Can patent duration hinder medical innovation
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Can patent duration hinder medical innovation Patrick Leoni1 · Alvaro Sandroni2
Received: 9 May 2015 / Accepted: 25 August 2016 / Published online: 2 September 2016 © Springer Science+Business Media New York 2016
Abstract We argue that, in the pharmaceutical industry, excessive patent duration can deter investments in innovative treatments in favor of me-too drugs. The point is that too-long durations foster incentives to collude to delay investments in R&D for innovative treatments. We give a set of sufficient conditions for which collusion is a subgame-perfect equilibrium; that is, the threat of punishing any deviator is credible. We then show that reducing current duration always breaks down market discipline, and so does an increase in duration for innovative treatments. Optimal patent duration must then be a trade-off between breaking down market discipline and rewarding innovation. Keywords Me-too drugs · Medical innovation · Patent duration · Collusion JEL Classification I1 · L1
Introduction A widespread tendency in the pharmaceutical industry is the large development of me-too drugs (that is, drugs that are small improvements on already patented treatments) instead of R&D attempts at medical breakthroughs (Ganuza et al. 2009; Gonzalez et al. 2015; United States Government Accountability Office 2006). A typical example is HIV/AIDS, where much-needed therapeutic vaccines (Klausner 2003) receive little attention in comparison to large investments in side treatments targeted at some particular symptoms (American Pharmaceutical 2007).
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Patrick Leoni [email protected] Alvaro Sandroni [email protected]
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Kedge Business School, Domaine de Luminy - BP 921, 13288 Marseille Cedex 9, France
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Department of Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, USA
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P. Leoni, A. Sandroni
For the particular case of HIV/AIDS again, those innovative treatments are difficult to develop, and they come at a high price and high risk of R&D failure (Kremer 2002; Kremer and Glennerster 2004; Leoni 2010, Ch. 7–8). Grootendorst and Di Matteo (2007) and Ito and Yamagata (2007) show that the patents system plays a critical role in fostering R&D investments in the pharmaceutical industry. Nonetheless, the patents’ system has never been blamed for the socially-detrimental domination of me-too drugs. Instead, the most compelling explanation for this domination so far is in Ganuza et al. (2009), where this phenomena is explained by inelasticity in demand and resulting proportionally larger reward associated with controlled risk of failure in the R&D process. Offit (2005) also argues that the risk and cost of R&D for innovative treatments (such as vaccines) are too high, compared to their market return. In sharp contrast, we argue that current patents’ systems are a major deterrent for investments in much-needed innovative treatments. Our point is that the current system provides strong and credible incentives f
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