Solving the Problem of New Uses

One of the most dramatic public-policy failures in biomedical research is the lack of incentives for industry to develop new therapeutic uses (“indications”) for existing drugs once generics are available. Policymakers and commentators are well aware of this “problem of new uses,” but fail to appreciate its magnitude. Over the past decade, this gap in the incentives for pharmaceutical R&D has become one of the greatest barriers to medical progress. Recent technological advances have allowed researchers to identify hundreds of potential new indications for older drugs that could address critical unmet medical needs. And researchers are poised to discover hundreds more. Developing new indications for existing drugs is much faster, cheaper, and less risky than developing new drugs, and therefore offers the single most promising avenue for delivering new medical treatments to the public. However, pharmaceutical companies invariably lose interest in developing new uses for existing drugs when patients have access to low-cost generics. This article explores the nature and source of this gap in the incentives for developing new medical treatments, showing that it ultimately stems from a simple information problem. At present, the government encourages drug development by granting firms temporary monopoly rights that block generic manufacturers from making or selling imitations of their drugs. The government also makes available an alternative type of monopoly protection for new indications that applies to the act of taking or administering a drug for a new therapeutic use. The latter monopoly rights could provide the appropriate incentives for developing new uses of existing drugs. However, pharmaceutical companies cannot enforce these rights without knowing when physicians prescribe the drug for the patented indication as opposed to some other use. If the government established an infrastructure for pharmaceutical companies to monitor the prescribed indications when pharmacists fill a prescription, those firms would possess the information necessary to enforce patents on new indications, thereby solving the problem of new uses. This article argues that the government could easily create such an infrastructure through the expanding use of eprescribing software and electronic medical records

Unpatentable Drugs and the Standards of Patentability

The role of the patent system in promoting pharmaceutical innovation is widely seen as a tremendous success story. This view overlooks a serious shortcoming in the drug patent system: the standards by which drugs are deemed unpatentable under the novelty and non-obviousness requirement bear little relationship to the social value of those drugs or the need for a patent to motivate their development. If the idea for a drug is not novel or is obvious, perhaps because it was disclosed in an earlier publication or made to look obvious by recent scientific advances, then it cannot be patented. Yet the mere idea for a drug alone is generally of little value to the public. Without clinical trials proving the drug's safety and efficacy, a prerequisite for FDA approval and acceptance by the medical community, it is unlikely to benefit the public. Given the immense investment needed to fund clinical trials on drugs, and the ability of generic manufacturers to rely on those tests to secure regulatory approval for their own products, pharmaceutical companies are rarely willing to develop a drug without patent protection. The novelty and non-obviousness requirements make no concession for the development costs of inventions, and thus withhold patents from drugs that are unlikely to reach the public without that protection. This gap in the patent system for drugs has created a pervasive problem in the pharmaceutical industry, causing firms to regularly screen through their drugs in R&D and discard ones with weak patent protection. The potential harm to the public from the loss of these drugs is likely significant. Congress can easily avoid this problem by ensuring that the successful completion of the FDA's rigorous clinical trial process is rewarded with a lengthy exclusivity period enforced by the FDA

Intellectual Property Versus Prizes: A Policy-Lever Analysis

Most developed nations rely on intellectual property as one of their primary tools to promote private investments in R&D. An alternative approach is for the government to reward innovators with a prize instead of an intellectual property right, such that innovations fall immediately into the public domain. This idea dates back centuries, but over the past decade there has been an explosion of scholarship on the subject. Policymakers and even the press have started to talk about use prizes as an alternative to intellectual property – particularly for prescription drugs. In the scholarly literature, it is generally assumed that eliminating intellectual property rights would result in prices closer to marginal cost, thereby reducing deadweight loss. The standard objection to prize proposals is that the government might offer the wrong reward for innovation. Scholarship on the prize system largely focuses on design mechanisms to ensure that the government offers appropriate rewards to innovators. This article examines the growing literature on the prize system and reaches several conclusion about the choice between intellectual property and prizes. First, the proponents of the prize system have made a respectable case that the government could acquire sufficient information about innovations to calculate an appropriate prize. Several scholars have taken this argument too far, however, concluding that prizes are superior to intellectual property in part because they offer better incentives for innovation. This argument is mistaken because any mechanism to calculate rewards under a prize system could also be used to supplement or tax profits under intellectual property, resulting in the same outcome. The prize system therefore cannot be justified as a way to improve the incentives for innovation provided by intellectual property

The Case for Tailoring Patent Awards Based on the Time-to-Market of Inventions

One of the hallmarks of our patent system is that it provides a one-size-fits-all reward for innovation. Few deny a uniform 20-year patent term for all inventions provides too much protection for some, and too little for others. But absent a principled and administrable alternative, the uniform patent system has been our best option. We may know which economic determinants are relevant to a socially optimal patent term and which predispose a patent to stifling future innovation. However, we have lacked a reliable way to measure and synthesize that information in a framework that the government could actually use to tailor patent awards. This paper identifies a readily observable, cross-industry indication of the socially optimal amount of patent protection that different technologies deserve. It demonstrates that “time-to-market,” or the time taken for an invention to reach the market, provides the foundation for a system of tailoring patents that strikes the correct equilibrium, balancing the benefits of innovation against the social costs of patents, both in the form of monopoly pricing and threats to subsequent innovation

Patents and Research Investments: Assessing the Empirical Evidence

A well-developed theoretical literature--dating back at least to Nordhaus (1969)--has analyzed optimal patent policy design. We re-present the core trade-off of the Nordhaus model and highlight an empirical question which emerges from the Nordhaus framework as a key input into optimal patent policy design: namely, what is the elasticity of R&D investment with respect to the patent term? We then review the--surprisingly small--body of empirical evidence that has been developed on this question over the nearly half century since the publication of Nordhaus's book.National Institute on AgingNational Institutes of Health (U.S.) (Common Fund, Office of the NIH Director, through grant U01-AG046708

Intellectual Property versus Prizes: Reframing the Debate

The academic literature on the prize system describes prizes as a radical alternative to intellectual property. The debate over which system is preferable has existed for centuries and usually boils down to a single question: Can the government determine the appropriate reward for innovations without relying on intellectual property rights to reveal their value to consumers? If yes, scholars assume that prizes are superior because they avoid deadweight loss and provide equal or better incentives for innovation. This reflects a fundamental misunderstanding of the nature of intellectual property rights. It equates intellectual property with uniform monopoly pricing and monopoly profits, while depicting the prize system as the only effective strategy to achieve efficient consumer pricing and government control over rewards. In reality, intellectual property merely provides a right to exclude others from the market. Governments can and often do institute policies that resemble prize systems—in both their structure and objectives—alongside intellectual property systems. Governments use subsidies (and sometimes price controls) to push consumer prices closer to marginal cost and adjust the incentives for innovation. Given these other policy levers available within an intellectual property regime, the existing prize literature has exaggerated and misconceived the differences between the two systems. Under many circumstances, the prize system has no advantage over intellectual property in terms of avoiding deadweight loss. Moreover, intellectual property will frequently offer superior incentives to prizes—irrespective of whether it is used to measure an invention\u27s value to consumers—because it provides an ongoing check against expropriation, thereby permitting renegotiation of rewards over time to reflect changing estimations of an invention\u27s social value. Contrary to the long-standing framework used to compare the two systems, intellectual property may be superior to prizes even when the government can determine the appropriate reward for innovations