Unpatentable Drugs and the Standards of Patentability

The role of the patent system in promoting pharmaceutical innovation is widely seen as a tremendous success story. This view overlooks a serious shortcoming in the drug patent system: the standards by which drugs are deemed unpatentable under the novelty and non-obviousness requirement bear little relationship to the social value of those drugs or the need for a patent to motivate their development. If the idea for a drug is not novel or is obvious, perhaps because it was disclosed in an earlier publication or made to look obvious by recent scientific advances, then it cannot be patented. Yet the mere idea for a drug alone is generally of little value to the public. Without clinical trials proving the drug's safety and efficacy, a prerequisite for FDA approval and acceptance by the medical community, it is unlikely to benefit the public. Given the immense investment needed to fund clinical trials on drugs, and the ability of generic manufacturers to rely on those tests to secure regulatory approval for their own products, pharmaceutical companies are rarely willing to develop a drug without patent protection. The novelty and non-obviousness requirements make no concession for the development costs of inventions, and thus withhold patents from drugs that are unlikely to reach the public without that protection. This gap in the patent system for drugs has created a pervasive problem in the pharmaceutical industry, causing firms to regularly screen through their drugs in R&D and discard ones with weak patent protection. The potential harm to the public from the loss of these drugs is likely significant. Congress can easily avoid this problem by ensuring that the successful completion of the FDA's rigorous clinical trial process is rewarded with a lengthy exclusivity period enforced by the FDA

Intellectual Property Versus Prizes: A Policy-Lever Analysis

Most developed nations rely on intellectual property as one of their primary tools to promote private investments in R&D. An alternative approach is for the government to reward innovators with a prize instead of an intellectual property right, such that innovations fall immediately into the public domain. This idea dates back centuries, but over the past decade there has been an explosion of scholarship on the subject. Policymakers and even the press have started to talk about use prizes as an alternative to intellectual property – particularly for prescription drugs. In the scholarly literature, it is generally assumed that eliminating intellectual property rights would result in prices closer to marginal cost, thereby reducing deadweight loss. The standard objection to prize proposals is that the government might offer the wrong reward for innovation. Scholarship on the prize system largely focuses on design mechanisms to ensure that the government offers appropriate rewards to innovators. This article examines the growing literature on the prize system and reaches several conclusion about the choice between intellectual property and prizes. First, the proponents of the prize system have made a respectable case that the government could acquire sufficient information about innovations to calculate an appropriate prize. Several scholars have taken this argument too far, however, concluding that prizes are superior to intellectual property in part because they offer better incentives for innovation. This argument is mistaken because any mechanism to calculate rewards under a prize system could also be used to supplement or tax profits under intellectual property, resulting in the same outcome. The prize system therefore cannot be justified as a way to improve the incentives for innovation provided by intellectual property

Solving the Problem of New Uses

One of the most dramatic public-policy failures in biomedical research is the lack of incentives for industry to develop new therapeutic uses (“indications”) for existing drugs once generics are available. Policymakers and commentators are well aware of this “problem of new uses,” but fail to appreciate its magnitude. Over the past decade, this gap in the incentives for pharmaceutical R&D has become one of the greatest barriers to medical progress. Recent technological advances have allowed researchers to identify hundreds of potential new indications for older drugs that could address critical unmet medical needs. And researchers are poised to discover hundreds more. Developing new indications for existing drugs is much faster, cheaper, and less risky than developing new drugs, and therefore offers the single most promising avenue for delivering new medical treatments to the public. However, pharmaceutical companies invariably lose interest in developing new uses for existing drugs when patients have access to low-cost generics. This article explores the nature and source of this gap in the incentives for developing new medical treatments, showing that it ultimately stems from a simple information problem. At present, the government encourages drug development by granting firms temporary monopoly rights that block generic manufacturers from making or selling imitations of their drugs. The government also makes available an alternative type of monopoly protection for new indications that applies to the act of taking or administering a drug for a new therapeutic use. The latter monopoly rights could provide the appropriate incentives for developing new uses of existing drugs. However, pharmaceutical companies cannot enforce these rights without knowing when physicians prescribe the drug for the patented indication as opposed to some other use. If the government established an infrastructure for pharmaceutical companies to monitor the prescribed indications when pharmacists fill a prescription, those firms would possess the information necessary to enforce patents on new indications, thereby solving the problem of new uses. This article argues that the government could easily create such an infrastructure through the expanding use of eprescribing software and electronic medical records

Do Firms Underinvest in Long-Term Research? Evidence from Cancer Clinical Trials

We investigate whether private research investments are distorted away from long-term projects. Our theoretical model highlights two potential sources of this distortion: short-termism and the fixed patent term. Our empirical context is cancer research, where clinical trials -- and hence, project durations -- are shorter for late-stage cancer treatments relative to early-stage treatments or cancer prevention. Using newly constructed data, we document several sources of evidence that together show private research investments are distorted away from long-term projects. The value of life-years at stake appears large. We analyze three potential policy responses: surrogate (non-mortality) clinical-trial endpoints, targeted R&D subsidies, and patent design

Do Fixed Patent Terms Distort Innovation? Evidence from Cancer Clinical Trials

Patents award innovators a fixed period of market exclusivity, e.g., 20 years in the United States. Yet, since in many industries firms file patents at the time of discovery (“invention”) rather than first sale (“commercialization”), effective patent terms vary: inventions that commercialize at the time of invention receive a full patent term, whereas inventions that have a long time lag between invention and commercialization receive substantially reduced - or in extreme cases, zero - effective patent terms. We present a simple model formalizing how this variation may distort research and development (R&D). We then explore this distortion empirically in the context of cancer R&D, where clinical trials are shorter - and hence, effective patent terms longer - for drugs targeting late-stage cancer patients, relative to drugs targeting early-stage cancer patients or cancer prevention. Using a newly constructed data set on cancer clinical trial investments, we provide several sources of evidence consistent with fixed patent terms distorting cancer R&D. Back-of-the-envelope calculations suggest that the number of life-years at stake is large. We discuss three specific policy levers that could eliminate this distortion - patent design, targeted R&D subsidies, and surrogate (non-mortality) clinical trial endpoints - and provide empirical evidence that surrogate endpoints can be effective in practice

Patents and Research Investments: Assessing the Empirical Evidence

A well-developed theoretical literature--dating back at least to Nordhaus (1969)--has analyzed optimal patent policy design. We re-present the core trade-off of the Nordhaus model and highlight an empirical question which emerges from the Nordhaus framework as a key input into optimal patent policy design: namely, what is the elasticity of R&D investment with respect to the patent term? We then review the--surprisingly small--body of empirical evidence that has been developed on this question over the nearly half century since the publication of Nordhaus's book.National Institute on AgingNational Institutes of Health (U.S.) (Common Fund, Office of the NIH Director, through grant U01-AG046708

Truth in Government: Beyond the Tax Expenditure Budget

Recently, the tax expenditure budget has come under renewed attack. Some argue that the conceptual and implementational flaws in the tax expenditure budget justify discontinuing its publication. This Article argues that-if improving the utility of information distributed about the direction and function of government is a desired end-one must focus on the interaction between the various information sources rather than the merits or demerits of any particular source of information. In arguing for the publication of more, rather than less information, this Article points out the generality of the supposedly fatal flaws in the tax expenditure budget: all the sources of information we have about government spending suffer from problems similar if not identical to those identified in the tax expenditure budget, e.g. the absence of an agreed-upon baseline of a normal tax system against which to measure tax expenditures. Rather than discontinuing publication of the tax expenditure budget, this Article argues that it should be supplemented with additional, albeit also imperfect information. In particular, this Article suggests that a cost benefit schedule and contact audits should accompany the tax expenditure budget. Although like the tax expenditure budget the information provided through these sources will not be perfect, it will promote the broader goals of transparency, voter awareness and government accountability

Truth in Government: Beyond the Tax Expenditure Budget

Recently, the tax expenditure budget has come under renewed attack. Some argue that the conceptual and implementational flaws in the tax expenditure budget justify discontinuing its publication. This Article argues that-if improving the utility of information distributed about the direction and function of government is a desired end-one must focus on the interaction between the various information sources rather than the merits or demerits of any particular source of information. In arguing for the publication of more, rather than less information, this Article points out the generality of the supposedly fatal flaws in the tax expenditure budget: all the sources of information we have about government spending suffer from problems similar if not identical to those identified in the tax expenditure budget, e.g. the absence of an agreed-upon baseline of a normal tax system against which to measure tax expenditures. Rather than discontinuing publication of the tax expenditure budget, this Article argues that it should be supplemented with additional, albeit also imperfect information. In particular, this Article suggests that a cost benefit schedule and contact audits should accompany the tax expenditure budget. Although like the tax expenditure budget the information provided through these sources will not be perfect, it will promote the broader goals of transparency, voter awareness and government accountability