NCPA - National Center for Policy Analysis

Innovation and Patent Protection

November 15, 2001

The willingness of governments to override the protection of intellectual property embodied in patent law may lead to less innovation in the future, warns Frank R. Lichtenberg of the Columbia University Graduate School of Business and National Bureau of Economic Research.

This is true particularly in pharmaceutical research, where certain governments have shown a willingness to ignore patent protections when the price or availability of a desired drug concerns them. For example, Canada ordered the anti-anthrax drug Cipro from a generic manufacturer at one point, later ending the practice and going back to the patent owner. In the United States, Sen. Charles Schumer proposed ignoring the patent, although nothing came of the proposal.

Weakening patent protection may have a chilling effect on private research and development investment, and therefore reduce the health and wealth of future generations. That is because spending on R&D depends on the expectation of future returns. And the actions of government can affect those expectations:

  • Thus, for example, the threat of pharmaceutical price controls in the Clinton administration's 1992-93 health care reform proposals had a significant negative effect on pharmaceutical R&D investment.
  • The threat of Clinton health care reform reduced the market value of pharmaceutical firms by 44 percent during the period from September 1992 to October 1993, estimate economists Sara Ellison and Wallace Mullin.
  • On the other hand, passage of the Orphan Drug Act in 1983 led to a twelvefold increase in the number of drugs for rare diseases brought to market.

Pharmaceutical firms rely more on patent protection than firms in other industries. Edwin Mansfield found that 65 percent of pharmaceutical inventions would not have been introduced if patent protection could not have been obtained; for the 11 other industries he studied, this percentage was only 8 percent.

Source: Frank R. Lichtenberg, "Cipro and the Risks of Violating Pharmaceutical Patents," Brief Analysis No. 380, November 15, 2001, NCPA.

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