Patent Challenges and Follow-on Pharmaceutical Innovation

The 1984 Hatch-Waxman Act offers market exclusivities to innovators for their new drugs and follow-on improvements and to first-time generic competitors for challenging innovators' patents. Using data on small-molecule New Chemical Entities (NCEs) from 1985 to 2016, patent challenges they face, and their follow-on innovation, I study the interplay between generic pressure and follow-on innovation. I find that on average follow-on innovation per NCE nearly triples in anticipation of first-time generic competition. However, NCEs approved from 2003 to 2006 show a decline in follow-on indications but an increase in other follow-on innovations relative to NCEs approved from 1985 to 2002. Importantly, follow-on indications reduce the probability of settlement in patent challenges by an average of five and a half percent. This result translates into an average externality value to consumers of about $50 million to $115 million per follow-on indication. By contrast, other follow-on innovations have no effect on the probability of settlement. This study also describes follow-on innovation launching and patenting dynamics that ensue, and it shows that the ratio of patents per follow-on innovation has consistently increased overtime. This suggests caution when using patent counts as a proxy for innovative output.