Patents are necessary for pharmaceutical companies

In many fields of technology, there are ongoing debates about how much patents matter in encouraging innovation – or about whether patents, even if they do create the intended incentives, do considerable damage by delaying wide access to highly valued goods and services. But, until recently, there has been little debate about the role of patents in pharmaceuticals. Even the Federal Trade Commission, which over the decades has taken its charge to maintain competition very seriously, has referred to innovation in the pharmaceutical industry as “showcas[ing] the patent system’s benefits.”

The industry agrees: pharmaceutical executives rate patents as far more important to innovation than do representatives of any other tech-driven business. (Indeed, in the same surveys, software entrepreneurs report that patents create little to no incentive to innovate.)

The reasons for the longstanding primacy of patents in pharmaceuticals are traceable to the way most drugs are developed. Pharmaceuticals are among the most costly consumer products to bring to market, with companies often investing in excess of $1 billion before a new drug can launch. The process is extremely lengthy as well as expensive; after a potential therapeutic compound is identified, it typically takes more than a decade to be tested and to pass muster with the FDA.

Pharmaceuticals are among the most costly consumer products to bring to market, with companies often investing in excess of $1 billion before a new drug can launch.

Moreover, the process is also extraordinarily risky: Most candidate drugs fail at some point in the clinical trials process, meaning their sponsors must look elsewhere to recoup their investments on those products. Perhaps most problematic of all, once developed, most “small-molecule” drugs – classic drugs like aspirin produced through standard chemical synthesis techniques – are simple to imitate. It may take a nine-figure outlay and a decade to bring a new drug to market, but as little as two years and a few million dollars to develop a generic version.

The triple whammy – the exceptionally high fixed costs, the risk and length of time needed to get a new drug approved and the relative ease of imitation – explains why patents are seen as utterly necessary to keep drug innovation on track. Manufacturers can use their patents to prevent others from making, using and selling the technology for 20 years from the date of the patent’s filing. Importantly, because certain legal doctrines require innovators to apply for patents early in development, much of this time is eaten up by the FDA approval process.

As a result, companies, on average, have just 12 years of patent protection left once a drug has reached the market. Thus, while patents do create a time-limited monopoly during which the patent holder has full discretion to set their product’s price, the innovator must recover the investment along with sufficient profits to offset the cost of other development initiatives that didn’t pan out.

In exchange for this exclusive right, patent holders must disclose to the public sufficient information about how to make and use their invention. And at the end of the patent period, competitors are free to use this information to copy the technology and presumably make a profit selling the drug at a lower price.