Fact of the Week: When a Breakthrough Drug Receives an Additional Year of Market Exclusivity, 20 Percent More Drugs are Approved in the Same Class

Intellectual property rights stimulate innovation by incentivizing R&D investment in high-risk, high-return sectors of the economy. This is especially so in the pharmaceutical sector, where developing new drugs often requires billions of dollars’ worth of investments in R&D stretching over a decade, on average. So how do longer periods of market exclusivity—such as the duration of patents and protections covering laboratory research data—translate into more drugs being developed and released in the same class of medicines?

Owing to long drug developmental times, when a firm releases a breakthrough drug, a competitor may already be somewhere along the development pipeline for a similar one. Even if the competitor firm eventually releases its own version of the drug, its period of market exclusivity still would be tied to that of the first drug’s, as when that term expires generics would enter the market and siphon away revenue. Therefore, granting longer market exclusivity periods to breakthrough drugs would help encourage development of similar drugs, since other firms would have enough time to recoup part of their R&D costs rather than having to scrap their partially completed projects outright.

A recent econometric analysis by Duncan Gilchrist shows just that. By analyzing pharmaceutical compounds released between 1987 and 2011, he finds that every additional year of market exclusivity given to a breakthrough compound increases the number of subsequent drugs approved in that class by between 18 and 25 percent—20 percent on average. His results show that stronger intellectual property rights in the pharmaceutical industry help stimulate greater life sciences innovation.