Do Fixed Patent Terms Distort Innovation?

...there is less R&D investment in drugs that target patient groups with longer commercialization lags, as proxied by higher ... survival rates, for which the effective duration of patent protection is shorter.

Patents award innovators a fixed period of market exclusivity, usually 20 years. However, in industries such as the pharmaceutical industry, firms file patents at the time of invention rather than at the time of first sale, so effective patent terms vary depending on the delay between invention and commercialization. When the delay is substantial as a result of lengthy clinical trials, the effective patent term can sometimes be quite short. In the extreme, inventions that would take longer than 20 years to commercialize receive effectively no patent protection.

In Do Fixed Patent Terms Distort Innovation? Evidence from Cancer Clinical Trials (NBER Working Paper No. 19430), authors Eric Budish, Benjamin Roin, and Heidi Williams explore how the delay between innovation and commercialization affects R&D incentives in the pharmaceutical industry.

Using a newly constructed dataset on cancer clinical trial investments since 1970, the authors' empirical work takes advantage of the fact that the length of a clinical trial is directly related to the survival time of the patient. Clinical trials are shorter - and hence effective patent terms longer - for drugs targeting late-stage cancer patients relative to drugs targeting early-stage cancer patients or cancer prevention. The authors find that there is less R&D investment in drugs that target patient groups with longer commercialization lags, as proxied by higher five-year survival rates, for which the effective duration of patent protection is shorter. A ten percentage point increase in the five-year survival rate for a given diagnosis is associated with an 8.7 percent decrease in R&D investment. Based on this and various sources of complementary evidence, the authors conclude that because of the distortions in R&D allocation that result from differential effective patent terms, current R&D spending does not yield as many potential life-years saved as it might if there were longer effective terms for R&D on early-stage cancer and cancer prevention.

--Claire Brunel