Longer patent durations are inefficient in promoting new drug development

Longer patent durations are an inefficient way to promote the development of new drugs, since it also increases incentives for challenging patents, a new study finds. The results suggest that pharmaceutical patents should be made shorter, but broader.

New drugs are expensive and time-consuming to develop. Patent policies aim at promoting new drug development by providing exclusive rights to innovators. On the other hand, patent policies must find the right balance between incentives for innovation and competition, in order to ensure access to affordable generic medicines and health care.

The EU and the U.S. should seek more efficient ways to promote innovation and to compensate for regulatory delays for pharmaceuticals, says Senior Researcher Tanja Saxell.

The new study by Saxell, Takalo and Izhak shows that a longer patent duration increases generic firms’ incentives for challenging new drug patents. In contrast, broadening patent protection reduces these incentives.

Using administrative data from the U.S. pharmaceutical industry, the authors investigate two policy interventions to affect the duration of pharmaceutical patents. First, the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) from 1994 changed the statutory patent term from 17 years from the grant date to 20 years from the first filing date. In fact, the policy shortened the effective duration of pharmaceutical patents that took a long time to prosecute at the U.S. Patent and Trademark Office. Second, the patent term adjustment provisions of the American Inventors Protection Act of 1999 compensated for long delays in patent prosecution.

Using difference-in-differences regressions based on the changes in patent law, the study finds evidence that one-year increase in the effective length of a new drug patent increases the probability of a successful patent challenge by approximately five percentage points (30 percent).

In contrast, the study finds that broadening the scope of new drug patents reduces patent challenges, using instrumental variable regressions based on differences in the propensity of some patent examiners to grant broader or more claims. Additional descriptive evidence further suggests that active ingredient patents provide stronger protection than other types of new drug patents. Exclusivity granted by the U.S. Food and Drug Administration upon approval of the new drug may also reduce incentives for patent challenges. New drug exclusivity works in a similar fashion to patents and broadens the scope of protection.

The European patent system has similar features to the U.S. system, and not only due to international legal agreements such as TRIPS. Similar to patent term extensions in the U.S., supplementary protection certificates in Europe aim to offset the loss of effective length due to the lengthy testing and clinical trials that new drugs require before receiving marketing approval.

The general aim of various term extensions and adjustments is to encourage innovation in areas with long delays in regulatory approval.

As we find that longer patents increase costly patent challenges, longer patents are an inefficient policy for promoting innovation. Our results suggest that patent protection for new drugs should be made shorter to reduce the costs of patent challenges and litigation, while using a broader scope to restore incentives to develop new drugs. Also, when patents expire earlier, generic entry occurs, but without generic firms having to challenge the patents as frequently.

Working paper:
olena Izhak, Tanja Saxell, Tuomas Takalo: Optimal Patent Policy for Pharmaceutical Industry
http://urn.fi/URN:ISBN:978-952-274-253-7