2. INVENTIVES. Only positive inducements solve.

While patent expiration has important impacts on parties other than the patentee, it also significantly affects the incentives and behavior of the patentee itself. Here again, most of the relevant studies focus on the pharmaceutical industry. Not surprisingly, one response of firms facing patent expiration is to engage in strategic behavior to extend exclusivity with little or no new innovation.138 Pharmaceutical patentees engage in “lifecycle management” by launching “authorized” generics prior to patents expiring on their brand drugs, practicing “evergreening” by which they patent incremental variations of a base drug, and obtaining FDA approval for new uses of existing drugs for which patents will soon expire.139 Pharmaceutical companies facing impending patent expiration have also engaged in “reverse payment” settlements with generic companies to delay the latter’s entry into the market.140 In other cases, firms facing patent expirations engage in mergers and acquisitions to shore up market share and revenues while actually decreasing aggregate expenditures on R&D.141 In short, impending patent expiration can motivate patentees to extend exclusivity in minimally innovative (and sometimes innovation- dampening) ways.142

Importantly, however, patent expiration can also motivate patentees to continue innovating. In this sense, impending expiration provides the constant pressure to innovate at the heart of churn. Technology firms are ongoing concerns that assume debts, lease facilities, and build up reliance interests on the expectation of continued revenue streams sustaining their operations. While the unit of analysis in patent law is usually a single innovation, a dynamic view of business lifecycles reveals that no technology firm can long sustain itself with just a single innovation. Furthermore, given the long time required to develop innovations and the probability that many of them will fail, firms cannot wait for a key patent to expire before initiating the next round of research and development. Rather, expiration of the patent term provides an impetus for established firms to innovate continuously.

A study by the European Union found that because impending patent expiration limits the time during which companies can recoup investments, “originator companies are incentivized to constantly search for new medicines.” 143 Other commentators assert that the “patent cliff” of upcoming expirations “induced the pharmaceutical industry into a new wave of product innovation.”144 A decade ago, the pharmaceutical industry faced impending patent expirations on forty biologics valued at $60 billion in annual sales.145 Merck responded to these upcoming expirations by investing $1.5 billion in Merck BioVentures, which aimed to discover new and follow-on biologics. 146 Many incumbents with expiring patents switched from a “blockbuster” strategy to a “niche buster” strategy, shifting research and development to specialty drugs with lower substitution potential.147 Particularly if non-innovative and strategic approaches to prolong exclusivity are curtailed, patent expiration can play an important role in motivating continual innovation by rightsholders, thus contributing to churn.