The Limits of the Patent System

Source: Random Thoughts on R&D, Innovation, IP and IT

14 Aug 2014


Do Patents Kill Innovation?

Do patents kill innovation? Evidence is piling up that they do. This time the evidence is from the pharmaceutical industry itself. The strongest case for patent has been made out in the pharmaceutical industry. Since pharmaceutical research is inherently risky and requires substantial investment, it is argued that the sector requires a strong patent protection.

It is in cancer drug discovery that evidence has come out that patents destroy R&D. A paper, “Do fixed patent terms distort innovation? Evidence from cancer clinical trials” by Eric Budish of University of Chicago, Benjamin N. Roin of Harvard Law School and Heidi Williams of MIT demonstrates, through empirical study, how patent system distorts R&D for cancer therapy. The paper finds that patents generate distorted R&D incentives, in the case of cancer. Cancer research, particularly for early stage cancer, which is curable, requires long clinical trials. Therefore industry prefers to invest in R&D for metastatic cancers, which requires less duration trials, but the therapy may prolong the life by only a few months. This is of significant concern from a medical perspective.

Surprisingly, the authors note that there has been no empirical study on patent protection and innovation.

Although theoretical models often assume a relationship between the strength of patent protection and the level of innovation, there is a remarkable dearth of empirical evidence on this link. For example, Lerner (2002) and Sakakibara and Branstetter (2001) find little evidence that stronger intellectual property rights induce more innovation.

Patent exclusivity is for a limited period of 20 years. There is usually a considerable gap between the filing of patent of the invention and the ultimate commercialisation. This may be referred to as a commercialisation lag. Normally for a drug the commercialisation lag is estimated to be about 10-12 years. Firms have to recoup their research investment and the profit during the patent period.

Cancer has a paradox from a patent perspective. The survival has to be measured over long periods of time. To explain, let us understand the two types of cancer. When it starts cancer is mostly localized (the primary site). At this stage it could be curable in many cases. At an advanced stage, the cancer spreads to other parts of the body. Metastatic cancer is a cancer that has spread from the primary site, where it started, to other parts of the body.

The authors cite the example of two studies reported in New England Journal of Medicine in 2011. A first study, de Bono et al. (2011), analyzed a treatment for

metastatic prostate cancer (an advanced stage of prostate cancer with a five-year survival rate of the order of 20 percent). The study tracked patient survival for a median time of 12.8 months, and estimated statistically significant improvements in survival (a gain of 3.9 months of life on average). A second study, Jones et al. (2011), analyzed a treatment for localized prostate cancer (an early stage of prostate cancer with a five-year survival rate of the order of 80 percent. The study tracked patient survival for a median time of 9.1 years, estimating statistically significant improvements in survival. Both the above cases have different patient follow-up times and this translates into a large difference in clinical trial length: 3 years for the metastatic cancer patient trial versus 18 years for the localized patient trial.

A private for profit firm will not carry out a trial for 18 years and bring a drug to the market when patent term itself is 20 years. As may be expected, the authors found that a private firm funded the study of the metastatic cancer patients with the shorter duration trial whereas the National Cancer Institute funded the study of localized cancer patients requiring long duration.

To find a real cure for a primary cancer, R&D is required over long periods of time. To demonstrate that cancer is cured, you need longer clinical trials with long commercialisation lag. The ‘for profit’ firms have very little incentive to do this. Therefore they focus on metastatic cancers that require only shorter clinical trials, where cures would amount to prolonging the life by few months.

Authors of the paper analysed the data from a clinical trial registry that has cataloged cancer clinical trials since the 1970s. They found the correlation that privately financed trials favoured shorter survival terms. The authors found that R&D investments on cancer treatments are strongly negatively correlated with expected survival time. They observed lower levels of R&D investment on inventions that required longer commercialization lags. This coupled with corporate short termismposes significant challenge to cancer research.

They also found that all six FDA-approved cancer prevention drugs (that are under-incentivized by the patent system), either relied on the use of surrogate endpoints for shorter trials or were approved on the basis of publicly financed clinical trials.

The authors point out that in the pharmaceutical industry, “drugs treating patients with short life expectancies can move through the clinical trials more quickly -and thus receive longer effective patent terms – than drugs treating patients with long life expectancies”. They provide several evidences showing patents distorting cancer R&D away from drugs targeting early-stage cancer patients or cancer prevention to late stage management.

In essence, the innovation that happens is not what is medically mandated, but driven by the industry’s ability to extract maximum during the patent term.

Another area where Patents are ineffective: Neglected and Orphan Diseases

Patents are a market driven tool. It works where there is a market from where it enables recouping of investments. Where market is absent, patents do not generate innovations.

Take the case of orphan diseases and neglected diseases. Remember, the United States is the largest pharmaceutical market of the world. Even there, if you have a disease which does not command a huge market which interests pharmaceutical companies, you don’t have innovation. The Orphan Drugs Act of US characterizes orphan diseases as those diseases that affect small numbers of individuals residing in the United States that the diseases and conditions are considered rare in the United States. It goes on to state that:

  • because so few individuals are affected by any one rare disease or condition, a pharmaceutical company which develops an orphan drug may reasonably expect the drug to generate relatively small sales in comparison to the cost of developing the drug and consequently to incur a financial loss;
  • there is reason to believe that some promising orphan drugs will not be developed unless changes are made in the applicable Federal laws to reduce the costs of developing such drugs and to provide financial incentives to develop such drugs; and
  • it is in the public interest to provide such changes and incentives for the development of orphan drugs.

This enactment recognizes the limits of the patent system and therefore a policy instrument other than patents have been used to spur innovation.

Compared to the small number of patients affected by Orphan diseases, neglected diseases affect a large number of individuals. Neglected Disease are mostly tropical infectious diseases affecting a large number of people. They earn this sobriquet as pharmaceutical companies generally neglect R&D in them. Take the case of Tuberculosis (TB). TB is second only to HIV as the leading infectious disease mortality, worldwide. 1.5 million people died of TB in 2012 alone. Someone dies of TB every 25 seconds somewhere in the world. Yet the current drugs in use for TB hail from the 1950’s and 1960’s. The therapy is lengthy and toxic. No new drugs that shorten the regimen have been introduced despite the enormous progress made by pharmaceutical industry during this time; that is the story of innovation for neglected diseases. TB is only illustrative. Malaria, dengue fever, dracunculiasis, leishmaniasis, lymphatic filariasis, onchocerciasis, schistosomiasis, soil transmitted helminthiasis, trachoma and trypanosomiasis, so the list goes on, all affecting the poor in the tropical regions. These diseases may be affecting different parts of the world. But they have one thing in common – no innovation.

It is in this sector that the 90-10 gap was noticed by the Commission on Health Research for Development which published the report Health Research: Essential Link to Equity in Development. 90% of the innovation in healthcare relates to the diseases of a mere 10% of the population of the world. Pharmaceutical companies who make substantial profits from global sale of drugs prefer innovation in lifestyle diseases to that of neglected diseases.

Patents as a public policy tool has completely failed to drive innovation in neglected diseases.

Limits of the Patent System

All these point to the limits of patent as an instrument of public policy to drive innovation. It does not induce innovation in cancer nor does it in neglected or orphan diseases. Patent induced innovation works only in a narrow space where all other propitious conditions are present. Beyond this narrow market driven space, say cancer or neglected diseases, it simply fails to drive innovation.

Patents have been characterized by many as the ‘be all’ and ‘end all’ of innovation. There are many who argue and even believe that patents are the sine qua non of innovation. Provide the strictest of patent laws innovation will follow, so goes the argument. This argument has been adopted, post TRIPS, by most policymakers as a given.

But the reality is different. It is only one of the components of a complex ecosystem that makes up the innovation ecosystem. We have a tendency to assume many more functions for patents.

Patents perform a limited function. Patent system is a market based mechanism for capital accumulation. It acts as an instrument to grant a limited exclusivity to the innovator for a limited period. It does not fix other gaps in the innovation ecosystem and its presence on its own does not spur innovation. On its own it does not attract either innovation or technology or investment. A counterfactual proves this assertion. If it was indeed the case, some of the sub Saharan African nations who have the strongest of the patent laws should have been the most innovative as well. In any case, post TRIPS we have more or less uniform patent laws around the world but that has not spread innovation or investment across the world.

Public policy making is not always evidence based. That is the tragedy. It is most of the time based on beliefs. And the predominant beliefs of the age always find its place in the policies, without much evidence to support such beliefs, whether good or bad. Sometimes evidence emerges to the contrary but they are ignored if it is against the current belief.

Corporate short termism and limits of patent puts a limit on humanities quest to find cures for many diseases. There has to be other public policy instruments that would drive and support innovation in cases where patent system does not work, or worse, provide perverse innovation as in the case of cancer.

Call for Reform

Do patents kill innovation? Even the conservative journal like The Economist thinks so. The Economist has recognized the limitations of the patent system and has called for reform. This is what the Economist says:

A one-size-fits-all patent system does not cater to the specifics of innovation in the pharmaceutical industry. But tailoring patent law may encourage lobbying and corruption. A careful reform of the patent system is necessary: outright abolition of patents will not be enough to save cancer patients’ lives.

In 2014, we are moving to 20 years of TRIPS. If many in the developing world ask, “what have we gained”, there is very little to answer to them in terms of better medicines for their diseases. If we accept that all lives have equal value,  it is time for policy makers to take a comprehensive look at innovation in the pharmaceutical sector and abhor the myopic view that patent cures all.

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