The final action proposed herein for modernizing the patent system— and the only one our committee did not derive from the 2004 National Academies report—is to change intellectual-property laws that constitute barriers to innovation in specific industries. The two main problem areas are in the pharmaceutical and information-technology industries. It is particularly expensive to create and market new drugs and medicines, and the costs are unlikely to be recovered unless there is predictable intellectual-property protection of appropriate duration. The interaction of the US Food and Drug Administration (FDA) approval process and the patent system poses unique challenges to the pharmaceutical industry. The inherent risk to drug developers is illustrated by the reality that more than 90% of pharmaceutical candidates fail in clinical testing.²⁶ Furthermore, only 1 in 1,000 new formulations tested reach clinical trials,²⁷ and a relatively small minority of those, perhaps one-third, pay back the cost of even their own research.²⁸ It is critical that a balance be struck in finding an appropriate period of exclusivity such that innovation is stimulated and sustained but patients have access to generic-drug-pricing structures.

Current intellectual-property protection for new medicines is governed under the Hatch–Waxman law, enacted in 1984, to give 14 years of patent protection after FDA approval of a new medicine. However, the law does not provide the same period for sustained marketing exclusivity. It curtails the ability to extend patents and provides opportunities for early patent challenges. The protection of data under the law is roughly one-half as long as the period afforded in Europe, creating a relative disadvantage for the United States in attracting pharmaceutical businesses²⁹ (see Box 8-2).

In the near term, the United States should adopt the European period of 10-11 years. However, research should be undertaken to determine whether this period is adequate, given the complexity and length of drug development today.

Patent issues are also particularly important to the information-technology industry, especially in software and Internet-related activities. The volume and unpredictability of litigation have recently attracted considerable attention and are currently being reviewed by Congress. An