Optimal patent policy for pharmaceutical products: reconciling innovation and access to new drugs
New drugs are expensive to develop. The average research and development investment required to bring a new drug to market has recently been estimated at over $ 1.3 billion, after factoring in the costs of failed trials (Wouters et al. 2020). However, once created, new drugs are fairly easy for generic manufacturers to emulate. As a result, competitive markets can underinvest in drug development from a societal perspective. This market failure is particularly pronounced in the case of investments in vaccine research (Kremer et al. 2016, de Rassenfosse et al. 2020).
Patent policies aim to overcome this market failure by granting inventors temporary exclusive rights. By making the inventor’s market power temporary, patent policies ensure access to affordable generic drugs and health care after patents expire. This trade-off between innovation and competition is at the heart of long-standing patent policies and theoretical work, dating back to Nordhaus (1969).
The global COVID-19 epidemic requires effective treatment. Once a new treatment has been discovered, it will take time to gain patent protection and bring it to market. Regulatory delays can shorten the effective term of the patent and dilute the incentives to develop the new treatment. For this reason, many countries grant term extensions to new drug patents to compensate for the effective reduction in patent term due to regulatory delays.
However, as in the case of HIV treatments (Hoe et al. 2011), another concern is that the inventor’s patent rights and associated market power may prevent access to essential COVID-19 drugs, especially in households or low-income countries (de Rassenfosse and others 2020, Unitaid 2020). Promising mechanisms to balance innovation and affordable access to new treatments are innovation prices (Athey et al. 2020) and pooling of patent rights and data (Hoe et al. 2011, Medicines Patent Pool 2020, Unitaid, 2020). In a recent paper (Izhak et al. 2020), we offer evidence supporting a complementary mechanism: government policies should make patents for new drugs shorter, but broader. This optimal policy encourages innovation while ensuring faster access to generic drugs, without the costly investments to be invented around the patents of new drugs.
Theory of innovation and competition
Our empirical work is guided by a theoretical model of innovation and competition, based on the theory of costly imitation pioneered by Gallini (2002). Using this model, we show that the characterization of the optimal patent policy requires as key inputs an estimate of the elasticity of a patent challenge with respect to the effective term of the patent or the scope of the patent.
Data and identification
To estimate these elasticities, we use comprehensive administrative data from the United States Food and Drug Administration and the United States Patent and Trademark Office (USPTO). The data identifies new drug patents and the successful challenges of these patents through the so-called Paragraph IV certifications of generic drugs. For identification, we use two quasi-experimental approaches: one based on changes in patent law, and the other on the assignment of patent examiners to patent applications at the USPTO.
We use two policy interventions affecting the effective duration of pharmaceutical patents. First, the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) of 1994 increased the legal term of the patent from 17 years from the date of grant to 20 years from the first filing date. . After TRIPS, delays in prosecuting patents at the USPTO effectively shortened the term of patents with prosecution times exceeding three years. The American Inventors Protection Act (AIPA) of 1999 introduced patent term adjustments to address this loss of effective patent term due to delays by the USPTO.
We document how TRIPS shortened the effective term of new drug patents that were sued for more than three years at the USPTO, particularly prior to AIPA. In contrast, the effective terms of patents for new drugs issued within three years were hardly affected by the reforms.
In the sample of new drug patents, long lead times are common, with the average lead time being three years from the filing of the patent. Figure 1 plots the variation in these regulatory deadlines across new drug patents. However, until the implementation of the TRIPS Agreement, the duration of 17 years (from the grant of the patent) automatically compensated for delays in the prosecution of patents. After TRIPS, patents with long prosecution times got virtually no compensation.
Figure 1 Histogram of patent timeframes (years) in the sample of new drug patents
Figure 2 Adjustment of the duration of patents for new drugs filed after the implementation of the AIPA (May 29, 2000)
To note: The figure excludes zeros in patent term adjustments.
After the AIPA, a patent is entitled to a term adjustment if the USPTO does not issue the patent within three years from the filing date. In our sample, about half of new drug patents are adjusted, reflecting the long delays in patent prosecution. The AIPA patent term adjustment averages 1.4 years, and adjustments over two years are quite common, as shown in Figure 2.
We use difference-of-difference regressions (DiD) on the impacts of TRIPS and AIPA on the effective duration and challenges of paragraph IV of new drug patents. We find strong evidence that long-term patents encourage paragraph IV challenges. Based on the regressions, we extrapolate the elasticity of a successful patent challenge over the effective length to about three.
Inspired by recent work (e.g. Sampat and Williams 2019), we also use instrumental variable (IV) regressions based on differences in the propensity of some patent examiners to grant larger or more claims. Our IV estimates suggest that the corresponding elasticity with respect to various measures of claim reach is around -1. We also provide additional descriptive evidence that supports the negative effect of broader patents on patent challenges.
Socially Optimal Policy
We predict the effects of changes in patent duration and scope on innovation and welfare, using elasticities estimated from DiD and IV regressions as inputs into our theoretical formulas. Consistent with the theoretical results of Gallini (1992), we find that long-term patents increase costly patent challenges and are ineffective in promoting the development of new drugs. Shorter patent terms would reduce costly patent challenges, while larger patents would restore incentives to develop new drugs. In addition, short-lived patents would expire sooner, thus ensuring faster access to generics. To restore incentives to innovate, shortened patent terms should be offset by expanding the scope of patent protection for new drugs, for example, by granting product patents instead of method patents, by granting longer market and data exclusivity periods for broader categories of new drugs, and restrictive provisions for compulsory licensing.
Previous empirical studies such as Sakakibara and Branstetter (2001), Moser (2005) and Lerner (2009) analyze the effects of policy reforms on innovation. As we take a step forward in the empirical characterization of a socially optimal patent policy, our predictions are crude and the measures of scope imperfect. To further improve the robustness of policy recommendations, we need more empirical estimates of the elasticities of innovation and imitation with respect to changes in patent policy.
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