Strong IPR is key to sustained R&D and innovation

Robust IP Protection Regime The drug development and approval process is expensive, lengthy, and risky.197 According to a recent study, it costs $2.6 billion to develop a new drug.198 Drug development also takes 10–15 years, and few drugs ever reach the market. A pharmaceutical company developing a new drug incurs the full costs of R&D, but it often does not capture the full benefits because as soon as the new drug is released, other firms can quickly replicate it. The existence of such knowledge spillovers means that incentives need to be created for a pharmaceutical company to invest in the necessary R&D to create a drug in the first place. To encourage socially desirable levels of R&D, a commonly used policy tool is patent protection.199 Patents, a form of IP protection, grant exclusive rights to commercialization of an invention for a specific period, typically 20 years. In the pharmaceutical industry, where drug development is lengthy and costly, patents are especially important to stimulate R&D investments. Patents enable pharmaceutical companies to recover their R&D investments and generate profits to sustain future R&D efforts.200 Using data from the Carnegie Mellon Survey on Industrial R&D, a 2008 study provides evidence that patent protection leads to higher private returns on R&D, which in turn stimulates future R&D investments in the pharmaceutical industry.201 Another study of 60 countries from 2000 to 2013 finds that patents are associated with earlier release of new drugs.202 And a third study using data on the launches of 642 drugs in 76 countries from 1983 to 2002 finds that a higher length and strength of patent protection significantly accelerates drug diffusion, spurring market entry in high-income countries.203 It also appears that IP protection on research tools in biomedical innovation seldom hinders the pursuit of scientifically promising projects, meaning that patents do not impede future innovation.204

A paper in the American Economic Review studying cancer clinical trial investments reveals that lags in commercialization tend to cause pharmaceutical R&D investments to be redirected away from drugs targeting early-stage cancers. There are more incentives to focus on the development of late-stage, rather than early-stage, cancer drugs due to shorter clinical trials for late-stage drugs and the fixed-term nature of the patent system, which provides a longer effective patent protection for drugs with a shorter time between invention and commercialization. While patents provide a fixed period of market exclusivity, “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.”205 Since it takes a longer time for early-stage cancer drugs to reach the market, their effective patent terms are shorter than those of late-stage drugs, so this combination of clinical trial length and patent system design may under-incentivize longer projects. To stimulate more long-term cancer research, the authors endorse: 1) policies to allow pharmaceutical companies to rely on surrogate endpoints in clinical trials, 2) a restructuring of the patent system to start the clock at commercialization (i.e., time of FDA approval rather than time of invention), and 3) R&D subsidies for projects with long commercialization lags.206

Moreover, unclear patent subject matter eligibility is a challenge for the U.S. life sciences innovation system. A recent study shows that although 17,743 patent applications were rejected in the United States as ineligible for patent protection, 1,694 of those were granted by the European Patent Office, by China, or both. This suggests that U.S. courts have been interpreting patent subject matter eligibility more narrowly than other countries.207 Therefore, as it considers patent reform, Congress should make clearer that innovative diagnostic and screening tools in the life sciences arena should be viewed as novel and patentable.