Background
This paper analyzes the public policy rationale for human gene sequence patents. It blends empirical data on the structure of R&D efforts in microbiology and the inventive content of recent U.S. DNA sequence patents with a theoretical and legal analysis of the role patents play in providing incentives for public and private R&D investments.

A preliminary section surveys prior studies on the role of patent protection and alternative barriers to the imitation of product and process inventions. Special attention is paid to the role of pharmaceutical patents, with an especially high ratio of front-end discovery and testing costs to imitation costs, and to the emergence of a vibrant market providing venture capital to biotechnology firms. The effects of the 1980 Bayh-Dole Act on government-industry licensing and cooperation are evaluated. An analysis of published data reveals that biotechnology is unusual not only for the large amount of government-supported basic research, but also for the nearly equal amount of basic research conducted with private funds.

Human Genome Patents
The magnitude and emphasis of genome patenting are assessed through an analysis of 1,770 U.S. patents issued between September 1998 and June 2001 with "DNA" or "nucleic acid" plus "sequence" in their abstracts. Consistent with current U.S. Patent Office guidelines, none were found to cover gene sequences without additional utility claims. Among the 1,150 patents of U.S. origin, slightly fewer than half had potential human uses. The leading recipients of human-use gene sequence patents were universities, followed by over-the-counter public companies, non-profit institutions such as hospitals, private companies, foreign-owned companies, and large well-established U.S. corporations. Thus, DNA sequence patenting is concentrated among non-profit institutions and relatively small private enterprises.

Policy Concerns
The smaller private enterprises engaging in DNA sequence patenting and research are believed to be particularly sensitive to patent protection in justifying R&D investments, including both discovery research and the testing of substances for clinical uses.

The development of commercializable biotech products depends upon series of inventions, ranging from basic methods inventions, isolation of particular DNA sequences and their relation to therapeutically useful proteins, to specific product formulations. This intricate network of inventions and covering patents poses potential "holdup" problems. A large number of patents may be needed to produce a specific end product, generating substantial transaction costs. Also, bargaining stalemates may arise over the use of fundamental "upstream" inventions in the marketing of final products.

Balancing these concerns against the important incentives patents provide to perform biological R&D, the paper recommends supporting:

1. the existing policy of refusing patents on DNA sequences without evidence of utility;
2. narrow interpretation of DNA sequence patents' scope and/or implementation of the "doctrine of reverse equivalents" (restricting the patent to the invention disclosed);
3. continued exemption of research uses from patent enforcement; and,
4. a presumption that courts should favor licensing (at reasonable royalties) rather than injunction when one set of patents blocks the commercialization of health-enhancing "downstream" inventions.