What if we don’t have sufficient intellectual property rights?

A significant body of economic work establishes that strong, effective intellectual property rights foster innovation, especially in high tech industries. Moreover, innovation creates sustained economic growth and economic growth creates jobs. Accordingly, any commitment to U.S. jobs must start with a commitment to effective IP rights. But what if those intellectual property rights are insufficient? What if patent protection isn’t effect or transparent or enforced? The answer is: investments in innovation won’t happen and neither will job creation.

Intellectual property rights, especially patents, not only safeguard a firm’s innovation, they also serve as a signal for potential venture capital (VC) financing. In a 2009 study investigating how patent applications and grants held by new firms impact their ability to attract VC financing, the authors find that investors rely on patents as signals to overcome the tremendous uncertainty involved in assessing the prospects of potential portfolio companies.[1] The study finds that in the presence of patent applications, VC financing occurs earlier. Confirming the findings of earlier work[2], this study further establishes that for startup firms the patenting process generates valuable quality signals which assist them in obtaining funding. Patents are believed to reduce information asymmetries between financiers and innovators, thus spurring market entry by startups. Fundamentally, patents facilitate access to VC financing, market entry and job creation. Without patents and an effective IP environment, the process stalls and, in some cases, firms may never emerge.

Admittedly it is difficult to find evidence of “what might have been”. However, there are some striking examples of firms unable to secure a patent that lost their VC funding and disappeared. Case in point, Innate Immune. As described in an earlier IPWatchDog contribution[3], Stanford immunologist Sam Strober developed a new treatment for Lupus and founded the startup Innate Immune. After recruiting the former director of clinical research at Genentech, Dr. Andrew Pearlman, to be the CEO, Innate Immune lined up venture capitalists ready to commit $30 million to develop the drug. Unfortunately the firm was unable to secure a patent due to the slow pace of approvals at the underfunded, overburdened U.S. Patent Office. The venture capitalists withdrew their funding and the firm, the drug and the jobs never materialized. No patent. No investment. No firm. No jobs.

Inadequate intellectual property protection is also an issue for large, established firms. Consider the following example from the biopharmaceutical industry. Pfizer’s Viagra was originally developed with the intent of treating high blood pressure and cardiovascular disease, due to the drugs ability to enlarge blood vessels and increase blood flow. Although initial studies demonstrated that the drug had minimal effects on critical cardiovascular parameters, the drug was approved in 1998 to treat erectile dysfunction. Almost two decades later, a new study now suggests that Viagra (and other PDE-5 inhibitors) may also have cardioprotective effects. Specifically, “continuous use of Viagra improves cardiac performance in patients, cardiac hypertrophy, and heart failure, conditions where the cardia pump function is compromised”.[4]

[Kristina]

While this could be wonderful news for patients with cardiovascular disease, it is highly likely that the potential of PDE-5 inhibitors may never be realized. Demonstrating that Viagra and other PDE-5 inhibitors is a safe and effective treatment for cardiovascular disease would require a lengthy clinical trial program with a large number of patients who would be monitored over many years. Given that such a study would likely cost hundreds of millions of dollars and Viagra will soon be off-patent, it is unlikely that Pfizer would be willing to invest the necessary funds to conduct the clinical trials even with this evidence of effectiveness.

In this case, the stumbling block is an issue of incremental innovation. All innovation is valuable to the economy and to patients, whether breakthrough medical discoveries or incremental innovations. Notably, most existing therapies currently in use are incremental innovations.   As evidence of their therapeutic value, a recent study finds that close to one-quarter of the therapeutic indications described are treated by drugs initially indicated to treat a different disease or condition.[5] The value of such innovation is best measured through the improved health outcomes for patients and the evidence suggests that PDE-5 inhibitors hold great promise for patients. It is essential to recognize the value of these treatments and the benefits they will provide to patients. They must be protected and incentivized.

Moreover, these are drugs whose safety and efficacy has been established. The healthcare system can realize significant savings from capitalizing on new indications for existing therapies. While the development of a new drug is currently estimated to cost nearly $2.6 billion, the investigation of this promising new use will cost a fraction of that amount.[6]   Without intellectual property protection to incentivize this development, the treatment and the jobs it would generate are lost.

Finally, international evidence further supports the claim that insufficient IP protection harms jobs. According to a 2014 study by Shapiro and Mathur, if India improved their levels of intellectual property protection, equivalent to those of China, annual foreign direct investment inflows would increase by 33% annually. The study goes on to claim that in the pharmaceutical industry alone, the increased investment would generate 18,000 new jobs. Further, if India achieved levels of intellectual property protection equivalent to the United States, the benefits would be greater still, increasing FDI by as much as 83% annually by 2020. Again, in the pharmaceutical industry alone, this would result in the creation of 44,000 new jobs. [7]

Without adequate IP protection, innovators are unable to attract investments, business creation is slowed and jobs lost. Evidence suggests that this same story plays out, albeit with differing dynamics, across all sorts of firms and all nations. Economic prosperity relies on job growth, and it is clear that strong, effective IP rights have a role to play in creating both.

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[1] Haeussler, Carolin, Dietmar Harhoff, and Elisabeth Muller. “To Be Financed or Not – The Role of Patents for Venture Capital Financing,” GESY discussion paper no.253, Governance and the Efficiency of Economic Systems, January 2009.

[2] Hall, B.H., and R.H. Ziedonis. “The Patent Paradox Revisited: An empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995,” RAND Journal of Economics, 32, pp.101-128.

[3] Nothhaft, Henry. “Start-Up Reality: No Patent = No Funding, No Business, No Jobs,” IPWatchDog, January 27, 2011.

[4] LaMattina, John. “Viagra Protects the Heart – Now What?” Forbes, October 21, 2014. Available at: http://www.forbes.com/sites/johnlamattina/2014/10/21/viagra-protects-the-heart-now-what/

[5] Wastilla, L.J., M.E. Ulcickas, and L. Lasagna. “The World Health Organization’s Essential Drug List. The Significance of Me-Too and Follow-On Research,” Journal of Clinical Research and Drug Development, 1989, vol.3, pp.105-115.

[6] Tufts Center for the Study of Drug Development. “Cost to Develop and Win Marketing Approval for a New Drug Is $2.6 Billion,” November 18, 2014.

[7] Shapiro, Robert J. and Aparna Mathur. “How India Can Attract More Foreign Direct Investment, Create Jobs, and Increase GDP: The Benefits of Respecting the Intellectual Property Rights of Foreign Pharmaceutical Producers,” SONECON, January 2014.