Innovation Policy Jun 1, 2008

Patent Pro­tec­tion and Inno­va­tion in Pharma

Do nation­al patent laws stim­u­late domes­tic inno­va­tion in a glob­al patent­ing environment?

Based on the research of

Yi Qian

Via­gra doesn’t grow on trees. Nei­ther does Advil, Lip­i­tor, or any of the myr­i­ad oth­er drugs that make their way to the mar­ket. These bio­chem­i­cal break­throughs are root­ed in human inno­va­tions, not mag­ic. Like most oth­er human endeav­ors, inno­va­tion is thought to be encour­aged by some push­ing and prod­ding. Align the right incen­tives, build the prop­er pro­tec­tions, and human inge­nu­ity might cook up a bet­ter pill (or com­pose a sym­pho­ny, or invent the hula hoop). But the work of Yi Qian (assis­tant pro­fes­sor of mar­ket­ing), pub­lished in The Review of Eco­nom­ics and Sta­tis­tics, calls into ques­tion the degree to which inno­va­tion can tru­ly be stim­u­lat­ed by the rights and restric­tions cod­i­fied in intel­lec­tu­al prop­er­ty (IP) protections.

Intel­lec­tu­al prop­er­ty rights were a con­cern long before the World Trade Orga­ni­za­tion (WTO) and count­less oth­er influ­en­tial acronyms came into being. Many invi­tees to the 1873 Inter­na­tion­al Exhi­bi­tion of Inven­tions in Vien­na opt­ed not to par­tic­i­pate out of fear that their ideas would be stolen and exploit­ed around the world. Ten years lat­er, the Paris Con­ven­tion for the Pro­tec­tion of Indus­tri­al Prop­er­ty marked the first major treaty intend­ed to devel­op inter­na­tion­al pro­tec­tion for intel­lec­tu­al cre­ations. In the same spir­it, the World Intel­lec­tu­al Prop­er­ty Orga­ni­za­tion (WIPO) was estab­lished in 1967. It became a spe­cial­ized agency of the Unit­ed Nations in 1974 with a man­date to devel­op a bal­anced and acces­si­ble inter­na­tion­al intel­lec­tu­al prop­er­ty sys­tem, reward cre­ativ­i­ty, stim­u­late inno­va­tion, and con­tribute to eco­nom­ic devel­op­ment while safe­guard­ing the pub­lic interest.”

As trade­mark mon­i­tor­ing was loos­ened, coun­ter­feit­ing became eas­i­er and authen­tic com­pa­nies actu­al­ly engaged in more inno­v­a­tive prac­tices to dif­fer­en­ti­ate them­selves from the coun­ter­feit­ers.With such a broad, ambi­tious man­date, WIPO endured its share of polit­i­cal divi­sions, large­ly between devel­oped and devel­op­ing nations. Frus­trat­ed by treaty lim­i­ta­tions imposed by WIPO’s devel­op­ing coun­tries, devel­oped coun­tries turned in the 1980s to the Gen­er­al Agree­ment on Tar­iffs and Trade (GATT) to estab­lish inter­na­tion­al IP stan­dards. The Uruguay Round of GATT nego­ti­a­tions from 1986 to 1994 gave birth to the WTO and the enact­ment of TRIPS (the Agree­ment on Trade-Relat­ed Aspects of Intel­lec­tu­al Prop­er­ty Rights), which out­lines many stan­dards for IP regulation.

Accord­ing to Qian, IP reg­u­la­tion has always been con­tro­ver­sial. One strand of lit­er­a­ture argued that patent law was crit­i­cal for inno­va­tion,” she said. By being promised the awardees of ex post monop­oly rights, inno­va­tors have more incen­tive to engage in inno­va­tion ex ante.”

But oth­ers refut­ed that,” she con­tin­ued. For exam­ple, in today’s world, when life cycles of prod­ucts can be so short, the long pro­ce­dure required for patent pro­tec­tion might ren­der prod­ucts incon­se­quen­tial. Patent laws could poten­tial­ly pro­mote exces­sive lit­i­ga­tion, as explained in a 2004 book by Josh Lern­er and Adam Jaffe, Inno­va­tion and Its Dis­con­tents. In addi­tion, patent laws may even block sequen­tial inno­va­tion, which is the build­ing of sub­se­quent inven­tions upon pre­ced­ing ones, by fos­ter­ing high licens­ing fees.”

In order to explore whether IP poli­cies stim­u­late tech­no­log­i­cal inno­va­tion, Qian focused on one par­tic­u­lar type of IP pro­tec­tion: the imple­men­ta­tions of phar­ma­ceu­ti­cal prod­uct patent laws in a set of coun­tries from 1980 to1999. With glob­al, annu­al spend­ing on phar­ma­ceu­ti­cals esti­mat­ed in excess of $600 bil­lion, and with devel­op­ment of an inno­v­a­tive, approved drug esti­mat­ed to cost in the neigh­bor­hood of $1 bil­lion, the phar­ma­ceu­ti­cal indus­try pro­vides plen­ty of oppor­tu­ni­ty to inves­ti­gate incen­tives and bar­ri­ers to inno­va­tion. In 2006 the U.S. Patent and Trade­mark Office award­ed almost 8,000 phar­ma­ceu­ti­cal-relat­ed patents to inven­tors around the globe, evi­dence that U.S. patents are among the most sought after in the world.

Hard-to-find data and lim­it­ed analy­sis tools have hand­cuffed much pri­or research in this area, which is marked by incon­clu­sive stud­ies of sin­gle coun­tries. It’s very dif­fi­cult to do research on non-OECD coun­tries,” said Qian, refer­ring to the scarci­ty of con­sis­tent, reli­able eco­nom­ic data for coun­tries that are not among the thir­ty rel­a­tive­ly devel­oped mem­bers of the Orga­ni­za­tion for Eco­nom­ic Coop­er­a­tion and Devel­op­ment. Qian gath­ered data from dif­fer­ent data­bas­es and used a sam­pling algo­rithm to match coun­tries of sim­i­lar char­ac­ter­is­tics, which let her draw causal infer­ences about the effects of nation­al patent poli­cies on domes­tic inno­va­tions. Qian used a nov­el com­bi­na­tion of matched sam­pling and pan­el analy­ses. This approach allowed her to ana­lyze data from nine­ty-two coun­tries from 1978 to 2002. In the process, she honed in on twen­ty-six coun­tries that pro­vid­ed an oppor­tu­ni­ty to ana­lyze a nat­ur­al experiment.”

Dur­ing the 1980s and 1990s, those twen­ty-six coun­tries passed phar­ma­ceu­ti­cal patent laws, cre­at­ing an eco­nom­ic researcher’s dream: a mix of nine­ty-two coun­tries, twen­ty-six with brand-new patent laws, oth­ers that had already offered such pro­tec­tions, and oth­ers that still did not offer such rights. By com­par­ing the amounts and weights” of U.S. patents issued to each country’s inno­va­tors, and by exam­in­ing time peri­ods both before and after the new laws were passed, Qian was able to tease apart rela­tion­ships between the pres­ence or absence of patent pro­tec­tions and the amount of resul­tant inno­va­tion. Since not all inno­va­tions are cre­at­ed equal, some being more ground­break­ing than oth­ers, patent weight reflects the degree to which a patent is cit­ed as an influ­ence by sub­se­quent patents.

But such a sim­ple set of com­par­isons alone could not make a clear case for or against the influ­ence of patent reg­u­la­tions. For exam­ple, in addi­tion to dif­fer­ences in the type and tim­ing of patent poli­cies, coun­tries also dif­fered in many oth­er respects — such as their legal tra­di­tions, edu­ca­tion lev­els, over­all eco­nom­ic capac­i­ties, and eco­nom­ic free­doms — all fac­tors that could influ­ence phar­ma­ceu­ti­cal research and devel­op­ment, inno­va­tion, and patent­ing. Qian had to account for the influ­ence of those fea­tures in order to attribute changes in patent awards to changes in IP law. A 70-year old sta­tis­tic, called Mahalanobis’s dis­tance, allowed her to do just that.

Matched sam­pling has been used in var­i­ous aca­d­e­m­ic fields for a while, par­tic­u­lar­ly in labor eco­nom­ics. But it’s not too fre­quent­ly used in pro­duc­tiv­i­ty eco­nom­ics,” said Qian, explain­ing her use of Maha­lanobis match­ing. Each coun­try is a point in a mul­ti-dimen­sion­al space, with its coor­di­nates reflect­ing coun­try char­ac­ter­is­tics such as gross domes­tic prod­uct, edu­ca­tion, eco­nom­ic free­dom, and the amount of the labor force involved in phar­ma­ceu­ti­cal production.”

Coun­tries that clus­tered togeth­er in that mul­ti­vari­able space, for exam­ple, Den­mark, Nor­way, and Swe­den, thus shared a great deal in com­mon on a wide range of inno­va­tion-rel­e­vant social, eco­nom­ic, and polit­i­cal fea­tures. By iden­ti­fy­ing clus­ters of sim­i­lar coun­tries among which the only major dif­fer­ence was the pres­ence, absence, or type of patent reg­u­la­tions, Qian could attribute dif­fer­ences in U.S.-awarded patents to dif­fer­ences in IP reg­u­la­tions. For exam­ple, con­sid­er­ing again our set of sim­i­lar Scan­di­na­vian coun­tries, Den­mark enact­ed new phar­ma­ceu­ti­cal patent poli­cies in 1983, while Nor­way had no such poli­cies at that time, and Swe­den already had such poli­cies in place (Table 1).

Table 1: Match­ing pairs and tim­ing of reforms

Note: Matched with the Maha­lanobis method. Each coun­try that imple­ment­ed domes­tic phar­ma­ceu­ti­cal patent pro­tec­tion is matched with two coun­tries as con­trol groups: one coun­try that did not have patent pro­tec­tion pri­or to the next ref­er­ence peri­od and one coun­try that had patent pro­tec­tion pri­or to the ref­er­ence peri­od. Qian grouped the reforms into four ref­er­ence periods.

Using this method, Qian came to this sim­ple con­clu­sion: Patent pro­tec­tion alone is not a suf­fi­cient con­di­tion for inno­va­tion.” Her con­clu­sion is sup­port­ed by three dif­fer­ent mea­sures: U.S.-awarded patents (both raw counts and cita­tion-weight­ed counts), phar­ma­ceu­ti­cal exports, and spend­ing on research and devel­op­ment. Those same mea­sures of inno­va­tion, how­ev­er, were enhanced in coun­tries with high­er lev­els of eco­nom­ic devel­op­ment, edu­ca­tion, and eco­nom­ic free­dom. Qian thus con­clud­ed, as oth­ers have spec­u­lat­ed, that regard­less of IP pro­tec­tion some nations sim­ply may not have suf­fi­cient inno­va­tion poten­tial to take advan­tage of those pro­tec­tions. Some min­i­mal lev­els of social, eco­nom­ic, polit­i­cal, and cul­tur­al capac­i­ty must be in place as the raw mate­ri­als upon which IP poli­cies may exert some pos­i­tive influence.

The patent sys­tem has pos­i­tive con­tri­bu­tions, but only in com­bi­na­tion with the country’s own inno­v­a­tive poten­tial,” explained Qian.

The pos­i­tive influ­ences of patent regulation’s can turn sour, how­ev­er, if not pru­dent­ly imple­ment­ed and mon­i­tored. Qian not­ed an invert­ed U” shape in the rela­tion­ship between IP reg­u­la­tion and inno­va­tion. Com­pared to a total­ly law­less IP envi­ron­ment, increased patent pro­tec­tions nur­tured inno­v­a­tive activ­i­ties — but only up to a cer­tain lev­el. Too much reg­u­la­tion effec­tive­ly sup­pressed or extin­guished the gen­er­a­tion of more and bet­ter innovations.

With the ink bare­ly dry on this research, Qian has already begun to dig deep­er into the inter­play between IP poli­cies and inno­va­tion. Weight­ed patents only cap­ture major inven­tions that have been patent­ed in the Unit­ed States. While these major inno­va­tions are inter­est­ing to study, I would also like to observe small­er inno­va­tions that were only local­ly suc­cess­ful. I’m extend­ing the research by get­ting new data on phar­ma­ceu­ti­cals in each country.”

Qian recent­ly gained access to a large data­base of new chem­i­cal enti­ty (NCE) devel­op­ments by thou­sands of com­pa­nies world­wide. She has con­duct­ed analy­ses using the num­ber of NCEs in dif­fer­ent clin­i­cal phas­es as inno­va­tion esti­mates instead of rely­ing on U.S. patent awards. In anoth­er paper Qian stud­ied the impacts and reme­dies of coun­ter­feits, the flip­side of IP rights. She found that as trade­mark mon­i­tor­ing was loos­ened, coun­ter­feit­ing became eas­i­er and authen­tic com­pa­nies actu­al­ly engaged in more inno­v­a­tive prac­tices to dif­fer­en­ti­ate them­selves from the coun­ter­feit­ers. This sug­gests that IP rights law is not always a nec­es­sary con­di­tion for inno­va­tion. The cen­tral theme of her new research, how­ev­er, is to test and pro­pose effec­tive means in com­bat­ing coun­ter­feits at both the com­pa­ny lev­el and pub­lic pol­i­cy level.

While not like­ly to put patent attor­neys out of work any­time soon, Qian’s research may allow devel­op­ing and devel­oped nations to recon­sid­er and fine-tune their IP poli­cies. In so doing, nations may encour­age more and bet­ter ideas and inno­va­tions, to ben­e­fit peo­ple with­in their own bor­ders and around the world.

Fur­ther read­ing:
Jaffe, Adam, and Josh Lern­er. Inno­va­tion and Its Dis­con­tents. New Jer­sey: Prince­ton Uni­ver­si­ty Press, 2004.

Maskus, Kei­th E. (2000). Intel­lec­tu­al Prop­er­ty Rights in the Glob­al Econ­o­my. Wash­ing­ton, D.C.: Insti­tute for Inter­na­tion­al Economics.

Featured Faculty

Yi Qian

Member of the Marketing Department Faculty until 2014

About the Writer

Dr. Brad Wible (Northwestern, The Graduate School, 2004) is a senior program associate with the Research Competitiveness Program, a science and policy program at the American Association for the Advancement of Science. He lives in Washington, D.C.

About the Research

Qian, Yi (2007). “Do National Patent Laws Stimulate Domestic Innovation in a Global Patenting Environment? A Cross-Country Analysis of Pharmaceutical Patent Protection, 1978-2002.” The Review of Economics and Statistics 89, no. 3: 436-453.

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