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Pharmaceutical drugs are often hailed as the poster child for the proposition that patents foster accelerated rates of innovation. This sentiment stems, in large part, from the significantly high research and development (R&D) costs endemic to the pharmaceutical sector. I argue that if the role of the patent regime is one of fostering higher amounts of investment in the R&D process, it is better served by a direct investment protection regime, where the protection does not depend upon whether or not the underlying idea behind the drug is 'new' and 'inventive', the two central tenets of patent law. Rather, any drug that successfully makes it past the regulatory filter ought to be entitled to protection, since its discovery and development entail significant investment and risk. Owing to the inadequacy of the current patent regime in appropriately protecting intensive pharmaceutical R&D investments from free-riders, I propose a comprehensive investment protection regime that protects all the investment costs incurred during the drug discovery and development process. Though similar to existing data protection regimes in some respects, it differs in others. Firstly, it enables a recovery of all R&D costs, and not only costs associated with clinical trials. Secondly, unlike patents and data exclusivity which offer uniform periods of protection, it rewards investments in a proportionate manner, wherein drug originators are entitled to protection against free-riders only until such time as they recoup their specific investments and earn a rate of return on investment that is dependent on the health value of the drug. Given that a pure market exclusivity based investment protection regime is likely to foster excessive pricing and subject the market to the dictates of a single firm, I advocate a compensatory liability model based on a novel cost sharing methodology, where follow-on entrants are free to manufacture the drug, but must pay a reasonable amount of compensation to the originator.

The theory of this thesis is that U.S. Court of Appeals case decisions influence rule changes made by the FDA. My hypotheses are (1) Republican appointed judges will favor businesses more often than Democrat appointed judges, (2) when businesses are favored more than consumers the FDA will reduce regulation, and (3) when regulation is reduced there will be an increase in drug approvals. hypothesis 4 states drug approvals decrease when Democrats hold a majority. Hypotheses 1, 2, and 3 were all tested using a c2 analysis for the years 2010, 2011, 2015, and 2016. A descriptive analysis of FDA policy changes is also complete for hypothesis 2. Hypothesis 4 is tested using a time series analysis. Hypotheses 1 and 3 found support. However, the findings of hypothesis 2 suggest political make-up matters more than case decisions. Table 5 supports hypothesis 4, but table 6 does not.

In this dissertation I explore the effect of marginal changes in the exclusivity environment, on returns of firms involved in the process of drug manufacturing and R&D. 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 and adopted in a patent and regulatory context. Exclusivity here is taken to refer to the intellectual property environment and 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 affect research intensives of firms such as pharmaceutical and biotechnology firms. Besides obtaining patents, FDA approval for marketing of new drugs is also a long regulatory process and 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 of 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 the change in firm returns following these decisions, and determining whether they are affected significantly negatively or positively. As an extension to the study, the research behavior of pharmaceutical and biotechnology firms are also analyzed taking into account the abnormal returns obtained from these event studies.