An article, by Matthew J. Higgins of the Georgia Institute of Technology and Stuart J.H. Graham of the University of California, Berkeley Law School suggests that the current Hatch-Waxman regime having a 5-year data exclusivity term and provisions for generic drug companies to challenge innovator drug patents is responsible for the dramatic drop-off in new small molecule drugs (from an average of 35 in 1996-2001 to 20 in 2002-07), and that the solution is to increase (indeed, double) the data exclusivity term for conventional drugs to 10 years, consistent with trends in Europe, Canada, and Japan

The authors start by reviewing the economic incentives for generic drug challenges to innovator drug patents. The biggest factor is the 180-day exclusivity period awarded to the generic challenger that is the first to file an Abbreviated New Drug Application (ANDA). The authors estimate that the average revenue garnered by a generic during this period is $60 million, which is 12 times the average cost of ANDA litigation ($5 million). This differential exists because during that 6-month period the first successful generic challenger can price the generic substitute just below the brand-name drug price (representing a "savings" to consumers). This potential windfall has motivated generic companies to engage in "prospecting" by filing numerous ANDAs with Paragraph IV certifications (that the patent protecting the innovator's drug is invalid). This conclusion is supported by a review of the number of ANDA lawsuits filed over the past ten years:

A total of 749 lawsuits have been filed challenging innovator drug patents during this period, involving 243 brand-name drugs. The authors note that the FTC has shown that "72% of Paragraph IV challenges filed between 1992 and 2000 resulted in litigation, with the generic drug challenger winning 42% of the time," citing Generic Entry Prior to Patent Expiration: An FTC Study (FTC, Washington, DC, 2002). Moreover, the drugs challenged in recent years have revenues of less than $100 million, showing that "blockbuster" drugs are no longer the only targets of Paragraph IV challenges.

The economic effect on innovator drug companies is large, averaging about a 12% loss in revenue. This loss "exceeded companies' gains from the patent extensions awarded to them," according to the authors, an outcome that is ironic considering the policy "balance" of the Hatch-Waxman regime between reducing the time needed for a generic drug to reach the market after innovator patent expiry and restoration of patent term lost to the period of regulatory review. Using Merck's Fosamax as an example, the authors state that Teva's successful Paragraph IV challenge permitted generic competition 4 years before Merck's patents were to expire, costing the company about $1.5 billion. (Teva is reported to have 160 pending ANDA filings and to be involved in 92 Paragraph IV challenges, "putting at risk over $100 billion in sales," citing Teva's Securities and Exchange Commission Form 20-F filing in 2007.) This lost revenue represents the cost of bringing two new drugs to market in the U.S.
As a result, innovator pharmaceutical companies are motivated to produce new branded drug offerings that bolster their existing franchises subject to generic challenge. However, these are not "new" drugs, but rather are predominantly reformulations representing only "marginal improvements" over existing forms of these drugs. The rate and number of successful Paragraph IV challenges is also reducing the average effective patent life for innovator drugs, particularly "blockbuster" drugs which remain the most attractive targets for Paragraph IV challenge (and the correspondingly higher value of the 180-day generic exclusivity term).
The authors suggest as a solution changing the data exclusivity term under the Hatch-Waxman act from 5 years to 10 years, using a comparison with other "Western" countries as justification:

Citing Professor Grabowski's research, as well as a report from the National Academies of Science and Engineering and the Institutes of Medicine (Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future (National Academies Press, Washington, DC, 2007), the authors assert that extending the period of data exclusivity is necessary to overcome the "market failure" in the pharmaceutical industry caused by the Hatch-Waxman Paragraph IV challenges of patents on innovator drugs. While they also suggest other regulatory incentives for drug development in particular areas (such as Alzheimer's disease and osteoarthritis), "[a]t a minimum, we should all note that Paragraph IV challenges are contributing to this failure when discussing the future of health care and long-term access to new treatment."
The irony of this report will not be lost on anyone following the data exclusivity period debate over follow-on biologics, and the authors' conclusions provide a direct challenge to those advocating a shortened term for biologic drugs based on the "successes" of the Hatch-Waxman regime for small molecule drugs.