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Lawsuits are not always successful even when claims are meritorious, leading to suboptimal deterrence. Misappropriators know there is at least some chance that they will escape detection or, if caught, will avoid liability. 145 Trade secret owners are thus likely to lobby both for criminal penalties for misappropriation and for prosecutors to bring charges against alleged infringers. Law enforcement resources are relatively static. If reliance on trade secrecy does increase, prosecutions will likely remain mostly constant in the short run, which means that criminal enforcement would decrease relative to the level of misappropriation. Trade secret owners will respond by pressing for more resources to be devoted to the problem, in an absolute sense and as a share of a prosecutor's time and budget. This prediction mirrors what has happened in other areas of IP, where rightsholders have pressed successfully for more resources to battle infringement. For example, the PRO IP Act of 2008 created dedicated federal positions in the executive branch and in embassies to combat violations of IP rights.'4 Politically, it is likely palatable to go after misappropriation, given the roots of trade secrecy in policing unethical commercial behavior. 147 Prosecutions for trade secrets offenses are likely to rise over time. As innovators shift to trade secret, they face the risk that outsiders, such as shareholders, will be unable to value correctly their advances.1 48 Indeed, underpricing is likely to occur. Because claims of having a secret invention are cheap talk, markets will rationally discount those claims, and innovators will be unable to realize fully the value of their secret advances. Firms are likely to try to overcome Arrow's paradox to realize the full value of their innovation. 149 There are a number of standard valuation models, but all rely on access to information-precisely the problem with a secret. 50 The most likely answer is to use a third-party certifier, where the certifier is under a duty of confidentiality to the trade secret owner, but is sufficiently trustworthy that its estimate of the secret's value will be credible.15 1 Unfortunately, the history of third-party certifiers is mixed at best. Certifiers must constantly balance credibility, which protects their reputation and makes their signals valuable, against appealing to clients, who want the highest possible rating for their secrets. There can be adverse selection, as with services that rate the privacy protections provided by Web sites. 15 2 Firms can set up their own certifiers, a practice known informally as "greenwashing."i 5 3 Companies may be selective about the information they disclose to certifiers. And, the time lag between the certifier's estimate and the eventual revelation of the secret's value (as embodied in products and services) may make it hard to gauge how accurate those calculations were. One can expect firms to try to gain credit in the marketplace for their secret innovations, but it will be challenging to do so.

The conventional wisdom for both innovators and scholars is that patenting is preferable to secrecy. While the road to patenting is costly and long, it rewards an inventor with strong property rights at the successful conclusion of the journey. The shorter duration of patent protection is seen as outweighed by the strength of those rights and by the 21 greater ease of valuing the patent. Patents help innovators exclude competitors, since neither independent discovery nor use after reverse engineering operate as defenses to liability for infringement. Scholars see the disclosure from patents as driving follow-on innovation and diffusing knowledge.26

Firms that don’t protect their innovation . That’s why intellectual property protection (IPP) is a key component in the strategy of both established enterprises and early-stage startups.

The first form of IPP that typically comes to mind is patenting to claim ownership. While the strength of the patent system varies across geographies, patent protection is well-established and increasingly homogeneous around the world. But studies show that when asked about their IPP strategies, both  and  often respond that other tools are more important than patents. In particular, trade secrecy, where companies choose not to disclose information about their inventions, is considered an increasingly important defense strategy and source of competitive advantage.

That trade secrets are seen by many as hampering innovation is not new to the age of AI, but it may be particularly acute for AI technologies. Trade secret law may be seen at odds with patent and copyright law, for example, which reward disclosure of innovation. Such disclosure enables others to build on or design around the innovations of others, spurring further advancement. If information is kept secret instead, this virtuous cycle is interrupted. Inventors cannot build on ideas that are hidden from view, and many companies will continue to research in the same area, often duplicating efforts. Moreover, because trade secret protection adheres immediately, e.g., to research and preliminary data, and does not require that an innovation ever be realized, valuable ideas that could lead to larger discoveries may go unshared.8 This is of particular consequence for AI technologies, for which the spread of innovation may already be difficult. AI requires significant investments in R&D, access to data sources, and the participation of highly skilled employees, all of which can limit the opportunities for significant AI advances.

1.1Substantial incentives are necessary for follow-on inventions With respect to inventions categorized as ‘‘secondary,’’ in the same way as ‘‘primary’’ inventions, there are significant costs and risks associated with translating these inventions into approved drugs. It is important to bear in mind that patents are not only important for incentivizing invention, but also for incentivizing the substantial investment needed to turn an invention into a useful product. As pointed out by Professor Rob Merges, ‘‘patents may have a greater impact on incentives to develop as on incentives to invent,’’36 and this is particularly the case with respect to pharmaceuticals, given the huge uncertainty as to whether a promising invention will actually prove viable in the market. Extensive and expensive human clinical trials are needed to assure the safety and efficacy of follow-on pharmaceutical inventions if they are going to provide any benefit to the public and, to the extent available, test data protection alone is often not sufficient to incentivize the funding of such trials.

It is generally recognized that most pharmaceutical innovation depends uniquely and critically upon the availability of effective patent protection.1 Even economists such as Bessen and Meurer, who are otherwise skeptical that benefits outweigh the costs of the patent system, explicitly acknowledge that pharmaceutical innovation is a special case where the benefits of patent protection likely outweigh the costs.2 The underlying basis for the particular importance of patents to pharmaceuticals is, in addition to the expense and riskiness that comes with developing new drugs in the laboratory, the extremely high cost and length of time involved in subsequently bringing that nascent drug out of the laboratory and transforming it into a safe, effective, and well-characterized human therapeutic. Even then, the innovator must conduct the extensive human clinical trials required to achieve marketing approval from a regulatory authority (e.g., the U.S. Food and Drug Administration [FDA] and its European counterpart, the European Medicines Agency [EMA]). Patents on pharmaceuticals are also particularly important due to the relative ease with which, in the absence of patent protection or some other form of exclusivity, a generic competitor can bring a bioequivalent product to market once the innovator has secured regulatory approval and established a demand for the product.

Many are suspicious of, or indeed jealous of, the good fortune of oth-ers. Even when profit is gained in the market without fraud and with the consent of all buying and selling goods and services, there is a sense on the part of some that something is wrong if considerable profit is secured. There is even a sense that good fortune in the market, especially if it is very good fortune, is unfair. One might think of such rhetorically disparaging terms as "wind-fall profits". There is also a suspicion of the pursuit of profit because it is often embraced not just because of the material benefits it sought, but because of the hierarchical satisfaction of being more affluent than others. The pursuit of profit in the pharmaceu-tical and medical-device industries is tor many in particular morally dubious because it is acquired from those who have the bad fortune to be diseased or disabled. Although the suspicion of profit is not well-founded, this suspicion is a major moral and public-policy challenge. Profit in the market for the pharmaceutical and medical-device industries is to be celebrated. This is the case, in that if one is of the view (1) that the presence of additional resources for research and development spurs innovation in the development of pharmaceuticals and med-ical devices (i.e., if one is of the view that the allure of profit is one of the most effective ways not only to acquire resources but productively to direct human energies in their use), (2) that given the limits of altruism and of the willingness of persons to be taxed, the possibility of profits is necessary to secure such resources, (3) that the allure of profits also tends to enhance the creative use of available resources in the pursuit of phar-maceutical and medical-device innovation, and (4) if one judges it to be the case that such innovation is both necessary to maintain the human species in an ever-changing and always dangerous environment in which new microbial and other threats may at any time emerge to threaten human well-being, if not survival (i.e., that such innovation is necessary to prevent increases in morbidity and mortality risks), as well as (5) in order generally to decrease morbidity and mortality risks in the future, it then follows (6) that one should be concerned regarding any policies that decrease the amount of resources and energies available to encourage such innovation. One should indeed be of the view that the possibilities for profit, all things being equal, should be highest in the pharmaceutical and medical-device industries. Yet, there is a suspicion regarding the pursuit of profit in medicine and especially in the pharmaceutical and medical-device industries.

New drugs are famously expensive and can remain so for years, until copies become available.1 Concern about their prices and the wait for cheaper copies has sparked legislative hearings and policy proposals over the years²including, recently, suggestions that the government impose price controls or even strip drug companies of their patent rights.2 These proposals implicate another significant public policy challenge: that we still lack effective treatments for many serious diseases. We have no meaningful treatment for Alzheimer’s Disease, for instance, even though ten percent of the U.S. population aged sixty-five or older has been diagnosed with Alzheimer¶s dementia, and the number of sufferers is projected to reach 7.1 million by 2025.3 Many cancers²such as pancreatic cancer, diffuse intrinsic pontine glioma, and glioblastoma multiforme²remain essentially untreatable.4 And many chronic diseases, though treated, continue to exact a toll.5 Better treatments for these conditions are needed.

The two issues²the high price of new drugs, and the need for new drugs²are intertwined. The U.S. legal system stimulates the invention and development of new drugs in part by promising a period of exclusivity in the market, which is attractive because it provides an opportunity to charge higher prices during the period.6 This exclusivity is made possible in part by the protection of patents associated with those new drugs.7 Patent protection ensures that an inventor can enjoy a period during which others cannot make or sell copies of the invention.8 The patent permits a temporary high price for the resulting new drug, and it thus encourages innovation.9 Although there is disagreement on the matter, many conclude that we cannot have the one (the innovation, meaning the drug) without the other (the encouragement to innovate, and thus a temporarily high price).10 What remains is the question of balancing: how much exclusivity in the market is needed for the optimal amount of medical innovation.11

*Mike; **Gary. 8-10, Why Altering Innovation Policies Will Stamp Out Medical Discovery, Morning Consult, https://morningconsult.com/opinions/altering-innovation-policies-will-stamp-medical-discovery/

New data shows that the number of patients with Hepatitis C will be in decline by 2017 and researchers today are projecting that with today’s effective cures, Hepatitis C could become a rare disease in the U.S. by 2036. This is a remarkable advance for a disease in which the only treatment option available five years ago cured just half of patients and caused debilitating side effects. This should also serve as a reminder that were it not for the continuing perseverance of our public and private sector researchers, cures would not be as readily available for patients today. Our nation is constantly on the verge of new, life-changing innovations, but we also risk jeopardizing important research and development opportunities if policymakers react to using rules like the aptly named federal agency power “march-in” to disrupt the innovation process. March-in power exists in a law called the Bayh-Dole Act, a bipartisan triumph that enables the development of new life-saving treatments. Enacted in 1980, the law allows universities and other research institutions to own and license innovations resulting from federally-funded R&D. It also gave the funding agencies (i.e. the National Institutes of Health) the power to “march-in” and require patent holders to issue additional licenses. This authority was included in case a licensee of a University or research institution such as a private sector company did not commercialize and produce the new, useful invention that was discovered. It is a safeguard that ensures promising inventions will reach consumers. However, it is important to note that the NIH has repeatedly rejected using “march-in” rights as a way to micromanage the production and prices of products. We must be candid with policymakers – interfering with licenses and IP rights between researchers and developers will not only stall medical advancements, but it will also diminish job growth and hurt the economy. Evidence of this can be seen in Cooperative Research and Development Agreements between the NIH and the private sector stalling after the NIH introduced specific pricing regulations as a requirement for exclusive licenses in 1990-1994. After that requirement was removed, public-private collaborations increased again. Medical discovery is the defining feature that separates the U.S. health care system from all others. Simply put, America is the epicenter of medical innovation; it improves the health of our patients and boosts our economy. Between 1996 and 2013, academia-industry patent licensing added an additional $518 billion to the U.S. GDP and supported more than 3.8 million jobs. Additionally, 909 start-ups were launched in 2014 alone as a result of technology transfer activities. Pro-innovation policies are critical to the drug development process, as it can take more than a decade to get a medicine approved by the Food and Drug Administration and ultimately to a patient, requiring perseverance that benefits patients everywhere. Seeking solutions to the nation’s health care costs is a laudable pursuit. However, we should examine all health care cost-drivers and support bipartisan policies that advance innovative treatments and cures, rather than single out individual industries or companies — especially those that drive our economy so vigorously. Laws like the Bayh-Dole Act should be protected in the U.S. and modeled across the globe. With the British voting to leave the European Union, life sciences R&D in Europe is in danger, and medical innovation needs U.S. leadership now more than ever. Regardless of how people are reacting in other countries, voters in America expect our health care policies to stay rooted in principles that support cures.

Markets for innovative goods involve significant spillovers in a global economy. When US consumers pay higher prices for drugs, this stimulates innovation that benefits consumers all over the world. Conversely, when large European markets restrict prices and profits, foreign consumers bear some of the long-run cost in the form of less innovation. The result is a free-riding problem at a global level. These incentives are particularly strong for smaller markets, whose policies have relatively little impact on global innovation, but can have relatively large impacts on national pharmaceutical budgets. The result is a system in which the largest countries bear disproportionate burdens for stimulating innovation. Using a microsimulation approach, we estimate the impact of these incentive effects. The model’s baseline estimates demonstrates that the US adoption of European-style price controls would harm consumers in the US and Europe; over a 50-year period, it would cost $8 trillion in the US, and $5 trillion in Europe. Similarly, repealing European price controls would add $10 trillion to the wealth of US society, and $6 trillion to wealth in Europe. Even under the most conservative assumptions, adopting price controls generates at best a small benefit, but risks a large cost. On the other hand, reducing pharmaceutical copayments would increase wealth in both societies, a result which is robust to a wide variety of parameter values. Go to: A. Introduction The United States is by far the largest market for pharmaceuticals. In 2005, the United States accounted for 42% of global sales, while Europe accounted for 29%.1 This difference is due in large part to more aggressive price negotiation by public insurance programs in Europe. While exact comparisons are difficult, the data suggest that European consumers pay 50% to 70% less for a given quantity of drugs.2 The higher profits in America contribute to the view of the United States as the engine for global pharmaceutical innovation. While some critics have questioned the link between profits and research and development (R&D), the absence of R&D into unprofitable third-world diseases and the increase in R&D for certain rare diseases after passage of the US Orphan Drug Act demonstrate otherwise. Evidence suggests that lower profits delay the launch of new drugs, limit the availability of new drugs, and ultimately reduce the pace of innovation (cf, Acemoglu and Linn, 2004; Finkelstein, 2004; Danzon, Wang, and Wang, 2005). New treatments are of value to the entire globe, not just to the society that discovered them. Thus, spending by Americans encourages innovations that benefit both Europe and America, and the reverse is also true. There are certainly profits to be made in Europe, and these will affect the global pace of innovation as well. In this way, pharmaceutical pricing policies in Europe and the United States are inextricably linked.

Most governments apply some form of price controls on pharmaceutical products. And although the price of pharmaceuticals is only one of many variables that impact the effectiveness of any health-care provision system, pharmaceutical sales are the main source of revenues for pharmaceutical companies to invest in future generations of innovative medicines. Overly restrictive price controls levied on bio-pharmaceuticals, by definition, mean less revenue for biopharma companies to invest in R&D. The bottom line is that when bio-pharmaceutical companies more fully capture the value of their innovations from the market, they reinvest much of those additional revenues toward future innovations. Research in pharmaceutical economics continually demonstrates that innovative pharmaceutical output is strongly linked to robust revenue streams. As the OECD report Pharmaceuticals Pricing Policies in a Global Market explains, “There is a high degree of correlation between sales revenues and R&D expenditures.”25 Indeed, recent data from the United Kingdom’s Department of Innovation, Universities, and Skills R&D Scoreboard indicate a very strong relationship between R&D expenditures and sales for the largest 151 pharmaceutical firms worldwide in terms of expenditures on R&D.26 Henderson and Cockburn find that R&D expenditures are directly proportional to the sales revenues available to fund R&D investment.27 Gambardella finds that sales revenue from previous periods has a significant positive impact on R&D.28 Moreover, pharmaceutical firms with the greatest sales are also the ones with the largest R&D investments, which may in part explain why most global R&D investments are undertaken by the largest multinational firms.29 Symeonidis notes that this is in part because large firms are better able to spread the risks of R&D uncertainty over multiple simultaneous projects.30 Take, for example Europe’s experience with price controls: up until the 1970s, European Union (EU) countries developed the vast majority of the world’s innovative pharmaceutical products.31 But as European countries implemented more stringent price regulations, innovation output fell. Indeed, a key reason why Europe has produced fewer biopharmaceutical innovations than the United States in recent decades is because its biopharmaceutical firms have not generated as much revenue (which can be reinvested in R&D) as American ones. (While it’s true that both American and European pharmaceutical firms sell into global markets, the largest proportion of drugs sold in the EU are made by EU companies, and the largest proportion of drugs sold in the United States are made by American ones, explaining why countries’ drug pricing and procurement levels affect firm-level profits differently across the Atlantic.) Differential revenues explain in part why, as noted, in the 2000s, more new chemical entities were developed in the United States than in the next five nations—Switzerland, Japan, the United Kingdom, Germany, and France—combined.32 European drug-price controls indeed factor directly into this reality. For example, Golec and Vernon contend that, because of drug price regulations, “European Union pharmaceutical firms are less profitable, spend less on R&D, and earn smaller stock returns than U.S. firms.”33 Drawing on data from 1986 through 2004, they go on to show that the economic tradeoff for the European Union’s maintaining real pharmaceutical prices constant over 19 years was forgoing about 46 new medicine compounds. Golec and Vernon took this one step further by presenting a counterfactual scenario of the United States adopting EU-type price controls over the same time period; they estimate that similar price controls would have resulted in 117 fewer new medicine compounds.34 Countries that impose overly strict regulations on the prices of pharmaceutical drugs also disincentivize international companies from entering markets to provide more innovative health-care solutions. A study that examined the 28 largest pharmaceutical markets between 1980 and 2000 found that countries with strict price controls hurt both domestic innovation in the life sciences as well as domestic consumers.35 Not only are drug launches delayed in these price-controlled countries compared to other less-regulated countries; companies are also less likely to introduce their product in additional markets once it is available in a market with heavy price regulations. Domestically produced pharmaceutical products from countries with stronger price controls also reach a smaller market internationally.36 Other studies yield similar findings in the international market for pharmaceuticals. In one, the probability of pharmaceutical launch is positively related to the expected price and volume of sales for a given market.37 This follows the logic that pharmaceutical companies will launch their products in markets where they can better capture the value of their innovations. Another study confirms the finding that consumers in countries that have stricter price controls, compared with countries that do not, have to wait longer for drug launches by international firms. 38 These studies highlight the interconnected nature of global life-sciences innovation, where government-mandated price controls do a disservice to consumers, domestic pharmaceutical firms, foreign pharmaceutical firms, and overall drug innovation. The United States foots most of the bill for global life-sciences innovation. Although the United States produces about 22 percent of global GDP and accounts for 4 percent of the world’s population, it accounts for 44 percent of global biomedical R&D expenditures and its domestic market accounts for 40 percent of the world’s pharmaceutical market share. 39 Other countries that impose overly strict price controls are free riding off the United States’ and other similar nations’ efforts. All nations benefit when breakthrough treatments for various diseases are discovered, but by imposing price control mechanisms, countries send a clear signal that they do not want to pay for the costs that go into discovering and commercializing such treatments.

The vast majority of the world’s pharmaceutical innovation comes out of the U.S. We produce some of the most vital drugs for people around the globe. In the case of COVID, our pharmaceutical companies have risen to the challenge and have developed vaccines in less than a year. These vaccines will play a critical role in allowing life to get back to normal for most Americans. In addition to the quick development of the vaccines, manufacturers were ready to go as soon as they had FDA approval. As a result, more than half the population has gotten at least one dose of the vaccine in roughly four months. The incredible effort it took to accomplish that should not be overlooked. Pharmaceutical companies have taken a beating in the media for the last several years over drug pricing and accessibility, and in response, state legislatures have supported bad policies like price controls and importing drugs from Canada. But the current pandemic shows us the importance of innovation in this area and why investment in pharmaceutical innovation is vital to the health and safety of Americans.

IP rights often only come into existence and meaningful effect after an invention is created and brought forward at significant expense by the innovator. At present, there are likely many untapped biomedical discoveries, including treatment options for debilitating diseases and even for future pandemics. Bringing these innovations forward requires organizations to devote years—if not decades—of R&D, as well as significant costs, in the hopes that one day they will be able to help patients, as Gilead’s remdesivir has done. IP rights exist to encourage such innovation.

History often repeats itself, and the pharmaceutical industry’s current “innovation gap” is one they’ve seen before — the world’s largest companies find themselves in the precarious position of needing to make big new bets before their once reliable cash cows stumble.

The innovation gap, also called the innovation deficit, is happening as companies watch some of their bestselling products of the last decade approach the end of patent protection — and with biosimilar competition on the horizon, revenues are bound to erode. R&D pipelines aren’t likely to make up the difference in time without some major overhaul, experts say.

There are several important reasons why health care is so expensive in the United States, and Grossman points out perhaps the most important: the United States effectively subsidizes research and development of drugs and medical devices for the rest of the world. As Grossman notes, other advanced nations “clamp down” on the profit motive in various ways, meaning that people who would normally make more money in a free market through developing new medical devices, medications, or procedures to produce better health care outcomes and perhaps drive down prices through competition have less incentive to do so in these more government-controlled health care systems. That is, despite the many regulations and laws aimed at consumer protection and safety that do exist in the United States, our health care market is relatively freer and more dynamic than those of other developed countries. This leads to a high rate of medical and pharmaceutical innovation that ends up benefiting the rest of the world, particularly other rich countries, in a similar way that NATO nations, for example, benefit from close military alliance with the United States. In short and somewhat reductive terms: we spend more money so everyone else can be healthier. But this doesn’t make total sense at first. If the United States is developing more innovative medicines, devices, and procedures than every other advanced economy, why aren’t we making money by selling these medical innovations to others for a hefty profit? Why aren’t there many more billions of dollars of revenue coming into the United States Treasury because of our status as a medical innovator? The answer is complicated, but here are some facts you need to know: First, pharmaceutical companies which innovate in the United States charge their domestic customers much more than they do their customers abroad. This is because, if countries don’t like the prices charged by a given pharmaceutical company for a certain drug, they will simply ignore the patent that company holds for their drug in the United States or elsewhere. Novartis spent nearly 15 years seeking a patent in India for Glivec, a medicine for chronic myeloid leukemia. That quest reached its dead end, at last. India’s Supreme Court rejected the Swiss drugmaker’s patent application. Glivec (marketed in America as “Gleevec”) is a blockbuster, earning the Swiss drugmaker $4.7 billion last year. Its prospects in India are now zilch. Although in this example Novartis happens to be a Swiss drug company, the ruling sends the same clear message to drug makers in the United States: Give us your drugs for next to nothing or you’ll get exactly nothing. Second, and relatedly, notice that there seems to be a correlation between how much a country spends on prescription drugs and the percentage of NMEs (New Molecular Entities) produced by that country. If you combine points 1 and 2, you start to understand that the high spending of health care consumers in the United States is arguably funding not only global pharmaceutical innovation but is also facilitating the availability of new medicines to other countries at much lower prices than domestic consumers pay. There is a third factor that might help explain why health care, especially with regard to pharmaceutical innovation, is so much more expensive in the United States: our massive regulatory agency of all things drugs and food, also known as the FDA, is significantly more burdensome for medical innovation than the analogous agency for all of Europe, the EMA (European Medicines Agency). The EMA doesn’t get the final say on whether a drug gets approved for sale in the EU, and perhaps even more significantly, they don’t breathe down their drug companies’ necks during clinical trials. In the U.S., because of the cumbersome bureaucracy of the FDA and its processes, we decide to tackle more targets in the drug development scene through “Fast Track” and “Breakthrough Therapy” route than through the more traditional and more costly standard drug approval processes. Does this represent an implicit admission that government is inefficient? The breakthrough therapy designation was created by the FDA Safety and Innovation Act, a law that requires the agency to fast-track promising drugs for serious or life-threatening conditions. The FDA aims to do this by meeting early and often with developers, as well as working with them to design clinical trials that deliver the needed data quickly and efficiently. It’s understandable that, given limited resources, the regulatory process can’t be automatic, or even fast-tracked, for all applicants. But if the FDA can put a medication on a path where an evaluation can be made “quickly and efficiently,” does that mean the normal course of action is to proceed slowly and inefficiently? If so, this could represent a needless driver of health care costs. We need to be able to ask this question: Is there something going wrong with the drug development process to have the costs so high and climbing higher every year? Looking at a cost breakdown of Big Pharma companies from 2014, a big chunk of their costs, almost equal to the sum of the entire first and second phase of their clinical trials, come from the 4th phase of clinical trials, which is often referred to as “post-marketing surveillance.” This is the phase of a drug’s life that takes place after its approval for sale on the U.S. market, in which the FDA requires continued and ongoing studies to validate the drug’s safety and efficacy using data generated from every phase of clinical trials leading up to its approval in the first place. It’s in this phase of a drug’s life where, after spending large amounts of money to get the drug approved, companies can still watch as the FDA rescinds a drug’s approval status, which leads to the drug getting withdrawn from the market, in many cases never to be seen again. In fact, as of 2015, 462 medicinal products were withdrawn from the market between 1953 and 2013, and the supporting evidence in 72 % of cases consisted of anecdotal reports. Only 43 (9.34 %) drugs were withdrawn worldwide and 179 (39 %) were withdrawn in one country only. Withdrawal was significantly less likely in Africa than in other continents (Europe, the Americas, Asia, and Australasia and Oceania). So, not only is almost a fourth of a drug’s average R & D cost attributable to legislative constraints the government imposes on pharmaceutical companies to police their own products even after they’ve been approved based on incredibly high standards of safety and testing, but also, compared to less developed countries, we’re more likely to pull drugs off the market and revoke their status as a result of anecdotal case reports of adverse effects that generally go unverified. We consistently decide to err on the side of safety, even if it means pulling the plug on a 10–15-year-long investment (the average length of development for a drug), which helps clarify how aspiring for safer and more effective drugs begins to preclude cheaper drugs. So the United States produces the most novel and cutting edge therapeutic compounds despite the most expensive and stringent approval process and sells them to other countries at much lower prices than we do at home. In doing this, we are indeed subsidizing research and development of drugs and medical devices for the rest of the world. This subsidized medical innovation is a major contributing factor to the out-of-control health care costs in the United States, and losing this innovation will be one of the sacrifices we make if we move toward a more cost-controlled or government-run health care system over the next several years.

Since the early twentieth century, federal law has required the sellers of drugs to test their products and seek the government’s permission before launching.13 A new drug must be proven safe and effective for a particular medical use.14 Satisfying this standard entails laboratory and animal (³preclinical´) testing as well as several phases of human (³clinical´) trials. The federal government’s gatekeeping mechanism protects public health by ensuring that new drugs are, on average, more beneficial than harmful for the patients for whom they are intended.15 But gatekeeping comes at a price: the research required by the U.S. Food and Drug Administration (FDA) is not only expensive and time consuming, but risky.16 The inventor must make an enormous investment, without knowing whether the drug will succeed in trials (or for what indication, exactly), without knowing when the trials will be completed and the drug approved, and without knowing whether (if approved) the drug will be commercially successful.17 Distortion of the patent term stems from the fact that drug inventors usually file their first patent applications before they start testing in humans.18 This generally means that the patents issue before the trials are done and before approval of the drug. And while the premarket testing continues, the patent life runs. By the time the federal government permits the inventor to commercialize the invention, much of the patent term has lapsed. The years that remain are the ³effective´ life of the patent²the years during which the inventor may lawfully exploit the invention in the market, without others also using the invention. The irony for inventors of new drugs is that drugs requiring more premarket investment (more years of research) may enjoy less patent life at the end of the day.

CONCLUSION The findings in this Article have significant policy implications. The two most significant results are as follows. First, in every regression, the length of the proxy-preclinical period and the length of the clinical period had negative explanatory power. As these periods got longer, the final effective patent life (after patent term restoration) consistently got shorter. The irony for inventors of new drugs is that drugs requiring more premarket investment (more years of research) may enjoy less patent life, in essence a distortion of the patent term. Second, with a handful of exceptions, therapeutic categories were generally not correlated with final effective patent life (that is, after restoration). It is convention in innovation policy to work by therapeutic category, but when focusing on the effect of research and development challenges and regulatory requirements, it may be more appropriate to focus on pharmacologic class instead. Longer clinical programs lead to shorter effective patent life, even after patent term restoration has been awarded. Although the impact is small, even a modest impact could be financially significant for an innovator. This finding contributes to a growing body of literature asking whether the U.S. legal system may be systematically skewing drug research incentives away from research programs that require a substantial investment of time. The decision to limit recovery to 50% of the days in clinical trials and, perhaps more importantly, to cap recovery at five years, may warrant reexamination. Other policy implications relate to the changes made to the patent term in 1994. Lawmakers in 1984 made a conscious choice to permit restoration of continuation patents so that drug companies could achieve fourteen years of effective patent life under section 156. The ability to choose a later-issued child patent helped mitigate the distorting effect of the premarket regulatory regime. This was possible because the patent term was calculated from patent issuance. Lawmakers in 1994 changed how the patent term was calculated, and now a child patent is less likely to reach fourteen years. The decision to unravel the choice made in 1984²if a conscious decision was even made²was not vetted publicly. The consequences could be profound. Under the changes made in 1994, a drug company may need to select a later-issued original patent to achieve the same result: fourteen years of effective patent life. This patent is unlikely to cover the drug’s active ingredient; instead, it may cover another aspect of the drug such as its formulation. These patents may be inherently less valuable to the drug’s inventor because it may be possible for generic and biosimilar applicants to develop copies that satisfy regulatory requirements for copies and yet do not infringe the patent. If these patents do not have the same value, the fourteen years of effective patent life is illusory. Policymakers effectively nullified the decision from 1984 without meaningful public discussion of the implications for drug innovation²discussion that is therefore overdue. If instead these patents do preclude approval of generic and biosimilar applications, their use in this fashion is fully consistent with the intent of Congress in 1984, and public rhetoric about the insidious nature of later-issued drug patents should be recalibrated.

Innovation can—and does—happen anywhere and at any time. As society ground to a halt in 2020, innovators around the world worked tirelessly to develop treatments, vaccines, and solutions to COVID-19 pandemic-related challenges. From personal protective equipment (PPE) to treatments and vaccines to autonomous delivery robots to remote and social distancing solutions for the workplace, intellectual property (IP) played an indispensable role in enabling research, development, and commercialization of many of the innovations meeting the challenges of the pandemic. IP enables start-ups to gain access to much-needed capital. IP gives innovators the confidence to invest in research and development (R&D) and provides incentives for commercialization. Indeed, it is difficult to innovate without the protection of ideas.

Despite this, some—particularly anti-business IP opponents—have blamed IP rights for a host of problems, including limited access to therapeutics, vaccines, and biotechnology. They offer seemingly simple solutions—weaken or eliminate IP rights—and innovation will flow like manna from heaven. Eliminating IP rights might accelerate the diffusion of some pre-existing innovations, but it would absolutely limit future innovations. Innovators, a bit like Charlie Brown kicking the football held by Lucy, would be wary of trusting governments who might say, “Well, this time we won’t take away your IP rights, so go ahead and invest large amounts of time and money.” Given the nature of COVID-19, nations around the world cannot afford to take this risk. Future pandemics and other challenges for which we will need to rely on IP-protected innovations to overcome are near certain to arise.

How can the Hatch–Waxman Act be amended to address the patent-term distortion? In practical terms, Congress could address the current asymmetry in pharmaceutical patent terms by amending one of two provisions included in the Hatch–Waxman Act of 1984. Before discussing these two approaches, it is critical to stress that our goal is not to increase exclusivity for pharmaceuticals in general. Rather, our goal is simply to equalize the periods of exclusivity provided to different types of drugs. The optimal amount of exclusivity is a separate question that should itself be informed by empirical evidence, as discussed above and below. The first potential reform to Hatch–Waxman would amend the patent term restoration provision. Patent term restoration under Hatch–Waxman currently allows a firm to extend one patent per drug for half the time spent in clinical trials, up to a maximum of five years, and with the total life not to exceed 14 years after FDA approval. This patent term restoration was intended to account for commercialization lags, but recent empirical evidence suggests it did not go far enough since longer clinical trials are still associated with shorter effective patent life (Lietzan and Lybecker 2020). Congress could amend the structure of the patent term restoration provision to more successfully equalize effective patent terms across candidate drug compounds.

MAKING PATENT TERMS MORE UNIFORM FOR PHARMACEUTICALS Our third proposal addresses the fact that, even though the patent system is meant to provide uniform patent terms across inventions, it fails to do so in practice. Perhaps the clearest evidence of this failure comes from pharmaceuticals, so we focus our reform proposal on that sector. In the pharmaceutical sector, failure to provide uniform patent terms may cause underinvestment in candidate drug compounds that require long clinical trials. In the United States and most other countries, patent terms generally last 20 years after an application is filed. But the effective patent term (i.e., the patent term that remains once a patented product is on the market) can be much shorter than 20 years when there is a long lag between patent application filing and first sale of the patented product to consumers. Drug patents are filed prior to the start of clinical trials, but effective patent terms do not start until after the trials have been completed and the drug has been approved by the U.S. Food and Drug Administration (FDA) for sale to U.S. consumers (Lietzan and Lybecker 2020; Roin 2014). Patents thus paradoxically provide the weakest incentive for inventions that take the longest time to develop, whereas simple theoretical models would suggest that society might prefer the opposite. Budish, Roin, and Williams (2015) discuss two examples that—while not definitive evidence of this distortion— illustrate how this problem could manifest itself in practice. Consider two clinical studies investigating treatments for prostate cancer, both of which were published in the New England Journal of Medicine in 2011. The first study (de Bono et al. 2011) analyzed a treatment for metastatic prostate cancer patients whose cancer had spread beyond the initial tumor and who had relatively poor survival prospects (in their data, a five-year survival rate of around 20 percent). The study needed to measure patient survival for just over a year in order to document a statistically significant improvement in survival in the (randomized) treatment group, and the total trial length was around three years. The second study (Jones et al. 2011) analyzed a treatment for localized prostate cancer patients whose cancer had not yet spread beyond the prostate and who had better survival prospects (in their data, a five-year survival rate of around 80 percent). Because these patients were in better health, this study needed to measure patient survival for a full nine years, and the total trial length was 18 years. In practice, drugs need more than one clinical trial to receive FDA approval, but taking the simple case where drugs get a 20-year patent term and patents are filed prior to the start of a single clinical trial, the first drug would receive 17 (20 minus 3) years of effective patent life, whereas the second drug would receive only 2 (20 minus 18) years. Perhaps because of the much shorter effective patent term provided in the second case, the first (metastatic) clinical trial was funded by a small biotech company, whereas the second (localized) clinical trial was publicly funded. This potential concern has long been recognized by policymakers, and the 1984 Hatch–Waxman Act included a provision that granted some qualifying firms a partial extension of their patent life to compensate for the time drugs spent in clinical trials. Specifically, Hatch–Waxman awards qualifying firms one half-year of additional patent life for each year spent in clinical trials, up to a maximum of five additional years, but not to exceed a total of 14 years after FDA approval. In practice, however, the structure of the current Hatch–Waxman provision appears flawed in the sense of not fully correcting for this distortion. Lietzan and Lybecker (2020) document that, for all 642 drugs that had their patent term restored between September 28, 1984 and April 1, 2017, the average effective patent life was less than 12 years, with drugs that required longer clinical trials receiving shorter effective terms. Congress could address this flaw by reforming Hatch–Waxman, for example by starting the exclusivity period (of some length; as we discuss below, potentially shorter than the current 20-year patent term) for pharmaceuticals at the time the drug is approved by the FDA for sale to patients. Simultaneously, patent and antitrust law should be vigorously enforced to limit opportunistic extensions of effective exclusivity periods that do not contribute to social value, such as so-called evergreening practices (Feldman 2018).