Technological Innovation and Intellectual Property

Why, F. M Scherer asks, was there “an extensive tilt toward strengthened patent laws…during the 1980s and 1990s, even as economic research was revealing that patents played a relatively unimportant incentive role in most large companies’ research and development investment decisions”?

In a groundbreaking paper, “The Political Economy of Patent Policy Reform in the United States,” Mike Scherer tells the story of the interplay between political interests, policy and economics research over the last two decades, including the Bayh-Dole Act, the Hatch-Waxman Act, the creation of the Court of Appeals for the Federal Circuit and the role of US in TRIPs negotiations.

In a review of this paper, Robert M. Hunt and Cecil Quillen write, “Professor Scherer presents a historical perspective that rarely appears in this literature. The paper is worth reading simply for its references because they remind us how much empirical research on the effects of patent policy has been forgotten by contemporary scholars…”

We are pleased to bring our readers both this important paper and the review.

In what can only be described as a remarkable coincidence, The Economist includes a lengthy description of the USPTO’s experimental “Peer to Patent” program, and the Wall Street Journal discusses studies by Dr. John Ioannidis that found peer review of scientific publications to be ineffective at preventing errors and false claims in the peer reviewed publications.

According to the Economist, “The hope is that Peer to Patent will reduce both uncertainty for inventors and unnecessary lawsuits because dodgy applications will be uncovered and rejected quickly.” The WSJ column, however, quotes Dr. Ioannisis: “There is an increasing concern that in modern research, false findings may be the majority or even the vast majority of published research claims.”

We hope peer review will work better for the USPTO than it does for scientific publications.

The Federal Trade Commission has announced the agency’s planned study of Authorized Generic Pharmaceuticals to consider their short-run impact on generic entry as well as their long-run effect on competition in the market for drugs.

What are “authorized generics”? Under paragraph IV of the Hatch-Waxman Act, the manufacturer who first files to produce a generic version of a branded drug is allowed (under some circumstances) a 180-day exclusive marketing period. However, this exclusivity does not rule out competition from “authorized generics”, a drug that is chemically identical to the branded version and authorized by the branded manufacturer for marketing as a generic version.

Authorized generics impact the market in two important ways:

1. they compete with first-filing generics, lowering prices for consumers, and,
2. they reduce the profitability of the 180-day marketing exclusivity period, reducing the incentives for generic entry. The FTC study should explore the impact and magnitude of these two effects.

In estimating the short-run and long-run impacts of authorized generics, it would be helpful if the following questions could be answered, questions that the existing literature has not yet explored:

• What is the average number of generic entrants and how do these generic entrants appear over time? Have successful paragraph IV certification challenges been increasing or decreasing over time? If the 180-day period of exclusivity is so important to the incentive to innovate, why do we see so many independent generic producers enter the market after the period of exclusivity? After all, only one can be granted the 180-day exclusivity and the odds are against a successful filing. If a large number of generic entrants are present, it suggests that these firms view the market as profitable, and are willing to enter, even if they do not receive the 180-day period of exclusivity. Accordingly, competition during the 180-days by an authorized generic cannot be interpreted as a significant deterrent to generic innovation.
• How much of the generic firm’s profit is earned during the 180-day period of marketing exclusivity? If the share of total profit earned during the 180 days is relatively small, it is arguable that the period of exclusivity is of limited importance and the impact of the authorized generic is limited. In addition, by how much is this profit eroded (on average) by the presence of an authorized generic?
• Over the period of study, how have the incidence of paragraph IV certifications changed? (Berndt, et.al. (2005) note that the percentage has increased from 2% between 1984 and 1989, to 12% between 1990 and 1997, and to 20% between 1998 and 2000.) Is this increasing trend still in play? It would be valuable to see these numbers broken down over time. (If yes, this indicates that the increasing prevalence of authorized generics has done little to discourage the generic industry from entry.)

Berndt, Ernst R., Richard Mortimer, Ashoke Bhattacharjya, Andrew Parece, and Edward Tuttle. “Authorized Generic Drugs, Price Competition and Consumers’ Welfare,” working paper, 26 October 2005.