Patents and Innovation for Neglected Diseases
A growing body of empirical research has sought to pinpoint the drivers of pharmaceutical innovation, in large part because drug discovery and development is infamously expensive. In the pharmaceutical industry, innovation is largely driven by private manufacturers and thus intimately tied to profit incentives and the size of the target market. An influential paper by Kremer (2002) cites the particular importance of profit incentives in driving technological progress in the pharmaceutical industry. Kremer notes that there is little work done on developing cures for diseases that predominantly affect developing countries because the people who suffer from those diseases have limited ability to pay.
This paper explores that relationship by proposing a model that relates the effect of potential market size to pharmaceutical innovation. However, in addition to factoring in an infected individual’s ability to pay for treatment, I focus on another factor that might influence innovation — intellectual property strength.
The growing adoption of IP reforms throughout the world has brought considerable controversy. In 1995, all World Trade Organization (WTO) member countries were required to strengthen their intellectual property standards under the Agreement on Trade-Related Intellectual Property Standards (TRIPS). TRIPS mandated that all signed countries recognize and enforce product patents in all fields of technology (most notably in pharmaceuticals), and launched a global trend toward stronger intellectual property rights. The adoption of TRIPS and other trade-based IP agreements can be viewed as an exogenous shock because poorer countries that would otherwise refuse to sign on did so due to the other benefits WTO membership offered. TRIPS and TRIPS-era trade-based intellectual property (IP) agreements are the subject of much controversy, and the debate over IP legislation has profound effects on international policymaking: uniform IP legislation has large economic, political, and social costs associated with its implementation because it almost certainly results in higher drug prices. Supporters of strong IP laws argue that patent protections incentivize innovation, while opponents argue that these innovations occur exclusively for wealthier countries.
This study explores the basis of this controversy. I use disease-level data on U.S. pharmaceutical patent application filings and a measure of potential market size (that is, the expected revenue over a drug’s lifetime) that exploits the potentially exogenous component of IP strength as measured by an industry-specific index of patent strength combined with country-level GDP and disease-level prevalence. The sum of the potential market size of all countries is then equated to the anticipated lifetime revenue of developing a drug and used to test if strengthened IP reforms increase innovative activity for diseases predominantly affecting wealthier countries (dubbed “global diseases”) and diseases predominantly affecting poorer countries (dubbed “neglected diseases”). I find that in the presence of all controls and in multiple specifications, there is a positive and statistically significant relationship between market size and innovation. I also find that the elasticity of market size to innovation for global diseases is consistently higher than the elasticity of market size to innovation for neglected diseases, although the significance of these results are not robust. This is hardly surprising, given that most pharmaceutical producers are located in wealthier countries, and have more incentive to innovate for diseases relevant in their affiliate countries. I also find when testing for market size without measures of IP that the gap in elasticity between global and neglected diseases widens, suggesting that IP reforms might have played a role in narrowing the innovation gap between global and neglected diseases.
The bulk of prior research has left out diseases that predominantly affect poor populations in the less-developed world. Compared to other diseases, neglected diseases have faced a persistent gap in innovation likely because both the costs of R&D and risk of failure outweigh the minimal anticipated return of investment from the people predominantly affected by these diseases. Thus, this paper expands on existing empirical literature in two ways: first, it accounts for the importance of intellectual property in relation to market size, and second, it focuses on innovations in the NTD category, which have been altogether ignored in prior research. While a study by Kyle and McGahon (2009) also accounts for intellectual property in their measure of market size, they use measures of intellectual property strength and TRIPS implementation that are not specific to the pharmaceutical industry. This study is consequently the first to its knowledge to incorporate measures of pharmaceutical-industry specific IP strength in its measure of market size as well as focus specifically on innovations for neglected diseases.
CONTACT ME to request full paper