The protection of patents is especially important in the biotech industry where bringing new drugs and treatments to market is incredibly expensive and requires buy in from venture capital, which requires information sharing and security.

Existing scholarship from the biotechnology industry provides a useful model to describe how patents facilitate information exchange in the innovative process more broadly. Similar to inventions in the medical device industry, which will be discussed in Part III, biotechnology-related inventions must undergo an extensive regulatory process to bring an idea to market. Additionally, startups in both of these industries are far more likely to hold patents or patent applications than startups in other industries. Technology in the biotechnology industry often begins with universities that spin off new startups, investors then provide funding, and ultimately the startups exchange their intellectual property with established pharmaceutical companies to obtain further investment. Professor Gary Pisano describes the “fragmented nature” of the biotechnology industry as compromising a multitude of small startups in “islands of expertise.” He notes that the ways in which companies are funded sometimes “conflicts with the long R&D timetable need to create new drugs”. Developing new drugs comes with considerable risk. The process of evaluating drug candidates and engaging in discovery prior to clinical trials can take three to six years. After that point, if the U.S. Food and Drug Administration (FDA) permits the Investigational New Drug (IND) application to go into effect, clinical trials take place over the next six to seven years. If the clinical trials are successful, the FDA then reviews the New Drug Application (NDA), which adds another six months to two years. A recent estimate of the costs of new drug development, from research to FDA approval, is approximately $2.6 billion. For funding, biotech startups often rely on equity financing through venture capital when they are in the early stages of conducting research, given the challenges of measuring performance at that time. Later in the drug development process, however, obtaining financing through entering into a joint venture is more closely aligned with the technological landscape and organizational structure of the industry, given the large expense and extended timeframe associated with obtaining FDA approval. Commentators from the biotechnology industry have questioned whether alternative structures for mitigating expropriation risks, such as staging disclosure or relying on reputational or industry norms, are best-suited for addressing the disclosure paradox, at least when seeking early stage investment. The difficulty of obtaining patent protection and increasing reliance on trade secrets in some circumstances can be problematic in this industry, given the time constraints investors and companies operate under and the importance of information exchange for development. In particular, emerging companies “have limited financial resources, and investors aren’t willing to give them the time to perfect their craft.” So, the disclosure paradox at the early venture financing stage may remain a challenge where patent protection is difficult to obtain.