Dynamic Innovative Inefficiency in Pharmaceutical Patent Settlements

June 3, 2012

Ineffective policing of bad patents remains a main focus of the academy with respect to Hatch-Waxman challenge settlements, but the potential of the challenge structure for weakening justified, good patents has gone relatively unnoticed. Currently, the most rational target for a generic challenger is a highly profitable patent, whether it is weak or strong. The pioneer patentee will be particularly risk averse with respect to blockbuster drugs and, therefore, willing to concede much in settlement negotiations out of fear of the vagaries of patent trials. Given that blockbuster drugs are used to subsidize the research and marketing of loss-producing drugs, to decrease the expected value of a popular drug is to discourage not only the development of future, likewise profitable drugs, but also a host of other more specialized drugs. This article examines the problem of innovative inefficiency within the Hatch-Waxman regime and proposes an approach for reform.