Public Policy

Intellectual Property Rights and Innovation

That is the title of a 2016 NBER chapter by Heidi Williams and the subtitle is “Evidence from Health Care Markets“. Economic theory back to Nordhaus (1969) predicts that intellectual property rights increase the incentive for firms to invest in research and development and likely this would lead to more innovation. Proving these empirically, however, is a challenge. As Williams states:

In my view, this dearth of empirical evidence reflects two challenges: the difficulty of measuring specific research investments and the fact that finding any variation (much less “clean” or quasi‑ experimental variation) in patent protection is difficult.

The paper is interesting throughout, but I thought of special interest to life science was the importance of surrogate outcomes for incentivizing innovation. Because patents are typically 20 years in length, clinical trials which taking longer to read out lead to a shorter effective patent length (i.e., the time between FDA approval and the end of the patent). Williams describes an example from heart disease:

Heart disease is the leading cause of death in the United States, but the age‑ adjusted rate of death from heart disease has dropped by 50% since 1968. While factors such as the decline in smoking have contributed to this trend, much of the decline in heart disease has been attributed to improved pharmacological preventives and treatments for cardiovascular disease, including the development of beta‑ blockers, angiotensin‑ converting enzyme (ACE)‑ inhibitors, and statins…All of these drugs were approved on the basis of evidence that they reduced blood pressure and cholesterol levels—outcomes that can be measured much more quickly than morbidity and mortality…Some researchers have argued that without these surrogate endpoints, it is unclear whether these drugs would have reached the market as treatments for heart disease.

In short, the use of surrogate outcomes can help to spur R&D and get drugs to patients sooner. The key issue, of course, is whether the surrogate outcomes are valid predictors for the outcomes patients actually care about. Williams argues that “public research investments aimed at establishing and validating surrogate endpoints may have a large social return.”


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