not provide patentable material. In instrumentation products, patenting the design of the instrument itself is a futile exercise because it is not difficult to design another instrument in a different way that performs in exactly the same manner. An instance illustrating this difference took place when we started a medical device division in Hoffmann-LaRoche, a drug company. The Roche attorneys insisted on patenting the circuit diagrams of the equipment because of their similarity to the structural formulas for drugs. This, however, was a false analogy.
Patents appear to be of relatively less importance in many segments of the device industry. Once a product is introduced, competition usually follows quickly. However, patents play other roles in the process of innovation. Until the recent changes in the income tax laws, the patent application played a significant role in determining whether royalties paid to the inventor would be treated as ordinary income or capital gains. The simple fact that a patent had been applied for signaled the Internal Revenue Service (IRS) to treat the subsequent royalties as capital gains. Another situation in which the patent plays a role surfaces when a small company needs investment capital. Potential investors usually are concerned with whether the new development is covered by one or more patents. The patents can be trivial, but the investors feel reassured.
The development of new medical devices generally takes place in small, entrepreneurial companies. Once an introduction is made, larger corporations tend to buy up the smaller innovative companies and their products, or the corporations may introduce their own version. There are several reasons why small companies take the lead in innovation in the medical device industry while large companies are dominant in the drug industry. The drug industry is relatively more restrained by its risks and regulations. That restraint is not nearly as important in the device industry, on the part of either the regulators or the technology. A small company can bring a new product to market in a fraction of the time required by a large company. In the small company the innovator usually is also a key decision maker and can take risks based upon his first-hand knowledge of the technology and its applications. In a larger organization the decision makers often are several management layers removed from the innovators and cannot feel the reassurance provided by direct involvement in the process. Without this involvement these decision makers do not have the tools to assess the risks and tend to avoid the risks altogether. On the other hand, in the past, large corporations have tended to set up expensive research divisions in order to generate innovation. Researchers within these divisions find an environment permitting creativity but without any of the urgency of the entrepreneur to develop applications in a timely manner. Many of the large corporations