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

Businessman walks off a cliff.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.

 

The Author

Kristina M. L. Acri née Lybecker

Kristina M. L. Acri née Lybecker is an Associate Professor of Economics at Colorado College in Colorado Springs, and Chair of the Department of Economics and Business. She earned a B.A. from Macalester College, with a double major in Economics and Latin American Studies, and received her Ph.D. in Economics in 2000 from the University of California, Berkeley. Dr.Acri's research analyzes the challenges surrounding intellectual property rights protection in innovative industries: incentivizing pharmaceutical research and development especially on neglected diseases, addressing the difficulties of strengthening intellectual property rights protection in developing countries, battling the problems related to pharmaceutical counterfeiting and the unique nature of protection for biotech therapies. Recent publications have also addressed alternatives to the existing patent system, the balance between pharmaceutical patent protection and access to essential medicines, and the markets for jointly produced goods such as blood and blood products. Kristina has testified in more than a dozen states on the economics of pharmaceutical counterfeiting. She has also worked with US Food and Drug Administration, Reconnaissance International, PhRMA, the National Peace Foundation, the OECD, the Fraser Institute, the Macdonald Laurier Institute, and the World Bank, on issues of innovation, international trade, and corruption.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 12 Comments comments.

  1. angry dude April 3, 2015 10:43 am

    “…patents facilitate access to VC financing…”

    Not anymore

    In fact, publicly disclosing key technologies in patents or published patent applications, which otherwise can be kept as trade secrets, jeopardizes company’s future.
    VCs are not stupid and should understand it by now.
    Trade secrets rule nowadays (assuming they can be maintained)

  2. Anon April 3, 2015 12:17 pm

    angry,

    Your constant mantra wears thin.

    I will fully grant you that a serious discussion of how best to protect the innovation efforts of an individual or a company include Trade Secrets.

    But your near-hysterical “run away from patents” is simply too much and too wrong to be taken seriously.

    Just because you have been burned in the kitchen does not mean that the stove is off limits to everyone. Please stop being so reactionary.

  3. angry dude April 3, 2015 12:48 pm

    Anon,

    I am not hysterical anymore – just realistic and very cynical

    Looking at many of the recently issued “high-tech” patents it’s hard not to notice that they describe (future) products without disclosing a single useful internal implementation detail, and even if they do I have plenty of doubts that those descriptions can lead to something workable in practice.
    Patents are all about bs legal games today – and nothing else.
    If you can afford this expensive bs then good for you.
    But I just can’t and even when I can I won’t enjoy it.

  4. Gene Quinn April 3, 2015 1:59 pm

    angry dude-

    You can believe that patents do not facilitate access to VC money if that makes you feel better, but don’t expect anyone else to share in that delusion. The truth, whether you want to accept it, is that VCs still demand patent protection. Anyone who says otherwise is not being honest.

    -Gene

  5. angry dude April 3, 2015 2:40 pm

    Gene,

    I’m sure many VCs still want some bs (non-enabled) patent application(s) filed so they can put “patent pending” sticker on a product or service.
    But if I were applying for VC funding today, I would explain to them very carefully the implications of publicly disclosing internals of the actual technology as opposed to keeping it a trade secret.
    Unless they want to lose money, I’m sure they will listen very carefully

    Maybe you can invite some real high-tech VC to comment on this issue in your blog ?

    Just not Paul Graham type of VC (with all due respect).. although it might be interesting to know what he thinks about patents vs trade secrets in the current anti-patent environment

  6. Matt Waters April 3, 2015 5:35 pm

    I just listened to the two “This American Life” episodes and this site was mentioned. First of all, I don’t know how anybody could say the patent system isn’t fundamentally broken. That’s especially true for software patents, but the 2013 episode even mentioned a claim for “any system which monitors physiological systems.” Not to mention the patent for making toast which was somehow granted in 2000. These are not software systems.

    There are many legislative proposals, but the plain text of the patent statutes makes it absurd any such “reform” is necessary in the legislative language. The plain language is that it’s non-obvious to someone skilled in the art. The, well, obvious question is, if these patents were non-obvious, how is there so much unintentional infringement? In the case with Intellectual Ventures’ patent featured in “This American Life,” the defendants named in the lawsuit numbered dozens at least. Truly none of the defendants used the patent publication for their idea and all somehow stumbled on to the same idea according to the plaintiff, but the idea was still “non-obvious.”

    So, I wouldn’t say this particular article is incorrect, per se. But it, at best, rearranged deck chairs on the Titanic. The “overburdened and underfunded USPTO” is a problem of the USPTO and Federal District’s own design, often granting thousands of patents with the same claim. And indeed, it’s false to say “if VC’s want it therefore it must be good.” VC money, or a version thereof, are behind Intellectual Ventures and other trolls. A true argument needs to be made from an overall economic efficiency perspective, not on one narrow interest.

    Finally the argument is faulty for conflating “patents” with “intellectual property,” particularly IP in India and China. I have no issues with most laws for copyrights, trademarks and trade secrets. Patents have far greater monopolistic power and each of the areas need to be evaluated individually for overall economic efficiency.

  7. angry dude April 3, 2015 9:09 pm

    Matt Waters,

    Perhaps you don’t know, but patent system in US was envisioned by the Founding Fathers NOT for short term economic efficiency, but for “promoting the progress” of humanity
    The question you need to ask when you read any patent is this: does this teach something new and sufficiently unobvious to justify a short-term exclusive right for patent holder in the name of promoting the progress in the longer run ?
    AND you need to be honest when answering this question…

  8. aldo April 4, 2015 9:05 am

    with all due respect,

    i had a simple idea taken from me by a bully company – life seemed upside down for many years – by grace we prevailed & i was overcome by the reality that if i could barely survive how would others have a fair chance… cbs news did a short piece: http://www.x-itproducts.com/news/

    ideas are another type of property.

    what would the world be like if a large property owner could take your small property just because the rules did not prevent it or were so complex and costly to enforce that you had not chance to stop it… the world would be owned by a few bullies and everybody else would be relegated to paying unfair rent & enslaved until a revolution happened…

    as for the betterment of society, even a small idea that is applied so as to provide definable benefit to others deserves protection – simply because it makes life better for others… & when pursued by an individual or small entity serves as a form of wealth distribution based on service to others… that ability was part of what the founding fathers understood – jefferson was an inventor:)

    markets are not efficient or omniscient, especially when it comes to the application of ideas…so when an individual or small entity takes a chance, protection is critical or all is for not…

    after my experience, the law firm advised me it would be better to buy a lottery ticket than to try to profit from a better idea – this is not what our founding fathers had intended nor a road that will lead us anywhere better…

    hope this is helpful.

    blessing & be innovative,

    aldo
    x-it inventor
    big lather inventor
    advocate

  9. Anon April 4, 2015 9:45 am

    Perhaps angry dude does not know that the term “promote the progress” was not a term limited to the sense of linear improvements in progress as so often is understood in the modern world, but also had the rather vanilla sense of merely promoting the capture knowledge, as the meaning of “an advertising promotion” carries.

    I have posted previously that this understanding must be kept in mind because the nature of innovation is not in fact linear.

    Innovation may build on the shoulders of those who have gone before, but which rather mundane aspect of today’s understanding will serve as the critical piece tomorrow is not – and cannot – be known a priori.

    I have also posted with an analogy that might make this thought easier to grasp: comparing and contrasting the paving of roads to the paving of a parking lot. Far too often people want to have in their minds a picture of a beautiful vista of a well coordinated street system. But that is just not the reality of how innovation works and how the system for promoting innovation works. Instead, the rather urban-blight view of a massive paved parking lot is the more appropriate visage. To be able to turn on a dime – at any time, and in any direction – is what the goal of “promotion” entails. Those wanting the “street” view often do not realize this distinction.

  10. Anon April 4, 2015 9:55 am

    To aldo at 8,

    Respectfully, the answer to your quandary is the exact opposite of what we are seeing today: make the patent right stronger and more easily enforced – not weaker and more uncertain.

    Unfortunately, there is a drumbeat that the mere idea of enforcing one’s right must be a “bad thing” in today’s world. There is a drumbeat that infringement is a mere “business-thing” and should be treated as merely a token offense, a type of speeding ticket or jay-walking ticket; veritably, as on par with other business ideas of a “broken promise” that can be chosen easily and rather painlessly when it suits the exigencies of convenience, with barely a pittance.

    But there is no such thing as a free lunch, and the current “policy” desires of this weakened state of patent strength necessarily carry a trailing edge that creates undesired market consequences.

    The answer to today’s oft portrayed problems with patents are counter-intuitively captured in the reverse direction of strengthening both the power and the respect of patents. The nigh-constant drum beat of denigration is simply the wrong beat to follow.

  11. angry dude April 4, 2015 5:32 pm

    to anon @ 9:

    Perhaps you don’t know why I am so angry ?
    I filed my patent application in 2002, it was published in 2004 and issued in 2006 – right after EBay decision. I knew back then that I was already screwed but still was astonished looking at the stream of anti-inventor events in the following years…
    It’s like you pay full price for a 20-year property lease but then they change the law to allow any bully to come and live on your property for free without being evicted.
    With sh1t like that who wants to invest in patent rights ?

  12. Anon April 5, 2015 10:05 am

    angry dude,

    As I posted at 2, your mantra has worn thin, and you need to realize that you are being irrational. Yes, I do understand that you feel that your anger is justified because of what happened to you. But much like the Snyder brothers, you are letting your emotions swallow your logic and understanding of the law.

    Please stop the rants. These only harm your credibility.