CP - Patent Buyouts - MSDI 2024

MSDI Patent Buyout CP
1NC
CP Text – The USFG should weaken the patents allowed under *THE PLAN* by conditioning the patents on free public domain availability following optional owner sale to the USFG.
Patent buyouts would accelerate pharmaceutical innovation and reduce high market pricing
James B. Rebitzer and Robert S. Rebitzer James B. Rebitzer is the Peter and Deborah Wexler professor at Boston University’s Questrom School of Business. Robert S. Rebitzer is a national advisor at Manatt Health Nov. 14, 2023 Patent buyouts could spur vital innovation in antibiotics, vaccines, and other medical fieldshttps://www.statnews.com/2023/11/14/patent-buyouts-health-care-innovation-cms-drug-price-negotiation/
There is little doubt, and much evidence, that innovators respond to expected future profit. People are drawn to problems for which the rewards are great. We have seen this in our own work; one of us is a health care economist who studies innovation and the other a consultant who advises innovators in the health sector. There is little doubt, and much evidence, that innovators respond to expected future profit. People are drawn to problems for which the rewards are great. We have seen this in our own work; one of us is a health care economist who studies innovation and the other a consultant who advises innovators in the health sector. The current dispute over drug price negotiations is a good time to consider alternatives to the patent system that may better align the incentives for innovation with the needs of patients and society. One such alternative, patent buyouts, has been proposed by Michael Kremer, University of Chicago economist and Nobel laureate. Kremer’s patent buyout proposal — articulated more than two decades ago — was inspired by the example of the patent for daguerreotype photography, which the French government purchased in 1839 and placed without charge in the public domain. As a result, this early form of photography was rapidly adopted worldwide. Kremer’s plan envisions offering innovators the option of selling their patent rights to the U.S. government at prices equivalent to their estimated private value as determined at auction. The government would then make the innovations available to the public without requiring a licensing fee. Patent buyouts eliminate many of the distortions that arise from today’s pricing model because the value of the innovation would not need to be recouped through market sales at monopoly prices in a fixed time frame. Under the buyout system, almost all new drugs would be sold and priced like generics. The social gains would thus be greatest for new drugs that would otherwise win a high price in the current system — typically branded drugs with few competitors. Life-cycle management would be a thing of the past. Indeed, this system, as with daguerreotype photography, might accelerate innovation by stimulating follow-up applications of the original discovery. A patent buyout scheme is no panacea and presents many practical challenges. Auctions would have to be carefully structured to determine the correct price and, in some cases like antibiotics, additional subsidies might still be required to support adequate innovation. The government could misuse its purchasing power and force the sale of patents at confiscatory prices. Financing the purchase of patent rights will also require careful thought. These practical challenges, not to mention the political challenges of reforming the patent system through an act of Congress, are daunting. However, it took nearly 40 years to authorize Medicare coverage of outpatient prescription drugs and an additional 20 years before CMS began to negotiate drug prices. Great change is often impossible until, suddenly, it is not. With the advent of this new era of drug price negotiation, now is the time to think about the changes needed to keep the engines of innovation in health care running far into the future.
Block Solvency
Patent buyout mechanisms are the best solution– patents, especially in pharmaceuticals distort innovation
Alberto Galasso Matthew Mitchell and Gabor Virag MARKET OUTCOMES AND DYNAMIC PATENT BUYOUTS Working Paper 20197 NATIONAL BUREAU OF ECONOMIC RESEARCH June 2014 http://www.nber.org/papers/w20197
Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify alternatives to patents that could lower prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government’s innovation policy, and are also widely implemented by private philanthropists. In this paper we develop a model in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy in our model still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent’s life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives in our model.
Patent buyouts spur follow on innovations and emerging technologies while eliminating monopoly distortions in pricing
Lee Robinson, Euan Ritchie, and Charles Kenny Aid-Financed Mechanisms for Technology Development CGD Policy Paper 176 June 2020 https://www.cgdev.org/sites/default/files/Aid-financed-Mechanisms-for-Technology-Development.pdf
As with prizes in general, high specificity can be possible in models that include a condition to leave innovations unpatented or eschew monopoly pricing, so product risks are reduced and again, only results would be rewarded. With patent buyouts designed to spur future innovation, specificity is still considerable but less than perfect. It might reduce the cost for other researchers to produce follow-on innovations, who otherwise would have needed to pay for rights to use the patented knowledge. If the buyout price is set between private and social value (and social value can be accurately estimated) then this is a good investment of resources. If the patent holder is the low-cost producer (which is plausible, given their intimate knowledge of the invention), then they would likely still wish to sell, as they would receive the mark-up over private value and be well positioned in the market.38 Patent buyouts would decouple rewards from access by reimbursing inventors separately form sales. Lower prices would then result, which would broaden access to the invention. Monopoly distortions would be eliminated and, since researchers into complementary inventions would not need to contract to split rents or to seek licensing agreements, complementary innovations might burgeon. This happened with the French government patent buyout for the daguerreotype;39 photography flourished. Buyouts could be very effective when applied to frontier technologies, therefore, as follow-on innovations are often necessary for these to deliver their full benefits.40
Patent buyouts can stimulate innovation, reduce wasteful research and eliminate the monopoly pricing distortions created by the IPR regime
Kremer, Michael R. 1998. Patent buyouts: A mechanism for encouraging innovation. Quarterly Journal of Economics 113(4): 1137-1167. http://nrs.harvard.edu/urn-3:HUL.InstRepos:3693705
Previous sections have examined the potential of patent buyouts to supplement our current system of promoting innovations through patents and direct government support of research. The government could offer to buy out patents at their private value, as revealed by an auction, times a markup designed to cover the difference between the private and social values of inventions. This mechanism involves more government discretion than the current patent system, but substantially less discretion than government funding of research through the NSF or NIH. Patent buyouts could potentially increase incentives for original invention closer to their social value; reduce incentives for wasteful ‘‘me too’’ research; and eliminate monopoly pricing distortions. On the other hand, patent buyouts could also cause a number of problems, including collusion to raise buyout prices. When new institutions are proposed, there is a natural tendency to focus on their potential risks and shortcomings. However, it is also important to recognize that existing mechanisms of encouraging innovation have serious flaws. In an 1851 editorial (cited by Dutton [1984]) urging that patents be abolished, The Economist wrote that the granting of patents ‘‘inflames cupidity, excites fraud, stimulates men to run after schemes . . . begets disputes and quarrels betwixt inventors, provokes endless lawsuits [and] makes men ruin themselves for the sake of getting the privilege of a patent, . . .’’All this is true, and yet it seems clear that the world is much better off with patents than without them. The same may be true for patent buyouts. Since it is difficult to gauge the effects of patent buyouts based on theory alone, and since large-scale patent buyouts would be risky, it might be useful to first try patent buyouts on a limited basis. Such a trial could help determine whether inventors would sell their patents, and whether bids would be substantially greater than realized profits or revenues, as would be the case if collusion were severe. This would help policy makers judge whether patent buyouts should be abandoned, redesigned, or used more widely. Pharmaceuticals are a natural area to try patent buyouts, since markets would be relatively competitive in the absence of patents; patent protection is effective; monopoly markups are large; drugs are nondurable; ‘‘me too’’ inventions are widespread; and considerable information is generated during FDA trials, so potential bidders could make informed bids.17 Moreover, because many pharmaceutical patents are valuable, the administrative costs of the system are likely to be small relative to the benefits of patent buyouts. Once FDA approval has been granted, little new development is typically required. Finally, buying out pharmaceutical patents is likely to have benign distributional consequences, whereas buying out, say, patents for improved yachts will not. Financing pharmaceutical research through patents places the financing burden on disease victims. If disease incidence is random, and not fully insurable, people will prefer ex ante to insure themselves by funding the research out of general tax revenue. The system could initially be applied to treatments for a few specific diseases considered to be particularly important, or particularly subject to problems resulting from the patent system. Orphan drug legislation provides a precedent for establishing special rules for drugs designed to treat particular diseases.
Patent buyouts support innovation – historical examples prove the capacity for follow on
Alberto Galasso Matthew Mitchell and Gabor Virag MARKET OUTCOMES AND DYNAMIC PATENT BUYOUTS Working Paper 20197 NATIONAL BUREAU OF ECONOMIC RESEARCH June 2014 http://www.nber.org/papers/w20197
In this paper we have examined the problem of a social planner aiming to maximize consumer welfare and innovation incentives while observing prices and quantities practiced by the innovator over time. We have shown that in our model information about market outcomes may allow the planner to generate more welfare than a traditional patent system through patent buyouts. There are a number of historical experiences in which governments bought patents out. The most famous example of patent buyout took place in July 1839 when the French government purchased the patent for the Daguerreotype photography process. The inventor, Luis Jacques Daguerre, was not able to find buyers for the process, but obtained the support of a politician that convinced the government to acquire the patent and put the rights in the public domain. Within a short period of time the process spread around the country to become the technology standard in photography (Kremer, 2001). In recent academic and policy debates pharmaceutical patent buyouts have been suggested as a strategy to improve health in low income countries. For example, Banerjee et al. (2010) propose that a Health Impact Fund compensate drug manufacturers that sell in low income countries at marginal cost. They suggest that the compensation to a given manufacturer would depend on use of the drug and evidence of realized health benefits.20 Our paper provides two main insights into the design and application of such buyout schemes. First, the planner may find it beneficial to collect market data before the buyout and use them to estimate the surplus generated by the innovation. In practice, surplus may be estimated through structural econometric models that allow policy makers to estimate the primitives of consumer preferences and to generate out of sample predictions (Cho and Rust, 2008). Such estimates can provide useful guidance in the determination the buyout compensation for the innovator. Second, the planner should consider the welfare cost associated with collecting price-quantity observations. As long as local variation in market outcomes can be exploited to learn about the global properties of the demand, prices close to marginal costs minimize the loss in consumer surplus.
Patent buyouts enhance innovation – historical examples prove
Kremer, Michael R. 1998. Patent buyouts: A mechanism for encouraging innovation. Quarterly Journal of Economics 113(4): 1137-1167. http://nrs.harvard.edu/urn-3:HUL.InstRepos:3693705
Incentives for marketing and development are likely to be enhanced by patent buyouts. Suppose that the private value of a patent is p(E), where E denotes expenditures on development and marketing. In the absence of patent buyouts, patent owners will invest in development until p/E 5 1. Patent owners who expect to sell their patent at a markup of M will invest until p/E 5 1/M. Inventors would be free to delay patent sales to first undertake development and marketing if they wished. Some opportunities for further development may appear only after patents have been sold. For example, technological advances in related fields may open up new opportunities for development after the patent has been bought out. Patent buyouts will strengthen incentives for this further development if it can be patented or appropriated in some other way. This is because the market for a complementary invention will be larger if the original invention is sold at marginal cost. Moreover, the developer of the complementary invention will not have to split its value with the original inventor or take the risk that unresolved patent disputes with the original inventor will block new complementary products. Although patent buyouts increase inventors’ incentive to conduct development prior to the buyout, and increase others’ incentives to conduct development after the buyout, they reduce inventors’ incentives to conduct unpatentable development after patent buyouts. For example, pharmaceutical firms have much less incentive to test for new uses for generic drugs than for patented drugs. In practice, there may be other ways of appropriating investment in marketing and development. For example, some aspirin manufacturers have sufficient market power that even without patent protection they advertise aspirin’s effectiveness in preventing heart attacks. The substantial technological improvements to the Daguerreotype process and the cotton gin after the patents were bought out provide at least some suggestion that patent buyouts do not generally greatly discourage further technological development. In any case, pharmaceuticals typically need little new development after they have been approved by the FDA.9
Patent buyouts generate greater innovation and increase social welfare
Alberto Galasso Matthew Mitchell and Gabor Virag MARKET OUTCOMES AND DYNAMIC PATENT BUYOUTS Working Paper 20197 NATIONAL BUREAU OF ECONOMIC RESEARCH June 2014 http://www.nber.org/papers/w20197
Mitigating patent rights as a way to improve welfare fits with current concern over the patent system. Concerns about the potentially deleterious effects of patents have been voiced in both academic and policy debates. In a prominent book, Jaffe and Lerner (2004) conclude that in the U.S. patents have become “sand rather than lubricants in the wheels of American progress.” Some have even gone so far as to recommend more draconian reductions in permissible patenting (Boldrin and Levine, 2008; Bessen and Maskin, 2009). The buyout system replaces some of the rents that are obtained through monopoly rights with a prize. If the planner cannot discern the quality of innovations, pure prizes are difficult to implement because the value of the prize cannot be tied to the surplus generated by the innovation as the demand is unknown by the policy maker. Even if the planner could get good information about the number of units sold at a given price, for instance by observing units sold under perfect competition, this is insufficient to construct the inframarginal values of consumers, which is essential to estimating the full value of an innovation. In our model, the hybrid mechanisms can generate greater innovation incentives and increase social welfare if the policy maker has less than perfect information about market demand.
An effective mechanism for patent buyouts would be a sealed-bid second-price auction. It would be especially effective for pharmaceuticals.
Kremer, Michael R. 1998. Patent buyouts: A mechanism for encouraging innovation. Quarterly Journal of Economics 113(4): 1137-1167. http://nrs.harvard.edu/urn-3:HUL.InstRepos:3693705
A standard way of eliciting information on the value of indivisible goods, such as patents, is through auctions. Figure I shows how an auction could be used to determine the price at which the government would offer to buy out patents. Under the mechanism, the market value of patents would be determined through a sealed-bid second-price auction,7 and the government would then offer to buy patents at this private value times some constant markup which would reflect the typical ratio of social to private value. Most of the patents that the government bought would be placed in the public domain. However, in order to give auction participants an incentive to reveal their true valuations, a small proportion of patents, chosen randomly, would be sold to the high bidder. Patent holders would have the right to accept or reject the government’s offer. Although the government might require a waiting period following either patenting or FDA approval of new drugs before it would buy out patents, patent holders would be free to postpone patent buyouts. Inventors who wished to sell their patents to the government would be responsible for paying for the administrative costs of the auction. Based on the empirical estimates of the social return to innovation discussed above, it seems likely that the government should offer to buy patents at a markup of at least twice their estimated private value. This will not match the social value of inventions, but it is likely to be a better approximation than the private value of patents, which is what inventors receive in the absence of patent buyouts. Under a sealed-bid, second-price auction, auction participants will bid their expectation of the patent’s value, given their information, conditional on their making the winning bid. It will be efficient for the government to estimate the private value using information from the entire distribution of bids, rath

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