When a drug developer creates a new chemical that they believe could be used to treat disease, they generally file for a patent, granting them the exclusive right to market that chemical. A chemical patent expires twenty years after the date of filing, after which point, generic versions of the drug that have been approved by the FDA can be marketed by other firms. Generic drugs compete with the original drug, significantly reducing its cost.
A developer’s twenty years of patent protection often includes many years during which a drug cannot be marketed because it has not yet been approved by the FDA. In some cases, development and clinical trials might take so much time that drug developers are left with too brief a period of market exclusivity to recoup their costs. In order to incentivize the development of new drugs, the FDA grants drug developers market exclusivity for a period of five years after a new drug is approved, during which time, no other firm is permitted to sell the drug, whether or not it is protected by a patent. Some drugs, including orphan drugs, are granted lengthened periods of market exclusivity in order to incentivize development. A drug’s patent life and market exclusivity period often overlap.