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Patents in the Knowledge-Based Economy Effects of Research Tool Patents and Licensing on Biomedical Innovation1 John P. Walsh University of Illinois at Chicago and Tokyo University Ashish Arora Carnegie Mellon University Wesley M. Cohen Duke University ABSTRACT Over the last two decades changes in technology and policy have altered the landscape of drug discovery. These changes have led to concerns that the patent system may be creating difficulties for those trying to do research in biomedical fields. Using interviews and archival data, we examine the changes in patenting and licensing in recent years and how these have affected innovation in pharmaceuticals and related biotech industries. We find that there has in fact been an increase in patents on the inputs to drug discovery (“research tools”). However, we find that drug discovery has not been substantially impeded by these changes. We also find little evidence that university research has been impeded by concerns about patents on research tools. Restrictions on the use of pat 1 We would like to thank the Science, Technology, and Economic Policy Board of the National Academy of Sciences, and the National Science Foundation (Award No. SES-9976384) for financial support. We thank Jhoanna Conde, Wei Hong, JoAnn Lee, Nancy Maloney, and Mayumi Saegusa for research assistance. We would like to thank the following for their helpful comments on earlier drafts of this chapter: John Barton, Bill Bridges, Mildred Cho, Robert Cook-Deegan, Paul David, Rebecca Eisenberg, Akira Goto, Lewis Gruber, Janet Joy, Robert Kneller, Eric Larson, Richard Levin, Stephen Merrill, Ichiro Nakayama, Pamela Popielarz, Arti Rai, and participants in the STEP Board Conference on New Research on the Operation and Effects of the Patent System October 22, 2001, Washington, D.C. and the OECD Workshop on Genetic Inventions, Intellectual Property Rights and Licensing Practices, January 24-25, 2002, Berlin, Germany, as well as the School of Information Seminar at University of Michigan.
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Patents in the Knowledge-Based Economy ented genetic diagnostics, where we see some evidence of patents interfering with university research, are an important exception. There is, also, some evidence of delays associated with negotiating access to patented research tools, and there are areas in which patents over targets limit access and where access to foundational discoveries can be restricted. There are also cases in which research is redirected to areas with more intellectual property (IP) freedom. Still, the vast majority of respondents say that there are no cases in which valuable research projects were stopped because of IP problems relating to research inputs. We do not observe as much breakdown or even restricted access to research tools as one might expect because firms and universities have been able to develop “working solutions” that allow their research to proceed. These working solutions combine taking licenses, inventing around patents, infringement (often informally invoking a research exemption), developing and using public tools, and challenging patents in court. In addition, changes in the institutional environment, particularly new U.S. Patent and Trademark Office (USPTO) guidelines, active intervention by the National Institutes of Health (NIH), and some shift in the courts’ views toward research tool patents, appear to have further reduced the threat of breakdown and access restrictions, although the environment remains uncertain. We conclude with a discussion of the potential social welfare effects of these changes in the industry and the adoption of these working solutions for dealing with a complex patent landscape. There are social costs associated with these changes, but there are also important benefits. Although we cannot rule out the possibility of new problems in the future, our results highlight some of the mechanisms that exist for overcoming these difficulties. INTRODUCTION There is widespread consensus that patents have long benefited biomedical innovation. A forty-year empirical legacy suggests that patents are more effec- 2 See Scherer et al. (1959), Levin et al. (1987), Mansfield (1986), and Cohen et al. (2000). For pharmaceuticals, there is near universal agreement among our respondents that patent rights are critical to providing the incentive to conduct R&D. Indeed, data from the Carnegie Mellon Survey of Industrial R&D (cf. Cohen et al., 2000) show that the average imitation lag for the drug industry is nearly 5 years for patented products, whereas for the rest of the manufacturing sector, the average is just over 3.5 years (p < 0.01). Moreover, recent evidence shows that the profits protected by patents constitute an important incentive for drug firms to invest in R&D (Arora et al., 2003).
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Patents in the Knowledge-Based Economy tive, for example, in protecting the commercialization and licensing of innovation in the drug industry than in any other.2 Patents are also widely acknowledged as providing the basis for the surge in biotechnology start-up activity witnessed over the past two decades.3 Heller and Eisenberg (1998) and the National Research Council (1997) have suggested, however, that recent policies and practices associated with the granting, assertion, and licensing of patents on research tools may now be undercutting the stimulative effect of patents on drugs and related biomedical discoveries. In this chapter, we report the results of 70 interviews with personnel at biotechnology and pharmaceutical firms and universities in considering the effects of research tool patents on industrial or academic biomedical research.4 We conceive of research tools broadly to include any tangible or informational input into the process of discovering a drug or any other medical therapy or method of diagnosing disease.5 Heller and Eisenberg (1998) argue that biomedical innovation has become susceptible to what they call a “tragedy of the anticommons,” which can emerge when there are numerous property right claims to separate building blocks for some product or line of research. When these property rights are held by numerous claimants (especially if they are from different kinds of institutions), the negotiations necessary to their combination may fail, quashing the pursuit of otherwise promising lines of research or product development. Heller and Eisenberg suggest that the essential precondition for an anticommons — the need to combine a large number of separately patentable elements to form one product—now applies to drug development because of the patenting of gene fragments or mutations [e.g., expressed sequence tags (ESTs) and single-nucleotide polymorphisms (SNPs)] and a proliferation of patents on research tools that have become essential inputs into the discovery of drugs, other therapies, and diagnostic methods. Heller and Eisenberg (1998) argue that the combining of multiple rights is susceptible to a breakdown in negotiations or, similarly, a stacking of license fees to the point of overwhelming the value of the ultimate product. Shapiro (2000) has raised similar concerns, using the image of the “patent thicket.” He notes that 3 For example, in one of our interviews, a licensing director for a large pharmaceutical firm said “Patents are critical for start-up firms. Without patents, we won’t even talk to a start-up about licensing.” 4 The National Research Council (1997) also considers the challenges for biomedical innovation posed by the patenting of research tools and upstream discoveries more generally. In a series of case studies, the National Research Council (1997, Ch. 5) documents pervasive concern over limitations on access due to the price of intellectual property and concern over the prospect of blocking of worthwhile innovations due to IP negotiations, but no instances of worthwhile projects that were actually blocked. 5 Examples include recombinant DNA (Cohen-Boyer), polymerase chain reaction (PCR), genomics databases, microarrays, assays, transgenic mice, embryonic stem cells, or knowledge of a target, that is, any cell receptor, enzyme, or other protein that is implicated in a disease and consequently represents a promising locus for drug intervention.
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Patents in the Knowledge-Based Economy technologies that depend on the agreement of multiple parties are vulnerable to holdup by any one of them, making commercialization potentially difficult.6 The argument that an anticommons may emerge to undercut innovation emphasizes factors that might frustrate private incentives to realize what should otherwise be mutually beneficial trades. Merges and Nelson (1990) and Scotchmer (1991) have argued, however, that the self-interested use of even just one patent— although lacking the encumbrances of multiple claimants characterizing an “anticommons”—may also impede innovation where a technology is cumulative (i.e., where invention proceeds largely by building on prior invention). An example of such an upstream innovation in biomedicine is the discovery that a particular receptor is important for a disease, which may make that receptor a “target” for a drug development program.7 A key concern regarding the impact of patents in such cumulative technologies is that “unless licensed easily and widely,” patents—especially broad patents—on early, foundational discoveries may limit the use of these discoveries in subsequent discovery and consequently limit the pace of innovation (Merges and Nelson, 1990).8 The revolution in molecular biology and related fields over the past two decades and coincident shifts in the policy environment have now increased the salience of this concern for biomedical research and drug innovation in particular (National Research Council, 1997). Drug discovery is now more guided by prior scientific findings than previously (Gambardella, 1995; Cockburn and Henderson, 2000; Drews, 2000), and those findings are now more likely to be patented after the 1980 passage of the Bayh-Dole Act and related legislation that simplified the patenting of federally supported research outputs that are often upstream to the development of drugs and other biomedical products. In this chapter, we consider whether biomedical innovation has suffered be- 6 The case of beta-carotene-enhanced rice (GoldenRice™) illustrates a potential anticommons/ thicket problem. This innovation involves using as many as 70 pieces of IP and 15 pieces of technical property spread over 31 institutions (Kryder et al., 2000). Under such conditions, Heller, Eisenberg, and Shapiro have all suggested that acquiring the rights to practice such an innovation may be prohibitively difficult. 7 For example, a Yale-Harvard collaborative group and researchers at Merck discovered (nearly simultaneously) that the immunophilin receptor FKBP might be important for immunosuppression, making it a target for research programs at Merck, Vertex (a biotech start-up), and Harvard Medical School that all tried to find chemicals that would bind to the receptor and thus could be used as drugs to suppress immune response (Werth, 1994). Successful development in this case would depend on combining the knowledge of the existence of the target with other innovations, particularly compounds that could modify the action of the target receptor. 8 Scotchmer (1991) focuses on the related issue of the allocation of rents between the holder of a pioneer patent and those who wish to build on that prior discovery, suggesting that there is no reason to believe that markets left to themselves will set that allocation in such a way that the pace of innovation in cumulative technologies is maximized. Barton (2000), in fact, suggests that the current balance “is weighted too much in favor of the initial innovator.” Scotchmer (1991) has suggested that ex ante deals between pioneers and follow-on innovators can, however, be structured to mitigate the problem.
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Patents in the Knowledge-Based Economy cause of either an anticommons or restrictions on the use of upstream discoveries in subsequent research. Notwithstanding the possibility of such impediments to biomedical innovation, there is still ample reason—and recent scholarship (Arora et al., 2003)—to suggest that patenting benefits biomedical innovation, especially via its considerable impact on R&D incentives or via its role in supporting an active market for technology (Arora et al., 2001). Although any ultimate policy judgment requires a consideration of the benefits and costs of patent policy, an examination of the benefit side of this calculus is outside the scope of our current study. In the second section of this chapter, we provide background to the anticommons and restricted access problems. The third section describes our data and methods. In the fourth section, we provide an overview of the results from our interviews and assess the extent to which we witness either “anticommons” problems or restricted access to intellectual property (IP) on upstream discoveries and research tools. To prefigure the key result, we find little evidence of routine breakdowns in negotiations over rights, although research tool patents are observed to impose a range of social costs and there is some restriction of access. In the fifth section of the chapter, we describe the mechanisms and strategies employed by firms and other institutions that have limited the negative effects of research tool patents on innovation. The final section discusses our findings and our conclusions. BACKGROUND Science and Policy Changes in the science underlying biomedical innovation, and in policies affecting what can be patented and who can patent, have combined to raise concerns over the impact of the patenting and licensing of upstream discoveries and research tools on biomedical research. Over the past twenty years, fundamental changes have revolutionized the science and technology underlying product and process innovation in drugs and the development of medical therapies and diagnostics. Advances in molecular biology have increased our understanding of the genetic bases and molecular pathways of diseases. Automated sequencing techniques and bioinformatics have greatly increased our ability to transform this understanding into patentable discoveries that can be used as targets for drug development. In addition, combinatorial chemistry and high-throughput screening techniques have dramatically increased the number of potential drugs for further development. Reflecting this increase in technological opportunity, the number of drug candidates in phase I clinical trials grew from 386 in 1990 to 1,512 in 2000.9 The consequence of these changes is that progress in biomedical research 9 We thank Margaret Kyle for making these data available to us.
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Patents in the Knowledge-Based Economy is now more cumulative; it depends more heavily than heretofore on prior scientific discoveries and previously developed research tools (Drews, 2000; Henderson et al. 1999). As the underlying science and technology has advanced, policy changes and court decisions since 1980 have expanded the range of patented subject matter and the nature of patenting institutions. In addition to the 1980 Diamond v. Chakrabarty decision that permitted the patenting of life-forms, and the 1988 Harvard OncoMouse patent that extended this to higher life-forms (and to a research tool), in the 1980s gene fragments, markers and a range of intermediate techniques and other inputs key to drug discovery and commercialization also became patentable. Moreover, Bayh-Dole and related legislation have encouraged universities and national labs, responsible for many such upstream developments and tools, to patent their inventions. Thus coincident changes in the science underpinning biomedicine and the policy environment surrounding IP rights have increased both the generation and patenting of upstream developments in biomedicine. Conceptual When is either an “anticommons” problem or restricted access to upstream discovery likely to emerge and why, and what are the welfare implications of their emergence? Consider the anticommons. The central question here, as posed by both Heller and Eisenberg (1998) and Eisenberg (2001), is, if there is a cooperative surplus to be realized in combining property rights to commercialize some profitable biomedical innovation, why might it not be realized? They argue that biomedical research and innovation may be especially susceptible to breakdowns and delays in negotiations over rights for three reasons. First, the existence of numerous rights holders with claims on the inputs into the discovery process or on elements of a given product increases the likelihood that the licensing and transaction costs of bundling those rights may be greater than the ultimate value of the deal. Second, when there are different kinds of institutions holding those rights, heterogeneity in goals, norms, and managerial practice and experience can increase the difficulty and cost of reaching agreement. Such heterogeneity is manifest in biomedicine given the participation of large pharmaceutical firms, small biotechnology research firms, large chemical firms that have entered the industry (e.g., DuPont and Monsanto), and universities. Third, uncertainty over the value of rights, which is acute for upstream discoveries and research tools, can spawn asymmetric valuations that contribute to bargaining breakdowns and provide opportunities for other biases in judgment. This uncertainty is heightened because the courts have yet to interpret the validity and scope of particular patent claims. Regarding the restriction of access to upstream discoveries highlighted by Merges and Nelson (1990; 1994), one can ask why that should be a policy concern. From a social welfare perspective, nothing is wrong with restricted access
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Patents in the Knowledge-Based Economy to IP for the purpose of subsequent discovery so long as the patentholder (or licensee) is as able as other potential downstream users to fully exploit the potential contribution of that tool or input to subsequent innovation and commercialization.10 This, however, is unlikely for several reasons. First, firms and, especially, universities are limited in their capabilities. Second, there is often a good deal of uncertainty about how best to build on a prior discovery, and any one firm will be limited in its views about what that prior discovery might be best used for and how to go about exploiting it. Consequently, a single patentholder or licensee is unlikely to exploit fully the research and commercial potential of a given upstream discovery, and society is better off to the extent that such upstream discoveries are made broadly available.11 For example, if there is a target receptor it is likely that there are a variety of lines of attack, and no single firm is likely capable of mounting or even conceiving of all of them. The notion that prior discoveries should be made broadly available rests, however, on an important assumption—that broad availability will not compromise the incentive to invest the effort required to come up with that discovery to begin with (cf. Scotchmer, 1991). In this chapter, we are therefore concerned with whether access to upstream discoveries essential to subsequent innovation is restricted. Restriction is, however, a matter of degree. If a discovery is patented at all, then it is to be expected that access will be restricted—reflecting the function of a patent. Indeed, any positive price for a license implies some degree of restriction. Therefore, we are concerned with more extreme forms of restricted access that may come in the form of exclusive licensing of broadly useful research tools, high license fees that may block classes of potential users, or decisions on the part of a patentholder to itself exploit some upstream tool or research finding that it developed. Historical The possibility that access to a key pioneering patent may be blocked, or that negotiations over patent rights might break down—even when a successful resolution would be in the collective interests of the parties concerned—is not a matter of conjecture. There is historical precedent. Merges and Nelson (1990) and Merges (1994), for example, consider the case of radio technology where the Marconi Company, De Forest, and De Forest’s main licensee, AT&T, arrived at an impasse over rights that lasted about ten years and was only resolved in 1919 10 That patents imply some type of output restriction due to monopoly is taken as given. The question here is whether there is any social harm if only one firm holds the right to exploit the innovation. 11 The premise of this argument, well recognized in the economics of innovation (Jewkes et al., 1958; Evenson and Kislev, 1973; Nelson, 1982), is that, given a technological objective (e.g., curing a disease) and uncertainty about the best way to attain it, that objective will be most effectively achieved to the extent that a greater number of approaches to it are pursued.
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Patents in the Knowledge-Based Economy when RCA was formed at the urging of the Navy. In aviation, Merges and Nelson argue that the refusal of the Wright brothers to license their patent significantly retarded progress in the industry. The problems caused by the initial pioneer patent (owned by the Wright brothers) were compounded as improvements and complementary patents, owned by different companies, came into existence. Ultimately, World War I forced the Secretary of the Navy to intervene to work out an automatic cross-licensing arrangement. “By the end of World War I there were so many patents on different aircraft features that a company had to negotiate a large number of licenses to produce a state-of-the-art plane” (Merges and Nelson, 1990, p. 891). Although breakdowns in negotiations over rights may therefore occur, rights over essential inputs to innovation are routinely transferred and cross-licensed in industries, such as the semiconductor industry, where there are numerous patents associated with a product and multiple claimants (Levin, 1982; Hall and Ziedonis, 2001; Cohen et al., 2000). In Japan, where there are many more patents per product across the entire manufacturing sector than in the United States, licensing and cross-licensing are commonplace (Cohen et al., 2002). Thus the historical record provides instances of both where the existence of numerous rights holders and the assertion of patents on foundational discoveries have retarded commercialization and subsequent innovation and where no such retardation emerged. The history suggests several questions. Have anticommons failures occurred in biomedicine? Are they pervasive? To what degree do we observe restricted access to foundational discoveries that are essential to the subsequent advance of biomedicine? What factors might affect biomedicine’s susceptibility (or lack thereof) to either anticommons or restrictions on the use of upstream discoveries in subsequent research? DATA AND METHOD To address these issues, we conducted 70 interviews with IP attorneys, business managers, and scientists from 10 pharmaceutical firms and 15 biotech firms, as well as university researchers and technology transfer officers from 6 universities, patent lawyers, and government and trade association personnel. Table 1 gives the breakdown of the interview respondents by organization and occupation. These interviews averaged over one and a half hours each. The interviews focused on changes in patenting, licensing activity and the relations between pharmaceuticals, biotechnology firms, and universities, and how patent policy has affected firm behavior. This purposive sampling was designed to solicit information from respondents representing various aspects of biomedical research and drug development (Whyte, 1984). We used the interviews to probe whether there has been a proliferation and fragmentation of patent rights and whether this has resulted in the failure to realize mutually beneficial trades, as predicted by the theory of anti
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Patents in the Knowledge-Based Economy TABLE 1 Distribution of Interview Respondents, by Organization and Occupation Pharmaceutical Biotech University Other IP lawyer 12 7 — 12 (7) Scientist 3 4 10 3 Business manager 9 7 3 — NOTE: “Other” includes outside lawyers (7) and government and trade association personnel. University technology transfer office personnel are classified as “business managers,” although some are also lawyers. Also, many of the lawyers and business managers were also R&D scientists before their current position. commons. We also looked for instances in which restricted access to important upstream discoveries has impeded subsequent research. In addition, we asked our respondents how these conditions may have changed over time, including whether the character of negotiations over IP rights have changed. Finally, we asked about strategies and other factors that may have permitted firms to overcome challenges associated with IP. FINDINGS Preconditions for an Anticommons Do conditions that might foster an “anticommons” exist in biomedicine? The essential precondition for an anticommons is the existence of multiple patents covering different components of some product, its method of manufacture, or inputs into the process through which it is discovered. We have no direct measure of the number of patents covering a new product. There has, however, been a rapid growth in biotechnology patents over the past fifteen years, from 2,000 issued in 1985 to over 13,000 in 2000.12 Such rapid growth is consistent with a sizable number of patents granted for research tools and other patents related to drug development. Our interview respondents also suggest that there are indeed now more patents related to a given drug development project. One biotechnology executive responsible for IP states: The patent landscape has gotten much more complex in the 11 years I’ve been here. I tell the story that when I started and we were interested in assessing the third party patent situation, back then, it consisted of looking at [4 or 5 named firms]. If none were working on it, that was the extent of due diligence. Now, it 12 http://www.bio.org/er/statistics.asp
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Patents in the Knowledge-Based Economy is a routine matter that when I ask for some search for third-party patents, it is not unusual to get an inch or two thick printout filled with patent applications and granted patents…. In addition to dealing with patents over the end product, there are a multitude of patents, potentially, related to intermediate research tools that you may be concerned with as well.” Almost half of our respondents (representing all three sectors of our sample: big pharmaceutical firms, small biotech firms, and universities) addressed this issue, and all of them agreed that the patent landscape has indeed become more complex.13 How complex is, however, an important issue. Although there are often a large number of patents potentially relevant to a given project, the actual number needed to conduct a drug development project is often substantially smaller. For example, Heller and Eisenberg (1998) use the case of “adrenergic receptor” claims as an illustration of the anticommons problem and find over 100 patents that might require a license to do research in this area. Responding to the Heller and Eisenberg article, Seide and MacLeod (1998) did a search on “adrenergic receptor” and, indeed, found 135 patents using this term. They then did an (admittedly cursory) patent clearance review and found that the vast majority would not in fact be infringed by an assay to screen for ligands against this receptor and that, at most, only a small number of licenses might be required. Another case (from agricultural biotech) was that of putting hemoglobin in maize (Warcoin, 2002). Here, 500 patent applications were initially reviewed, of which 100 were potentially of interest. In the end, 13 relevant patents were identified, including research tools, specific DNA for expression, and the technology for transforming the plant. We asked about 10 of our industry respondents to tell us how many pieces of IP had to be in-licensed for a typical project. They said that there may be a large number of patents to consider initially—sometimes in the hundreds, and that this number is surely larger than in the past. However, respondents then went on to say that in practice there may be, in a complicated case, about 6-12 that they have to seriously address, but that more typically the number was zero. An IP lawyer at a biotech firm states: The head of research comes to you and says he intends to develop this product and he wants you to look into the patent situation. You get back an inch or two thick pile of patents. You go through… and make judgments, what patents are relevant? Then, you go through those more in depth…. At the next step, you are 13 A few respondents noted that there is some recent backing off from mass patenting strategies. For example, over the last few years, NIH went from patenting 90 percent of their inventions to patenting only 40 percent (Freire, 2002). Some firms have also begun concentrating on their most promising targets, because of the high cost of maintaining patents and the low value of many genomic patents, particularly expressed sequence tags (ESTs), that may not give rights to downstream developments in therapeutics.
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Patents in the Knowledge-Based Economy left with 5-10, maybe 20, it depends. Not hundreds. You investigate these…. In the end, there are probably 3-6 that you have to negotiate. Thus, although most R&D executives report that the number of licenses they must obtain in the course of any given project has increased over the past decade, that number is considered to be manageable. In addition to a larger number of patents typically bearing on a given project, the numbers and types of institutions involved have also grown. Preceding the recent growth in biotechnology patenting, the number of biotechnology firms grew rapidly in the 1980s (Cockburn et al., 2000). More recently, we observe biotechnology firms acquiring significant patent positions. Hicks et al. (2001), for example, report that the number of U.S. biotechnology firms receiving more than 50 patents in the prior six years grew from zero in 1990 to 13 by 1999. Universities have also become major players in biotechnology, as sources of both patented biomedical inventions and start-up firms that are often founded on the strength of university-origin patents. Many respondents (14 from industry and 6 from universities) noted that this new role of universities is one of the significant changes over the last two decades in the drug and related industries. Universities have increased their patenting dramatically over the last two decades, and although still small, their share of all patents is significantly higher than before 1980. Furthermore, much of the growth in university patents tends to concentrate in a few utility classes, particularly those related to life sciences. In three of the key biomedical utility classes, universities’ share of total patents increased from about 8 percent in the early 1970s to over 25 percent by the mid-1990s (NSF, 1998). Also, universities’ adjusted gross licensing revenue has grown from 186 million dollars going to 130 universities in 1991 to $862 million going to 190 universities in 1999 (AUTM, 2000), with the preponderance of these sums reflecting activity in the life sciences. An eightfold increase in university technology licensing offices from 1980 to 1995 is further evidence of increasing emphasis on the licensing of university discoveries (Mowery, et al., 2001). Contributing to the rise in patenting, particularly in genomics, is the intensification of defensive patenting. An executive with a biotechnology firm compared its patenting strategy with that of Japanese firms in industries such as telecommunications or semiconductors: “We have a defensive patent program in genomics. It is the same as in the Japanese electronics industry. There they patent every nut and screw on a copier, camera, and build a huge portfolio, so Sony never sues Panasonic and Panasonic never sues Sony. There is a little of that going on in genomics. That way, if an IP issue ever arose, we have some cards in our hand.” A respondent from a large pharmaceutical firm made a similar comment about their motives for patenting research tools: “I supposed because we see everyone else doing it in part. Sort of like the great Oklahoma Land Rush. If you don’t do it you’re not going to have any place to set up a tent, eventually.” Overall, about a third of our industry respondents claimed to be increasing their pat-
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Patents in the Knowledge-Based Economy Responding partly to concerns expressed by NIH, universities, and large pharmaceutical firms, the USPTO has also adopted new policies that diminish the prospect of an anticommons. Specifically, in January 2001, the USPTO adopted new utility guidelines that have effectively raised the bar on the patentability of tools, particularly ESTs. These guidelines are designed to reduce the number of “invalid” patents (cf. Barton, 2000). Some of our respondents have suggested that recent court decisions have also mitigated potential problems due to research tool patents by limiting the scope of tool patents or, in some cases, invalidating them. Thus, although patentholders have the right to sue for infringement, the perception is that they are increasingly likely to lose such a suit. Cockburn et al. (2003) find that the CAFC went from upholding the plaintiff in about 60 percent of the cases to finding for the plaintiff in only 40 percent of the cases in recent years. One case that comes up frequently among our respondents is University of California v. Eli Lilly and Co. As noted above, the University of California tried to argue that its patent on insulin, based on work on rats, covered Lilly’s human-based bioengineered insulin production process. The CAFC ruled that California did not in fact possess this claimed invention at the time of filing; therefore, the claim was not valid, and Lilly was not infringing. Another controversial case was over a transgenic mouse used to study Alzheimer disease. Mayo had been widely distributing the mice at nominal cost to academic researchers.63 In 1999 Elan Pharmaceuticals sued for infringement and sent subpoenas to individual researchers across the country, demanding their lab notes. In 2000, a District Court judge dismissed the patent infringement suit by Elan Pharmaceuticals against Mayo Foundation, invalidating the patents on the grounds that their claims were covered by an earlier patent.64 The case of Roche versus Promega over Taq (see above) is another example of the courts ruling against a research tool patent holder. As one respondent put it: “These are good times for a patent infringer and not great times for a patent holder.” This seeming change in the court’s attitude may represent a shift toward more freedom to conduct research without undue concern over research tool patents. There remains, however, a great deal of uncertainty over how the courts will rule on the validity of research tool patents generally. One case, discussed above, that has been closely watched is the Rochester v. Searle case over COX-2 inhibitors. The critical issue in the case is whether knowledge of a drug target allows one to claim ownership over specific classes of drugs (i.e., how broadly do initial discovery claims extend over future developments building on those discover- 63 However, they charged some pharmaceutical companies up to $850,000 for a breeding group (Dalton, 2000). 64 On August 30, 2002, the CAFC reversed the summary judgment of invalidity based on anticipation and remanded the case back to the District Court for further proceedings. The District Court and the CAFC have not yet ruled on the breadth of the Elan patent claims.
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Patents in the Knowledge-Based Economy ies). Although the district court recently dismissed Rochester’s complaint of infringement (see footnote 16), the case will apparently be appealed, and the ultimate outcome may have important implications for how patents on key upstream discoveries affect subsequent drug development and commercialization. DISCUSSION AND CONCLUSION In this chapter, we have considered two possible impacts of the patenting of research tools on biomedical research. First, we considered whether the existence of multiple research tool patents associated with a new product or process poses particular challenges for either research on or commercialization of biomedical innovations. Second, we examined whether restricted access to some upstream discovery—perhaps protected by only one patent—has significantly impeded subsequent innovation in the field. In brief, we find that the former issue—the “anticommons”—has not been especially problematic. The latter issue of access, at least to foundational upstream discoveries, has not yet impeded biomedical innovation significantly, but our interviews and prior cases suggest that the prospect exists and ongoing scrutiny is warranted. The patenting of research tools has made the patent landscape more complex. As suggested by Heller and Eisenberg (1998), our interviews confirm that there are on average more patents and more patentholders than before involved in a given commercializable innovation in biomedicine, and many of these patents are on research tools. Despite this increased complexity, almost none of our respondents reported commercially or scientifically promising projects being stopped because of issues of access to IP rights to research tools. Moreover, although we do not have comparably systematic evidence on projects never undertaken, our interviews suggest that IP on research tools, although sometimes impeding marginal projects, rarely precludes the pursuit of more promising projects. Why? Industrial and university researchers have been able to develop “working solutions” that allow their research to proceed. These working solutions combine taking licenses (i.e., successful contracting), inventing around patents, going offshore, the development and use of public databases and research tools, court challenges and using the technology without a license (i.e., infringement), sometimes under an informal and typically self-proclaimed research exemption. In addition, the members of a research community (which includes both academic and commercial researchers) are somewhat reluctant to assert their IP against one another if that means they will sacrifice the goodwill and information sharing that comes with membership in the community. Changes in the institutional environment, particularly new USPTO guidelines and some shift in the courts’ views toward research tool patents, as well as pressure from powerful actors such as NIH (stimulated perhaps by the early concerns articulating the anticommons problem) also appear to have further reduced the threat of breakdown. Finally, the very high technological opportunity in this industry means that firms can shift their re-
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Patents in the Knowledge-Based Economy search to areas less encumbered by intellectual property claims, and, therefore, the walling off of particular areas of research may not, under some circumstances, exact a high toll on social welfare. Although stopped and stillborn projects are not especially evident, many of the working solutions to the IP complexity can impose social costs. Firms’ circumvention of patents, the use of substitute research tools, inventing around or going offshore—although all privately rational strategies—constitute a social waste. Court challenges and even the contract negotiations themselves can also impose significant social costs. Litigation can be expensive and non-out-of-pocket costs, represented by the efforts devoted to the matter by researchers and management, can be substantial. Even when there is no court challenge, the negotiations can be long and complex and may impose costly delays. Disagreements can and have led to litigation, which is especially costly for small firms and universities. It is difficult to know, however, how much contracting costs in biomedicine reflect an enduring feature of IP in biomedicine and how much is transitional, arising from the uncertainty associated with the newness of the technology and uncertainties about the scope and validity of patent claims. Moreover, as new institutions (i.e., universities) and firms become owners of intellectual property, there is a costly period of adjustment as these new actors learn how to manage their IP effectively. The development of standard contracts and templates may be helpful in diminishing these adjustment costs, and funding agencies such as NIH can play an important role in developing and encouraging the use of such standards. The second issue that we examined is the impact on biomedical innovation of restricted access to research tools. In thinking about the issue of access, it is helpful to distinguish research tools along two dimensions. First, it is obviously of interest how essential or “foundational” a research tool is for subsequent innovation, both in the sense of whether the tool is key to subsequent research and in the sense of the breadth of innovation that might depend upon its use. Is the research tool a key building block for follow-on research on a specific approach to a specific disease, is the tool key to advance in a broad therapeutic area, or might its application even cut across a range of therapeutic and diagnostic domains? A second dimension of interest is the degree to which a research tool is rival-in-use. By “rival-in-use” we mean research tools that are primarily used to develop innovations that will compete with one another in the marketplace. For instance, in the case of a receptor that is specific to a particular therapeutic approach to a disease, if one firm finds a compound that blocks the receptor, it undermines the ability of another to profit from its compound that blocks the same receptor. The defining feature of research tools that are not rival-in-use is that the use of the research tool by one firm will not typically reduce others’ profits from using it. Such tools include PCR, microarrays, cre-lox, and combinatorial libraries. From a social welfare perspective, a research tool that is not rival-in-use is like a public good in that it has a high fixed cost of development and zero
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Patents in the Knowledge-Based Economy or very low marginal cost in serving an additional user. Thus maximization of social welfare requires that the tool be made available to as large a set of users as possible. We have observed that holders of IP on nonrival research tools often charge prices that permit broad access, at least among firms. In some of these cases, the IP holders have also charged higher prices to commercial clients and lower prices to university and other researchers who intended to use the tool largely for noncommercial purposes. From a social welfare perspective, such price discrimination expands the use of the tool and is welfare enhancing. There are, however, cases in which the IP holder cannot or does not develop a pricing strategy that allows low-value and academic projects access to the tool, as for instance in the case of DuPont’s initial terms for the cre-lox technology or Affymetrix’s initial terms for GeneChips. However, DuPont eventually bowed to pressure from NIH (although, as noted above, the issue is not entirely settled) and Affymetrix developed a university pricing system that greatly increased access (while others developed do-it-yourself microarrays).65 The concern with regard to IP access tends to be the greatest when a research tool is rival-in-use and is potentially key to progress in one or more broad therapeutic areas. When a foundational research tool is rival-in-use, the IP holders often either attempt to develop the technology themselves or grant exclusive licenses. As suggested above, exclusive exploitation of a foundational discovery is unlikely to realize the full potential for building on that discovery because no one firm can even conceive of all the different ways that the discovery might be exploited, let alone actually do so. Geron’s exclusive license for human embryonic stem cell technology shows how restrictions on access to an important, broadly useful rival-use technology can potentially retard its development.66 A more prosaic example is the pricing of licenses for diagnostic tests. Myriad’s (and others’) licensing practices show that, to the degree that a high price on a diagnostic test puts it out of the reach of clinics and hospitals involved in research that requires the test results, clinical research may be impeded, yielding long-term social costs.67 The social welfare analysis of this situation is, however, not straightfor- 65 We conjecture that it is exactly these non-rival-in-use technologies with many low-value uses that are likely to benefit from NIH intervention, if necessary, because there will be a large constituency of users who want access (including many researchers at NIH itself), most of the research community uses will be low value, and the cost to the patent owner of allowing these nonrival uses is low, because the high-value uses are not necessarily affected. 66 Of course, President Bush’s decision to deny federal funding to human embryonic cells lines created after August 9, 2001 limited the ability of researchers to invent around Geron’s patents (Kotulak and Gorner, 2001). 67 Here the difficulty is associated with the fact that the same activity that is rival-in-use (providing commercial diagnostic services) is also the (possibly non-rival-in-use) research use. The difficulty of separating these two activities in the American system of funding clinical research contributes to the problems associated with patents on diagnostic uses of genes.
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Patents in the Knowledge-Based Economy ward. Even though knowledge, once developed, can be shared at little additional cost and may be best exploited through broad access, it does not follow that social welfare is maximized by mandating low-cost access if such access dampens the incentive to develop the research tool to begin with. Many of the same kinds of “working solutions” that mitigate the prospect of an anticommons also apply to the issue of access for research. Our interviews suggest that a key “working solution,” however, is likely infringement under the guise of a “research exemption.” Firms and universities frequently ignore existing research tool patents, invoking a “research exemption” that is broader than the existing legal exemption and that is supported by norms of trust and exchange in the research community. As discussed above, such instances of possible infringement, especially on the part of universities, are tolerated by IP-holding firms, both for normative reasons and because of the high cost of enforcing rights through litigation, relative to the low payoff for stopping a low-value infringement. One can rationalize the failure of the IP holder to aggressively monitor infringement as a form of price discrimination, and, as suggested above, economic theory suggests that such price discrimination can improve social welfare.68 There are two central questions to ask when considering the effects of a given research tool patent on the progress of biomedical research. The first has to do with the specifics of the biology in question: Does current scientific knowledge provide us with many or few opportunities for modifying the biological system in question? As science progresses, we are likely to see an oscillation, with new discoveries opening promising but narrow shortcuts and further exploration of those discoveries uncovering a variety of lines of attack on the problem. Where there are many opportunities, the likelihood of a research tool patent impeding research is smaller. Here again, the Geron case provides an illustration, with the recent development of alternatives to the use of embryonic cells for exploiting the promise of stem cells mitigating the restrictive impact of Geron’s control over embryonic stem cell technology. The second question has to do with specifics of the legal rights in question, and was highlighted by Merges and Nelson (1990) and Scotchmer (1991): Does the scope of claims in this patent cover few or many of the research activities using this technology? As the USPTO and the courts become more familiar with a technology, uncertainty over the scope of patent claims should diminish. The eventual outcome of the Rochester v. Searle/Pharmacia COX-2 case, for example, is likely to have significance beyond the parties’ considerable financial stakes. If the district court decision against Rochester is upheld, we are likely to see research proceed with reduced concern over upstream research tool patents, although one 68 As long as the infringing uses do not reduce the value of the tool to the users with a high willingness to pay, such price discrimination is likely to be privately profitable as well.
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Patents in the Knowledge-Based Economy should then consider the impact of that decision on the incentives for developing that class of upstream discovery. Through a combination of luck and appropriate institutional response, we appear to have avoided situations where a single firm or organization using its patents has blocked research in one or more broad therapeutic areas. However, the danger remains that progress in a broad research area could be significantly impeded by a patentholder trying to reserve the area exclusively for itself. The question is whether something systematic needs to be done. One possibility that has been considered is a revision of the law providing for research exemptions to better reflect the current norms and practices of the biomedical research community (cf. Rai, 1999; Ducor, 1997, 1999). It is not easy to discern when research is commercial or noncommercial notwithstanding what kind of institution is doing the research (cf. OECD, 2002). Thus it is not apparent that society would benefit from a policy response as opposed to continued reliance on current ad hoc practices of de facto infringement under the informal rubric of the “research exemption.” The viability of this latter approach may, however, be undermined by the recent October, 2002 CAFC decision in Madey v. Duke which effectively narrows the research exemption to exclude, in essence, any use of IP in the course of university research. The effect of this decision is not to make the unauthorized use of others’ IP in academic biomedical research illegal; such uses, as suggested above, were already likely illegal in light of recent, pre-Madey interpretations of the research exemption. Rather, this decision will focus attention on such practices, sensitizing both faculty and university administrations to the possible illegality of—and liability for—such uses of IP. This could well chill some of the “offending” biomedical research that is conducted in university settings. Given the importance of this informal exemption for allowing open science to proceed relatively unencumbered, this outcome would be unfortunate. Thus, policymakers should ensure an appropriate exemption for research intended for the public domain. We cannot, therefore, rule out future problems resulting from patents currently under review, court decisions, new shifts in technology, or even assertions of patents on foundational discoveries. Therefore, we anticipate a continuing need for the active defense of open science. Yet the social system we observe has appeared to develop a robust combination of working solutions for dealing with these problems. Recent history suggests that these solutions can take time and expense to work out, and the results may not be optimal from either a private or social welfare perspective, but research generally moves forward. It should also be recalled that patents benefit biomedical innovation broadly by providing incentives that have called forth enormous investment in R&D (cf. Arora et al., 2003), and that the research tools developed have increased the productivity of biomedical research (e.g., Henderson et al., 1999). Thus, our conclusion is that the biomedical enterprise seems to be succeeding, albeit with some difficulties, in developing an accommodation that incorpo-
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Representative terms from entire chapter: