1. The importance of patents and intellectual property protection to biopharmaceutical innovation

Due to distinctive economic characteristics, patents and regulatory exclusivity have long been considered essential to prescription drug development. These characteristics include the costly, lengthy, and risky nature of innovative research and development (R&D) and the much lower investment required for generic drugs. Because of this disparity, without patent protection and regulatory exclusivity, particularly in the USA, innovators would be unlikely to make the substantial investments required to bring new drugs to market. Whereas drug development is global, patent law and regulation are country-specific. In the USA, regulatory exclusivity operates in parallel with patents, defining when generics or biosimilars may not submit abbreviated applications and/or enter the market.

Generic imitation may require several million dollars, whereas the cost to bring a single FDA-approved drug to market (including the cost of failed attempts) has been estimated at $1.4 billion in out-of-pocket costs and $2.6 billion including the cost of capital [1,2]. New drug R&D requires more than a decade, including pre-clinical testing, clinical trials, and US regulatory approval [1,2]. In comparison, clinical testing is not required for generics; manufacturers need only demonstrate bioequivalence to an already-approved drug. Risk is also high; the vast majority of candidates are eliminated, most before clinical testing. For those that begin clinical testing, the probability of proceeding to approval averages only 12% [2,3]. Therefore, R&D must be funded by a few successful, on-market medicines [4]. Generally, in the USA, once patent protection and any 180-day generic exclusivity end, multiple generics launch, and generic share increases rapidly. For all new molecular entities experiencing first generic entry in 2011–12, the average brand’s unit share of molecule sales declined to 16% 12 months after generic entry, versus 44% in 1999–00 [5]. In 2013, generics represented 86% of all US prescriptions [6].

In addition to distinctive R&D and market competition economic characteristics, biopharmaceuticals are also distinguished from other industries by a large gap between the statutory patent term (20 years from the effective patent filing date) and the effective patent term (years remaining at launch), even after any patent term restoration and additional regulatory exclusivity (e.g., for pediatric studies). The average time between brand launch and first generic sale for drugs experiencing initial generic entry in 2011–12 was 12.6 years for drugs with sales greater than $100 million (in 2008 dollars) in the year prior to generic entry, and 12.9 years overall [5]. In contrast, assuming < 3 years for the US Patent and Trademark Office to examine and approve a patent application (overall average of 29 months for FY2013), the remaining duration (assuming 20 years from the effective patent filing date) would be > 17 years in other industries [7].

Finally, patents serve other particularly important economic functions in biopharmaceuticals, developing robust markets for technology and ‘signaling’ to potential investors the quality of pre-market assets [8]. Since the 1980s, a number of scientific, economic, and legal developments have created the modern-day US biopharmaceutical sector [9]. In addition to scientific discoveries creating new areas of life sciences research, patent law developments made obtaining and enforcing patents for genes and recombinant entities possible, the Bayh-Dole Act encouraged university licensing of government-sponsored research, and a venture capital industry emerged, supporting early phase companies. Between 1980 and 2012, life sciences venture investments totaled $108 billion in 4,600 start-ups (19% of all US venture investment then) [10]. Potential start-up investors weigh patents heavily, including expected effective patent terms of molecules in development, and patent strength for proprietary technology.

2. Previous cross-industry studies

Previous studies have assessed the importance of patents to R&D investment and innovative activity in the USA, finding variation across industries, with patents viewed as more critical to firms realizing the benefits of R&D investments in drug development.

Edwin Mansfield (1986) estimated the impact of patents on the development and introduction of inventions without patent protection, relying on data from 100 US manufacturing firms in 12 industries [11]. Respondents reported that 65% of commercially introduced inventions in the pharmaceutical industry would not have been introduced without patents, and 60% of inventions would not have been developed in 1981–83 without patents. Figures for other industries were far lower, from 0% (textiles, rubber, motor vehicles, office equipment) to 30% for the next-highest industry (chemicals).

Richard Levin et al. (1987) surveyed R&D managers of 600 US firms, similarly finding that of 18 industries, ‘drugs’ had the highest rating for effectiveness of patents in preventing unlicensed duplication [12]. Pharmaceuticals were the only industry in which product patents were rated by most as more effective than other methods of appropriating the benefits of innovation (greater than secrecy, lead time, learning curve advantages, sales or service efforts).

Cohen et al. (2000) analyzed survey results from ∼ 1500 US R&D managers in 34 industry groups and similarly found that the two industries rating effectiveness of patents highest in appropriating the benefits of product innovations were pharmaceuticals and medical equipment [13].

Arora et al. (2007), using data from the 1994 Carnegie-Mellon Survey of US R&D labs (1991-93 data), estimated returns to patent protection and their impact on firm-specific R&D investment, across industries [14]. The expected incremental value of an innovation due to patenting (‘patent premium’) was highest in the medical instruments, biotech, and drugs and medicines industries, of any of the 19 industries studied, confirming the higher expected returns to patenting and that higher patent returns stimulate greater R&D investment.

3. Recent government and licensing executive surveys

Recent US government and licensing executive surveys confirm these results. In the three annual Business R&D and Innovation Surveys (BRDIS) conducted by the US Census Bureau for the National Science Foundation (2008–10), companies most likely to report that utility (including composition of matter) patents were ‘very’ or ‘somewhat important’ were in pharmaceuticals and medicines; semiconductor machinery; and electromedical, electrotherapeutic, and irradiation apparatus (North American Industry Classification System four-digit level) [15]. Sixty-one percent of “R&D-active pharmaceuticals and medicines” companies reported utility patents being ‘very’ or ‘somewhat important.’ In comparison, utility patents were rated as ‘very’ or ‘somewhat important’ by < 4% and ‘not important’ by 96% of all respondents (2010 results).

In addition, between 2004 and 2009, the LES Foundation conducted an annual online survey of US and Canada members of the Licensing Executive Society [16]. The most recent (collected in 2008, referring to 2007) gathered data from ∼ 600 licensing professionals in small (fewer than 500 employees) and large (> 500 employees) ‘technology creator’ and ‘technology user’ organizations.

The 2007–08 LES survey also found differential patent importance:

• Eighty-nine percent of respondents in the healthcare (including biotechnology, pharmaceuticals and medical) industry characterized patents as ‘extremely important’ in ‘creating a competitive advantage for your organization’ (Figure 1).

• In comparison, 79% of energy and chemicals respondents (energy, chemicals, petrochemicals, polymers, and allied industries), 73% of electronics and software respondents, and 47% of other respondents (financial markets, food and beverage, transportation and mechanics, and other industries) reported patents were ‘extremely important.’ The gap between the importance of patents and other forms of intellectual property (IP) protection (know-how, trade secrets, trademarks, and copyrights) was greatest in healthcare (including biotechnology, pharmaceuticals and medical devices) (Table 1).

The importance of patents to innovation: updated cross-industry comparisons with biopharmaceuticals

All authors

Iain Cockburn Richard C. Shipley Professor of Management & Genia Long Senior Advisor

https://doi.org/10.1517/13543776.2015.1040762

Published online:

18 June 2015

Figure 1. Importance of patents – healthcare respondents. Includes biotechnology, pharmaceuticals, and medical. Blank responses excluded from calculations.

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4. Conclusion

Since the 1980s, US-focused researchers have found patents to be relatively more important to R&D than other forms of IP protection (trademarks, copyrights, confidential trade secrets, confidential or non-confidential know-how) and strategic complementary assets (such as lead time, sales and service, and manufacturing advantages) in biopharmaceuticals than in other industries. The most recent data from US government and annual US and Canada licensing professional surveys are consistent with these findings.

5. Expert opinion

In most other industries, patents have not been the reported mechanism US firms rely on most to protect their R&D investments. Rather, trademarks, copyrights, and trade secrets typically have been identified as more important (two to three times more commonly reported as ‘very important,’ all industries average, according to the 2010 BRDIS survey).

The differential importance of patent (and regulatory exclusivity) protection has persisted despite changes in the biopharmaceutical landscape, including evolving brand-generic drug competition, a maturing, increasingly important biotechnology sector, and changes in the US patent litigation environment. Given high, increasing costs, and persistently high scientific risk, of bringing an FDA-approved drug to market, and the continuing importance of secure patents to attracting start-up investment capital, this difference is expected to persist. The uncertainty surrounding expected patent protection may be increasing, however, with unknown effects. Drug patent challenges have become more common, and occur earlier after launch; 81% of drugs experiencing first generic entry in 2012 had experienced a so-called Hatch-Waxman ‘Paragraph IV’ patent challenge, versus only 9% in 1995 [5]. Another unknown is whether importance ratings of patents versus other forms of IP protection differ today for biologic and small-molecule drugs, and what effects US biosimilar entry will have over time.

Due to the availability of US data over time and its market importance, we have focused our analysis there. Differences in patent and regulatory regimes and other factors may result in other countries reporting different results. Local and global innovation effects of these differences are important areas for further research.