Patents, Data Exclusivity, and the Development of New Drugs

Pharmaceutical firms typically enjoy market exclusivity for new drugs from concurrent protection of the underlying invention (through patents) and the clinical trials data submitted for market approval (through data exclusivity). Patent invalidation during drug development renders data exclusivity the sole source of protection and shifts the period of market exclusivity at the project level. Patent invalidation therefore constitutes a natural experiment that allows us to causally identify how the duration of market exclusivity affects firms' incentives to innovate. In instrumental variables regressions we quantify the effect of a one-year reduction in expected market exclusivity on the likelihood of drug commercialization. We provide first estimates of the responsiveness of R&D investments to market exclusivity expectations and hereby inform the ongoing policy debate on the regulation of intellectual property rights in the pharmaceutical industry.