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The biopharmaceutical industry is uniquely reliant on IP protections – undermining them would kill innovation by making an already expensive process completely unfeasible.
Kristina M. Lybecker, PhD, 17 PhD Economics, Associate Professor of Economics @ Colorado College, “Intellectual Property Rights Protection and the Biopharmaceutical Industry: How Canada Measures Up,” Fraser Institute, January 2017, https://www.fraserinstitute.org/sites/default/files/intellectual-property-rights-protection-and-the20biopharmaceutical-industry.pdf C.VC
The unique structure of the innovative biopharmaceutical industry necessitates a variety of intellectual property protection mechanisms. In particular, the industry is characterized by a research and development (RandD) process that is lengthy, expensive, uncertain, and risky. According to DiMasi and colleagues, the estimated cost of developing a new medicine is US$2.6 billion (DiMasi, Grabowski, and Hansen, 2016).2 In addition, the time required to develop a new drug is also significant, averaging 10 to 15 years without any guarantee of success (PhRMA, n.d.). While these figures are highly controversial, biopharmaceutical innovation is unquestionably an expensive and lengthy undertaking.3 For the biopharmaceutical industry, innovation and its protection are essential and the source of both profits and growth. As such, patent protection is disproportionally more important for ensuring that the innovator appropriates the returns to RandD for the biopharmaceutical industry than virtually any other. Extending the findings of the 1987 “Yale Survey” (Levin, Klevorick, Nelson, and Winter, 1987), the “Carnegie Mellon Survey” established that while patents are again considered “unambiguously the least effective appropriability mechanisms,” the drug industry and other scholars regard them as strictly more effective than alternative mechanisms (Cohen, Nelson, and Walsh, 1996). The industry’s disproportionate reliance on patents and other forms of intellectual property protection is confirmed in numerous other studies.4
In essence, IPR protections provide innovative biopharmaceutical firms with an assurance of some return on their investment, thus creating incentives for the development of new technologies that could otherwise be easily replicated and sold by competitors. Due to the tremendous fixed costs required to develop new treatments and cures, a significant potential exists for free riding by follower firms, a market failure that would prevent investment in innovation were it not for the patents and other forms of intellectual property protections that provide a limited period of market exclusivity or other such incentives. Fundamentally, patents amount to an efficiency tradeoff. Society provides innovators with a limited period of market exclusivity to encourage innovation in exchange for public access to this knowledge. In exchange for the temporary static loss from market exclusivity, society gains complete knowledge of the innovation through disclosure, a permanent dynamic gain. Through this tradeoff, the existing patent system corrects the market failure that would stymie innovation. In its Apotex Inc. v. Wellcome Foundation Ltd. finding, Justice Binnie wrote for the Supreme Court of Canada, “A patent, as has been said many times, is not intended as an accolade or civic award for ingenuity. It is a method by which inventive solutions to practical problems are coaxed into the public domain by the promise of a limited monopoly for a limited time. Disclosure is the quid pro quo for valuable proprietary rights to exclusivity which are entirely the statutory creature of the Patent Act” (para. 37).
The biopharmaceutical industry is characterized by a number of legal and economic issues that distinguish it from other research-intensive industries. Danzon (1999) describes three features that are particularly noteworthy. First, given that the biopharmaceutical industry is characterized by an unusually high rate of RandD, intellectual property protection provides for the potential for significant market power and monopoly pricing that raises numerous public health policy questions surrounding prices and profits. Second, virtually every aspect of the industry is heavily regulated, from safety and efficacy to promotion and advertising, to pricing and reimbursement. Danzon describes the impact of these regulations as “profound and multidimensional even within a single country, affecting consumption patterns, productivity, RandD and hence the supply of future technologies” (Danzon, 1999: 1056). Lastly, while research and development costs are borne solely by the innovator, the resulting product is a global public good. “Each country faces an incentive to adopt the regulatory policies that best control its pharmaceutical budget in the short run, free-riding on others to pay for the joint costs of RandD and ignoring cross-national spillovers of national regulatory policies through parallel trade and international price comparisons” (Danzon, 1999: 1056). The combination of these characteristics defines a set of unique economic and legal challenges for the innovation of new drugs and the public health policies that surround their production, marketing, and distribution.
Innovative companies make far greater investments in time, resources, and financial support than do generic firms. Notably, innovation-based companies spend more than 200 times that which generic companies spend on the development of a particular drug (CIPC, 2011: 10). In addition, the investment of time, from laboratory to market, is also close to double for innovative companies relative to generic producers. Table 1 highlights the differences in the drug development processes of innovative and generic companies. For innovative biopharmaceutical companies, the development process is expensive, risky, and time consuming, all of which points to the need for strong IP protection to encourage investment and ensure companies are able to recover their investments.
The risk involved in biopharmaceutical development is starkly illustrated in a recent report by Biotechnology Innovation Organization (BIO), which reports that less than one of every 10 drugs that enter clinical trials is ultimately approved by the Food and Drug Administration in the United States. The report finds a success rate of merely 9.6, a calculation that is significantly smaller than the widely-cited 11.8 figure from a 2014 study by the Tufts University’s Center for the Study of Drug Development.5 The International Federation of Pharmaceutical Manufacturers and Associations (2012) estimates that more than 3,200 compounds were at different stages of development globally in 2011, but only 35 new medicines were launched (Dawson, 2015).
Fundamentally, research-based biopharmaceutical companies incur greater expenses and risk in the development of their products than do generic manufactures. These investments of time and financial resources should be recognized and the effective patent life should be sufficient to recoup these investments. Continued investment and innovation are contingent upon strong, effective intellectual property protection and the ability of innovative firms to recoup their investments. Patents and other forms of intellectual property protection are disproportionally important to the research-based biopharmaceutical industry. Consequently, the legal architecture necessary to foster a robust innovation-based industry is multifaceted and is a powerful force shaping the biopharmaceutical industry, its profitability, productivity, and innovative future.