Evergreening pharmaceutical patents extends monopolies and delays generic entry into the market – patent challenges are the safeguard but strengthening IPR makes challenges weaker

Despite the standard “one-patent-one-product” model in intellectual property rights discourse, a common practice by innovators is to acquire numerous patents on different features of the same product to extend its monopoly life. In this paper, I systematically document the presence of imperfect intellectual property rights in the pharmaceutical industry, an industry often characterized by the standard model (Burk and Lemley, 2003). I show that the standard model does not hold: Multiple patents may cover a single product, with the scope and enforceability of each patent potentially uncertain, contributing to indeterminate periods of monopoly protection. In a sample of novel drugs, I find that nearly all drugs are covered by multiple intellectual property rights and that actual monopoly terms often last well beyond the fixed term of a drug’s initial molecule patent. I then offer, to my knowledge, the first causal estimate in any industry on the extent to which additional patents extend monopoly life. By exploiting the quasi-random assignment of patent ap- plications to examiners and variation in cross-examiner leniency, I determine that the average drug receives 3 years of additional monopoly life due to imperfect intellectual property rights, equivalent to 22 percent of mean monopoly term. I posit two mechanisms by which the accumulation of intellectual property rights on a single drug may delay generic entry: by introducing a binding later IP expiration and by increasing uncertainty in the scope and enforceability of remaining IP rights. Consistent with these mechanisms, I provide empirical evidence of non-monotonic generic entry patterns relative to IP expirations and a series of analyses illustrating that uncertainty in IP scope/enforceability is an important factor behind delayed generic entry. The paper’s analysis demonstrates that the strategic use of patents by innovating firms can substantially increase entry barriers into a market and lengthen monopoly durations. The results are in line with prior research on secondary patenting by branded manufacturers and patent challenges by generics. For instance, my finding that uncertainty in IP enforceability is an important mechanism for delaying generic entry complements work by Hemphill and Sampat (2011, 2012), who note that patent challenges may serve to limit evergreening behavior by branded firms, and research by Grabowski et al. (2017), who find both increased patenting activity and more challenges for the most popular new drugs. In recent work, Kyle et al. (2021) note that primary drug patents are the key patents impacting generic competition in India. My results are complementary to theirs. I show that in addition to primary patents, secondary Orange Book patents play a significant role in delaying competition in the U.S. drug market. The results of this paper have [has] important implications for consumer welfare, innovation incentives, and the design of intellectual property rights both broadly across sectors and within the pharmaceutical industry in particular. I find that more novel drugs receive longer monopoly extensions. That is, these imperfections allow pharmaceutical IP rights to approach a first-best system where monopoly terms are proportionate to innovation size. However, the extensions translate to only minimal increases in new molecules, relative to the substantial consumer welfare loss due to extended monopoly pricing. Thus, these imperfections in our patent system mean that firms can at least partially offset distortions of a fixed-term system by accumulating patents on a single product; yet at the same time, additional targeting may be necessary to achieve innovation policy objectives. Overall, this paper highlights that intellectual property rights are less rigid than we typically assume and these imperfections matter for discussions on optimal patent policy and innovation.