Do fixed patent terms distort innovation? Evidence from cancer clinical trials∗

Patents award innovators a fixed period of market exclusivity, e.g., 20 years in the United States. Yet, since in many industries firms file patents at the time of discovery (“invention”) rather than first sale (“commercialization”), effective patent terms vary: inventions that commercialize at the time of invention receive a full patent term, whereas inventions that have a long time lag between invention and commercialization receive substantially reduced or in extreme cases, zero effective patent terms. We present a simple model formalizing how this variation may distort research and development (R&D). We then explore this distortion empirically in the context of cancer R&D, where clinical trials are shorter and hence, effective patent terms longer for drugs targeting late-stage cancer patients, relative to drugs targeting early-stage cancer patients or cancer prevention. Using a newly constructed data set on cancer clinical trial investments, we provide several sources of evidence consistent with fixed patent terms distorting cancer R&D. Back-of-the-envelope calculations suggest that the number of life-years at stake is large. We discuss three specific policy levers that could eliminate this distortion patent design, targeted R&D subsidies, and surrogate (non-mortality) clinical trial endpoints and provide empirical evidence that surrogate endpoints can be effective in practice. ∗Financial support from NIA Grant Number T32-AG000186 to the NBER, NSF Grant Number 1151497, the Chicago Booth Initiative on Global Markets, the NBER Innovation Policy and the Economy program, and the Petrie-Flom Center at Harvard Law School is gratefully acknowledged. We thank Meru Bhanot, David Burk, Toby Chaiken, Brian Cordonnier, Greg Howard, Niels Joaquin, Megan McGrath, and Ana Medrano-Fernandez for excellent research assistance. Daron Acemoglu, David Autor, Raj Chetty, Joe Doyle, Dan Fetter, Amy Finkelstein, Ray Fisman, Alberto Galasso, Amanda Kowalski, Anup Malani, Matt Notowidigdo, Felix Oberholzer-Gee, Ariel Pakes, Al Roth, Jon Skinner, Alan Sorensen, Scott Stern, Glen Weyl, and seminar participants at BEA, Carnegie Mellon, the CBO, the Cornell Empirical Patent Law Conference, Georgia Tech, Harvard Law School, MIT, the NBER (Industrial Organization, Law and Economics, Productivity, and Public Economics), the Northwestern Kellogg Healthcare Markets conference, Toulouse, UC-Berkeley Haas, UIUC, UVA, Wellesley, and Yale Law School provided very helpful comments. Contact: [email protected], [email protected], [email protected].