Incrementalism in Pharmaceutical Research: Incentives and Policy Implications

The tremendous commercial success of drugs which scientific data suggest are of no benefit to most patients relative to pre-existing drugs is illustrative of a phenomenon in pharmaceutical markets whereby products can become commercially successful even though their social costs vastly outweigh their social benefits. This suggests that a confluence of market failures, patent laws and FDA regulation of pharmaceuticals is creating perverse incentives that both encourage inefficient allocation of resources and decrease consumer access. In this paper, I explore this phenomenon by addressing two related questions. First, how can incremental improvements in medications be characterized so as to identify which incremental research should be encouraged or discouraged by patent and regulatory law? And second, which doctrinal or policy levers should Congress and the courts use to reduce incentives for undesirable incrementalism? Part I of this paper describes the economic and legal context that must inform pharmaceutical policy. Part II attempts to characterize pharmaceutical innovations in terms of their social value and degree of innovation, and thereby to identify the types of innovations that patent law and FDA regulations should promote. Part III presents possible policy solutions for tailoring incentives to discourage undesirable forms of incrementalism and encourage valuable forms of innovation. In particular, mandatory and voluntary comparative testing of drugs, increasing the standard of nonobviousness for patentability, improvements to the patent application process, and penalties for holders of invalid patents in paragraph IV challenges are explored as means to enhance the correlation between the social benefits and royalties derived from pharmaceutical patents.