An event study of the effect of the Drug Price Competition and Patent Term Restoration Act of 1984 on stock returns of research-based and generic pharmaceutical manufacturers

The Drug Price Competition and Patent Term Restoration Act of 1984 (The Act) had two primary purposes: (1) increase incentives for research-based pharmaceutical manufacturers to develop pioneer drugs by providing a method to extend the time span of patent protection; and (2) reduce FDA regulatory requirements needed for premarket approval of generic versions of post-1962 off-patent drug products.;This study used an event study methodology to detect abnormal stock returns that may have occurred around events which led to the passage of The Act. Data were analyzed from: (a) a portfolio of twelve research-based pharmaceutical manufacturers; and (b) a portfolio of four generic pharmaceutical manufacturers. The ordinary least squares regression market model was used to detect abnormal returns utilizing dummy variables for each event day. This study also analyzed the stock market's reaction to a previous attempt to pass patent-term restoration legislation in 1981 and 1982.;The results indicate that there was enough uncertainty during the legislative history of The Act to keep the stock market from considering the impact of The Act on research-based and generic pharmaceutical manufacturers until August 1984. The results also provide strong evidence that when the probability of passage increased and the final form of the bill became more clear, the stock market expected The Act to negatively affect the financial performance of research-based pharmaceutical manufacturers. The market reacted positively to The Act with regard to generic pharmaceutical manufacturers although the small number of generic firms increased the relative contribution of each individual firm to the portfolio return. This may have made it more difficult to identify significant market reactions toward the generic drug industry.;It is recommended that similar event study methodologies be utilized to examine the effect of other events on research-based pharmaceutical manufacturers. Events which could be studied with this methodology include research and development announcements of breakthroughs in drug therapy, FDA approvals of new drug, and announcements of new competition from either generic drug products or new pioneer products within the same therapeutic class.