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

Abstract

Patents award innovators a fixed term of market exclusivity. Yet, since in many industries firms file patents at the time of discovery ("invention") rather than first sale ("commercialization"), fixed patent terms can generate variation in effective patent lengths. We present a simple model characterizing the conditions under which this variation would be expected to distort research and development (R&D) investments away from technologies with long time lags between invention and commercialization. We then explore this distortion empirically in the context of cancer drug R&D, where drugs treating patients with short life expectancies can move through clinical trials more quickly - and thus receive longer effective patent terms - than drugs treating patients with long life expectancies. Using a newly constructed data set of cancer clinical trials to measure the R&D investments relevant to patients of different cancer types and stages of disease, we document that - consistent with our model - patient groups with higher survival rates tend to have lower levels of R&D investment. Our baseline point estimates suggest that a 10 percentage point increase in the five-year survival rate is associated with a reduction in R&D investments on the order of 10 percent. Evidence from two complementary analyses supports the idea that the observed survival time-R&D correlation is inefficient. The correlation does not appear to be driven by differences in demand for treatments, and we provide a bound of what share of the correlation could be explained by differences in the costs of R&D. Taken together, our evidence provides support for the idea that fixed patent terms distort R&D, and that feasible policy levers have the potential to eliminate this distortion.