Abstract:
This chapter examines the critical role of patent protections in biopharmaceutical innovation, particularly in the context of COVID-19 vaccine development. It highlights the high costs and risks associated with drug development, where patents provide essential incentives for investment. The COVID-19 IP waiver aimed to enhance access to vaccines but risked undermining future innovation by weakening market exclusivity. Historical lessons from Japan illustrate how reduced patent protections can stifle R&D investment and innovation. The chapter also explores U.S. policy changes, such as expanding “march-in rights,” which could further discourage private sector involvement in drug development. Ultimately, the author argues that robust patent protections are crucial for sustaining pharmaceutical innovation and ensuring long-term public health benefits.
Chapters in the Book:
- Part 4- The Hidden Costs of Free Stuff
- Chapter 14- Free Stuff Gets Dangerous (p.294-308)
Summary
14. Free Stuff Gets Dangerous
When intellectual property (IP) skeptics talk about the concerns of strong property rights, they sometimes make an exception for IP rights (in particular, patents) concerning the pharmaceutical and biotech industry. Usually, this is due to the overwhelming empirical evidence supporting patent protection in the pharmaceutical industry. Typically, drug development is associated with high costs and risks in R&D. For example, developing a new biopharmaceutical product costs over $2.8 billion and usually takes more than a decade. However, replicating successful drugs is significantly cheaper. Thus, the risk of appropriation is very high. In short, empirical studies show that pharmaceutical firms view patent protection as essential for R&D investments, more so than other industries. Furthermore, evidence on the advocacy reveals that biopharma companies consistently and uniformly advocate for strong patent protection. (Unlike the information technology sector, which has mixed positions.) Additionally, studies find that stronger patent protections in developed countries correlate with increased local pharmaceutical R&D investment. The empirical literature also aligns with the theory that investors typically require a robust patent portfolio to fund expensive R&D. This goes to show that the biopharmaceutical industry, including large integrated firms, is heavily reliant on patents.
Despite this overwhelming evidence, some policymakers argue patents are unnecessary for biopharma innovation, dismissing them as unjustified profits for private industry. Pressure to weaken patent protections typically comes from the desire for lower drug prices. However, these potential short-term benefits may come at the costs of disincentivizing investment in biopharma and reducing the development of new drugs. To preserve these incentives globally, all World Health Organization-countries signed the TRIPS agreement [1] in 1995. It set global minimum patent protections to support pharmaceutical innovation. However, recent U.S. policy actions, like waiving COVID-19 vaccine patents and expanding Bayh-Dole “march-in” rights[2], threaten to weaken these protections. Concerningly, this policy shift reflects an expanding trend of IP scepticism that has already reduced protections in content and technology markets.
14.1. The Covid-19 IP Waiver
In October 2020, India and South Africa proposed a TRIPS waiver to ease access to COVID-19 medical products by weakening patent protections. The waiver idea followed years of advocacy from developing nations, claiming IP rights conflict with human rights in healthcare access. However, the U.S. and other innovation-leading countries opposed the waiver, arguing it would reduce incentives for future pharmaceutical investments. Their proposal involved alternative access solutions like subsidies and differential pricing.
When the U.S. Trade Representative supported the waiver in May 2021, it effectively reversed the long-standing U.S. policy. After gaining more support for the waiver from Brazil, India, and South Africa, the WTO adopted it in June 2022, applying it to patented inventions for COVID-19 vaccine production and supply. In February 2023, the U.S. Trade Representative requested a study on expanding the waiver to include COVID-19 diagnostics and therapeutics. However, later that year, a U.S. International Trade Commission report failed to find evidence that IP rights posed a significant impediment to access to COVID-19 diagnostics and therapeutics.
Initially, some commentators expressed doubt that the World Trade Organization (WTO)’s IP waiver would significantly improve access to COVID-19 vaccine technologies. Given that pharmaceutical innovation relies on the patent system, the IP waiver has three adverse impacts on the development of new vaccines. First, the waiver could discourage investment in new vaccines by undermining market exclusivity, essential for justifying high-cost, high-risk projects. Vaccine development demands massive capital, specialized facilities, and expert personnel. Without secure IP protection, there is significant doubt that these companies could have justified making these exceptionally large investments. Thus, an IP waiver would encourage pharmaceutical firms to shift resources away from vaccine development and toward other categories. Second, smaller firms might struggle to attract capital without patents, because they often rely on partnerships with larger companies for commercialization. Specifically, successful COVID-19 vaccines like BioNTech/Pfizer, Moderna, and AstraZeneca depended on IP protection to secure partnerships that combined complementary expertise and resources. Here, patents play a crucial role in safeguarding knowledge assets in partnerships and ensuring efficient collaboration between research institutions and commercial firms. Third, the IP waiver may not enhance third-party vaccine production, because patent owners are unlikely to share vital technical know-how under compulsory licenses. In other words, retaining patent protections supports structured partnerships that safeguard intellectual assets while enabling knowledge. Given these adverse impacts, the waiver could deter biopharmaceutical companies from investing in vaccine development. Looking forward, the COVID-19 IP waiver risks undermining private sector investment, potentially slowing innovation in the biomedical field.
14.2. How Patents Helped End the Covid-19 Pandemic
Advocates for the IP waiver claimed patents hindered COVID-19 vaccine development, but closer examination shows patents actually facilitated innovation and distribution. For example, the BioNTech/Pfizer vaccine emerged from decades of mRNA research supported by public and private funding. BioNTech was a small biotech startup, which secured funding in 2008. As part of these efforts, BioNTech had partnered with Pfizer on the development of an mRNA-based vaccine against influenza. This partnership combined BioNTech’s R&D expertise with Pfizer’s large-scale testing, production, and distribution capabilities, accelerating vaccine development. Crucially, BioNTech’s patent portfolio safeguarded its innovations and enabled collaboration with Pfizer. Therefore, patents played a key role in protecting specialized knowledge and fostering partnerships that expedited the COVID-19 vaccine’s development. IP rights provided BioNTech and Pfizer with legal exclusivity, justifying their costly vaccine development by protecting against imitators who did not incur R&D costs. Ultimately, this partnership accelerated the vaccine’s development.
Nonetheless, some argue short-term access to drugs can outweigh long-term innovation incentives, but COVID-19 showed patents can support both access and innovation. The IP-waiver was adopted only as the pandemic eased, meaning patents governed the critical phases of vaccine development and distribution. The coronavirus pandemic therefore provides an opportunity to assess whether patent protections impeded access as proponents of the IP-waiver have suggested. The answer is, clearly not. There are several reasons. First, developed countries donated COVID-19 vaccine doses to developing nations through the COVAX program. Second, leading vaccine producers pledged about 3.5 billion doses at discount to lower-income countries. Third, some companies licensed their technology to producers in developing countries, enhancing local manufacturing capacity. It is important to observe that patents facilitated these transactions and therefore expanded access. Ultimately, this structured licensing enabled knowledge transfer, ensuring licensees could effectively use the technology, increasing access.
14.3. Proposed Expansion of “March-In Rights”
The Bayh-Dole Act allows recipients of federal research funding, mainly academic institutions, to patent innovations developed with that funding. At its core, the Act aims to leverage private market incentives to turn federally funded research into commercially viable products, crucial for biotech development. Thus, it supports a biotech ecosystem, combining public funding and partnerships between start-ups and large pharmaceutical firms. However, the Act includes a “march-in rights” provision which enables the government to compel patent licensing in cases of unmet health or safety needs. Since 1980, the government has never exercised march-in rights. However, recently, the government has reconsidered using march-in rights as a tool to regulate drug prices. This policy shift has led to the creation of a working group of the Department of Commerce and the Department of Health and Human Services to develop criteria for exercising march-in rights. Draft guidelines released in December 2023 propose considering factors like product pricing when determining the use of march-in rights.
Advocates argue that march-in rights should be used if drug prices from federally funded research are deemed unreasonably high. This position treats march-in rights as a form of price regulation. Importantly, this conflicts with the Bayh-Dole Act’s original purpose of encouraging private investment. Nonetheless, the statute’s authors opposed this broad interpretation. It should be mentioned that expanding march-in rights would create legal uncertainty and discourage companies from partnering with federally funded institutions. In 1997, the National Institutes of Health warned that broad use of march-in rights could reduce incentives for developing new healthcare products.
Historical experience supports concerns that expanded use of the march-in right would have unfavorable effects on private investment in the biopharmaceutical industry. Before the Bayh-Dole Act, federal research could not be patented or licensed exclusively to private entities. Federal policies aimed to promote competition and innovation, but private companies showed little interest in developing research without exclusivity. By 1980, only 5% of federally owned patents were being exploited, indicating that open-access policies led to minimal development. Adopting broad march-in rights today would similarly deter firms from partnering with academic institutions due to the risk of price regulation. This would effectively reverse the intent of the Bayh-Dole Act and significantly hinder partnerships that convert research into commercial products. As a result, the public health system would suffer from lower innovation rates.
14.4. Cautionary Lessons from Japan
It is possible to argue that even if patent protections were weakened, pharmaceutical innovation could still continue at strong levels. However, a world with stronger patent protections might also lead to more robust pharmaceutical innovation. In the end, the evidence remains inconclusive. Experiences in Japan provide strong reasons for caution in making policy changes that would significantly cut back on patent rights. During the 1970s and 1980s, the Japanese pharmaceutical industry was a world leader in drug innovation. Japan’s share of new chemical entities (a measure of new drugs) released, declined significantly after the 1980s, from 29% in 1981–1990 to 7% in 2011–2020. By contrast, during this same period, the U.S. share of new chemical entities increased from 31% during 1971–1980 to 64% during 2011–2020. During approximately the same period, Japan’s pharmaceutical industry also saw a decline in both R&D investment and innovation outputs.
While several non-IP-related factors contributed to the decline of the Japanese pharmaceutical industry, it happens to coincide with an effective devaluation of pharmaceutical patents during the same period. Starting in 1982, Japan introduced strict price controls for pharmaceuticals. This reduced the value of patent protection by replacing market-determined prices with government-imposed ones. Despite responding to demands for lower drug prices, they may have actually contributed to a sharp decline in investment in the pharmaceutical industry. As price controls reduced expected returns on drug development, capital shifted away from the Japanese pharmaceutical sector. Over time, this shift may have caused a significant net welfare loss for Japanese consumers, with adverse effects on public health.
The U.S. Inflation Reduction Act of 2022 introduced price controls for certain branded drugs. Similar to Japan, this could impact long-term innovation in the U.S. life sciences market. Price controls may provide political benefits in the short term, However, they risk harming the long-term pharmaceutical innovation ecosystem in the U.S.
14.5. Closing Thoughts
Theory, evidence, and history speak against an IP-skeptical approach in biopharmaceutical policy. This could give rise to significant adverse impacts on innovation, competition, and public health. Unlike many information technology markets, biopharmaceuticals require secure IP rights to protect against imitators. Moreover, patents are essential for start-ups that convert scientific research into drugs and therapeutics. This process is supported by the 1980 Supreme Court ruling and the Bayh-Dole Act. Recently, proposals like the COVID-19 IP waiver and expanded march-in rights threaten this delicate system. Such policy changes could disrupt vital transactional relationships within the biopharmaceutical ecosystem. Consequently, reducing or eliminating patent protections conflicts with evidence-based innovation policy, which focuses on long-term results rather than ideological arguments.
[1] The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement on IP rights signed by all members of the World Trade Organization (WTO).
[2] March-in rights allow the U.S. government to intervene and grant licenses to other entities if the original patent holder fails to meet certain obligations. These rights are typically invoked when the government funds the development of a patented invention.
