The Hatch-Waxman Act of 1984 extended the patent life of a pioneer drug to compensate for delays in the FDA approval process, which incentivized pioneer firms to invest in research and development and accelerated the entry of generic drugs, which would reduce pharmaceutical expenditures. Unfortunately, the Act has serious flaws that encourage both generic producers and pioneer firms to game the system. In the pursuit of economic profit, some producers of generic drugs use the Hatch-Waxman Act to challenge pioneer brands that were covered by valid patents. This conduct undermines the value of the patent awarded to the pioneer firm by the Patent and Trademark Office. At the same time, pioneer firms stall generic competition by filing perhaps baseless patent infringement suits. After 30 months, the pioneer firm and the would-be entrant often strike deals that result in reverse payments by the pioneer firm to the generic producer to delay its entry into the market. This conduct has aroused antitrust concerns that are the subject of this chapter.

In recent years, there have been many accounts of extreme prescription drug prices that have raised issues of equity, price gouging, social conscience, and demands for relief. In part, these prices arise due to the inelastic demand for lifesaving drugs and the patents that create short-term legal monopolies. The economic rationale for patent protection flows from the fact that the investment made by inventors necessarily precedes any financial benefits received from the discovery of new products or more efficient production processes. Patent law prevents copiers from free riding so that innovators can reap the reward of monopoly profits for their innovation. Thus, there is a trade-off between innovation and affordability. Antitrust law cannot be used to disrupt legal monopolies, so the US government has turned to congressional proposals that would mitigate extreme drug pricing. We also review the policies of other countries that are aimed at reducing pharmaceutical drug prices and consider whether such policies would work in the US market.