“If we do not want to rely on patents and related IPRs to drive Research and Development investment we need to find other ways to incentivize innovation.”

With more than 100 vaccines against COVID-19 currently being developed across the world, a debate has been sparked about access to new drugs and the role of patents. Our new research paper (Wagner, Gaessler, forthcoming) confirms that calls for weakening the protection of new pharmaceutical drugs likely are counterproductive, as reduced protection might slow the speed of technological progress in the pharmaceutical industry. Pharmaceutical firms typically enjoy market exclusivity for new drugs through two mechanisms: the protection of invention by patents and the exclusivity of data collected in clinical trials. This market exclusivity typically drives up the prices of new drugs charged to consumers. Yet, they are the main incentive for private pharmaceutical companies to invest in R&D for new remedies.

We calculate that one year of lost market exclusivity, which grants pharmaceutical firms a quasi-monopoly on a certain drug, reduces the chances of ongoing drug development projects to be successfully completed by about 16 percent. This is the first time that an academic paper quantifies the deterrence effect of reducing market exclusivity. The estimated impact of the duration of market exclusivity on the completion of drug development is larger than what many observers previously thought.

To collate our findings, we gathered data on 1,769 unique drug candidates tested in clinical trials whose underlying patents were at risk of invalidation, and linked the development histories of these projects with their associated intellectual property rights. Specifically, we examined a group of drugs that lost associated patent protection during clinical trials and compared them to drugs whose patent protection remained intact.  Revoking the patent during clinical trials leads to a reduction in overall market exclusivity, which in turn determines the period in which pharmaceutical firms can exclusively offer the drug on the market. Patent invalidation reduces the duration of market exclusivity in the former group of projects only and thus creates a natural experiment suitable for this analysis. In order to avoid that our estimates are affected by unobservable characteristics of the patent or the drug, we rely on instrumental variable estimations. By using the rate of eventual drug approval as a proxy for R&D effort, we determine the decline in innovation for the group of drug projects characterized by a shortened period of market exclusivity.

There is a difficult trade-off between the length of market exclusivity for novel drugs, and thus the effectiveness and speed of creating a new drug, and its price to consumers. Our research, for the first time, quantifies how market exclusivity reduction impairs innovation. If we as a society do not want to rely on patents and related intellectual property rights  to drive R&D investment ‒ and with regard to the current pandemic there might be good reasons for this ‒ we need to find other ways to incentivize innovation.

Fabian Gaessler (Max Planck Institute for Innovation and Competition)
Stefan Wagner (ESMT Berlin)

The full paper “Patents, data exclusivity and the development of new drugs” is available as a working paper at SSRN and it will be published in Review of Economics and Statistics soon.

This text is jointly published by BSE Insights and BCCP.

Link to BCCP News Version of this Insight

Reference

Gaessler, F. and Wagner, S. (forthcoming): Patents, data exclusivity and the development of new drugs. Review of Economics and Statistics.