The Invention of an Investment Incentive for Pharmaceutical Innovation

Pharmaceutical drugs are often hailed as the poster child for the proposition that patents foster accelerated rates of innovation. This sentiment stems, in large part, from the belief that pharmaceutical research and development (R&D) entails significant costs and resources. I argue that if the role of the patent regime is one of fostering higher amounts of investment in the R&D process, it is better served by a direct investment protection regime, where the protection does not depend upon whether or not the underlying idea behind the drug is “new” and “inventive”, two central tenets of patent law. Rather, any drug that successfully makes it past the regulatory filter ought to be entitled to protection, since its discovery and development entail significant investment and risk. Owing to the sub‐optimality of the current patent regime in protecting intensive pharmaceutical R&D investments from free riders, I propose a comprehensive investment protection regime that helps recoup all investments incurred during the drug discovery and development process. Though similar to existing data protection regimes in some respects, it differs in others. Firstly, it enables a recovery of all R&D costs, and not only costs associated with clinical trials. Secondly, unlike patents and data exclusivity, which offer uniform periods of protection, it rewards investments in a proportionate manner, wherein drug originators are entitled to protection against free riders only until such time as they recoup their specific investments and earn a rate of return on investment dependent inter alia on the health value of the drug. I consider a pure market exclusivity based investment protection regime but note that it is likely to foster excessive pricing and subject the market to the dictates of a single firm. In the alternative, I consider a compensatory liability model based on a novel cost sharing methodology, where follow‐on entrants are free to manufacture the drug, but must pay a reasonable amount of compensation to the originator. Lastly, I consider a reimbursement model, where the costs of drug discovery and development are reimbursed through public funding and prizes. Once it is appreciated that the function of investment protection is better addressed through a separate regime, the pressure on patents to fulfil a role for which it is not intrinsically suited, abates. This point is an important one to appreciate, as the conflation between patent protection and investment protection has caused many to argue for a dilution of the patentability threshold.