially, it eliminates duplicative testing and makes entry easy for generic competitors, while at the same time extending patent protection for future new product introductions. In this paper we analyze its likely impacts on competition in the pharmaceutical industry, the incentives for innovation, and general consumer welfare.