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Tragedy of the Anti Commons or Live and Let Live
Name: Tragedy of the Anti Commons or Live and Let Live
Author: john walsh
Pages: 65
Year: 2003
Language: English
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EXECUTIVE SUMMARY Over the last two decades changes in technology and policy have altered the landscape of drug discovery. These changes have led to concerns that the patent system may be creating difficulties for those trying to do research in biomedical fields. Using interviews and archival data, we examine the changes in patenting in recent years and how these have affected innovation in pharmaceuticals and related biotech industries. We find that there has in fact been an increase in patents on the inputs to drug discovery ("research tools"). However, we find that drug discovery has not been substantially impeded by these changes. We also find little evidence that university research has been impeded by concerns about patents on research tools. Restrictions on the use of patented genetic diagnostics, where we see some evidence of patents interfering with university research, are an important exception. There is, also, some evidence of delays associated with negotiating access to patented research tools, and there are areas in which patents over targets limit access and where access to foundational discoveries can be restricted. There are also cases in which research is redirected to areas with more intellectual property (IP) freedom. Still, the vast majority of respondents say that there are no cases in which valuable research projects were stopped because of IP problems relating to research inputs. We do not observe as much breakdown or even restricted access to research tools as one might expect because firms and universities have been able to develop "working solutions" that allow their research to proceed. These working solutions combine taking licenses, inventing around patents, infringement (often informally invoking a research exemption), developing and using public tools, and challenging patents in court. In addition, changes in the institutional environment, particularly new U.S. Patent and Trademark Office (USPTO) guidelines, active intervention by the National Institutes of Health (NIH), and some shift in the courts' views toward research tool patents, appear to have further reduced the threat of breakdown and access restrictions although the environment remains uncertain. We conclude with a discussion of the potential social welfare effects of these changes in the industry and the adoption of these working solutions for dealing with a complex patent landscape. There are social costs associated with these changes, but there are also important benefits. Although we cannot rule out the possibility of new problems in the future, our results highlight some of the mechanisms that exist for overcoming these difficulties. 1

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INTRODUCTION There is widespread consensus that patents have long benefited biomedical innovation. A forty year empirical legacy suggests that patents are more effective, for example, in protecting the commercialization and licensing of innovation in the drug industry than in any other. 1 Patents are also widely acknowledged as providing the basis for the surge in biotechnology start up activity witnessed over the past two decades. 2 Heller and Eisenberg (1998) and the National Research Council (1997) have suggested, however, that recent policies and practices associated with the granting, assertion, and licensing of patents on research tools may now be undercutting the stimulative effect of patents on drugs and related biomedical discoveries. In this chapter, we report the results of 70 interviews with personnel at biotechnology and pharmaceutical firms and universities in considering the effects of research tool patents on industrial or academic biomedical research. 3 We conceive of research tools broadly to include any tangible or informational input into the process of discovering a drug or any other medical therapy or method of diagnosing disease. 4 Heller and Eisenberg (1998) argue that biomedical innovation has become susceptible to what they call a "tragedy of the anticommons," which can emerge when there are numerous property right claims to separate building blocks for some product or line of research. When 1 See Scherer et al. (1959), Levin et al. (1987), Mansfield (1986), and Cohen et al. (2000). For pharmaceuticals, there is near universal agreement among our respondents that patent rights are critical to providing the incentive to conduct R&D. Indeed, data from the Carnegie Mellon Survey of Industrial R&D (cf. Cohen et al., 2000) show that the average imitation lag for the drug industry is nearly 5 years for patented products, whereas for the rest of the manufacturing sector, the average is just over 3.5 years (p < 0.01). Moreover, recent evidence shows that the profits protected by patents constitute an important incentive for drug firms to invest in R&D (Arora et al., 2002). 2 For example, in one of our interviews, a licensing director for a large pharmaceutical firm said "Patents are critical for start up firms. Without patents, we won't even talk to a start up about licensing." 3 The National Research Council (1997)] also considers the challenges for biomedical innovation posed by the patenting of research tools and upstream discoveries more generally. In a series of case studies, the National Research Council (1997, Ch. 5) documents pervasive concern over limitations on access due to the price of intellectual property and concern over the prospect of blocking of worthwhile innovations due to IP negotiations, but no actual instances of worthwhile projects that were actually blocked. 4 Examples include recombinant DNA (Cohen Boyer), polymerase chain reaction (PCR), genomics databases, microarrays, assays, transgenic mice, embryonic stem cells, or knowledge of a target, that is, any cell receptor, enzyme, or other protein that is implicated in a disease and consequently represents a promising locus for drug intervention. 2

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these property rights are held by numerous claimants (especially if they are from different kinds of institutions), the negotiations necessary to their combination may fail, quashing the pursuit of otherwise promising lines of research or product development. Heller and Eisenberg suggest that the essential precondition for an anticommons the need to combine a large number of separately patentable elements to form one product now applies to drug development because of the patenting of gene fragments or mutations and a proliferation of patents on research tools that have become essential inputs into the discovery of drugs, other therapies, and diagnostic methods. Heller and Eisenberg (1998) argue that the combining of multiple rights is susceptible to a breakdown in negotiations or, similarly, a stacking of license fees to the point of overwhelming the value of the ultimate product. Shapiro (2000) has raised similar concerns, using the image of the "patent thicket." He notes that technologies that depend on the agreement of multiple parties are vulnerable to holdup by any one of them, making commercialization potentially difficult. 5 The argument that an anticommons may emerge to undercut innovation emphasizes factors that might frustrate private incentives to realize what should otherwise be mutually beneficial trades. Merges and Nelson (1990) and Scotchmer (1991) have argued, however, that the self interested use of even just one patent although lacking the encumbrances of multiple claimants characterizing an "anticommons" may also impede innovation where a technology is cumulative (i.e., where invention proceeds largely by building on prior invention). An example of such an upstream innovation in biomedicine is the discovery that a particular receptor is important for a disease, which may make that receptor a "target" for a drug development program. 6 A key concern regarding the impact of patents in such cumulative technologies is that 5 The case of beta carotene enhanced rice (GoldenRice ) illustrates a potential anticommons/thicket problem. This innovation involves using as many as 70 pieces of IP and 15 pieces of technical property spread over 31 institutions (Kryder et al., 2000). Under such conditions, Heller, Eisenberg, and Shapiro have all suggested that acquiring the rights to practice such an innovation may be prohibitively difficult. 6 For example, a Yale Harvard collaborative group and researchers at Merck discovered (nearly simultaneously) that the immunophilin receptor FKBP might be important for immunosuppression, making it a target for research programs at Merck, Vertex (a biotech start up), and Harvard Medical School that all tried to find chemicals that would bind to the receptor and thus could be used as drugs to suppress immune response (Werth, 1994). Successful development in this case would depend on combining the knowledge of the existence of the target with other innovations, particularly compounds that could modify the action of the target receptor. 3

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"unless licensed easily and widely," patents especially broad patents on early, foundational discoveries may limit the use of these discoveries in subsequent discovery and consequently limit the pace of innovation (Merges and Nelson, 1990). 7 The revolution in molecular biology and related fields over the past two decades and coincident shifts in the policy environment have now increased the salience of this concern for biomedical research and drug innovation in particular (National Research Council, 1997). Drug discovery is now more guided by prior scientific findings than previously (Gambardella, 1995; Cockburn and Henderson, 2000; Drews, 2000), and those findings are now more likely to be patented after the 1980 passage of the Bayh Dole Act and related legislation that simplified the patenting of federally supported research outputs that are often upstream to the development of drugs and other biomedical products. In this chapter, we consider whether biomedical innovation has suffered because of either an anticommons or restrictions on the use of upstream discoveries in subsequent research. Notwithstanding the possibility of such impediments to biomedical innovation, there is still ample reason and recent scholarship (Arora et al., 2002) to suggest that patenting benefits biomedical innovation, especially via its considerable impact on R&D incentives or via its role in supporting an active market for technology (Arora et al., 2001). Although any ultimate policy judgment requires a consideration of the benefits and costs of patent policy, an examination of the benefit side of this calculus is outside the scope of our current study. In the second section of this chapter, we provide background to the anticommons and restricted access problems. The third section describes our data and methods. In the fourth section, we provide an overview of the results from our interviews and assess the extent to which we witness either "anticommons" or restricted access to intellectual property (IP) on upstream discoveries and research tools. To prefigure the key result, we find little evidence of routine breakdowns in negotiations over rights, although research tool patents are observed to impose a range of social costs and there is some restriction of access. In the fifth section of the chapter, we describe the mechanisms and strategies employed by firms and other institutions that have 7 Scotchmer (1991) focuses on the related issue of the allocation of rents between the holder of a pioneer patent and those who wish to build on that prior discovery, suggesting that there is no reason to believe that markets left to themselves will set that allocation in such a way that the pace of innovation in cumulative technologies is maximized. Barton (2000), in fact, suggests that the current balance "is weighted too much in favor of the initial innovator." Scotchmer (1991) has suggested that ex ante deals between pioneers and follow on innovators can, however, be structured to mitigate the problem. 4

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limited the negative effects of research tool patents on innovation. The final section discusses our findings and our conclusions. BACKGROUND Science and Policy Changes in the science underlying biomedical innovation, and in policies affecting what can be patented and who can patent, have combined to raise concerns over the impact of the patenting and licensing of upstream discoveries and research tools on biomedical research. Over the past twenty years, fundamental changes have revolutionized the science and technology underlying product and process innovation in drugs and the development of medical therapies and diagnostics. Advances in molecular biology have increased our understanding of the genetic bases and molecular pathways of diseases. Automated sequencing techniques and bioinformatics have greatly increased our ability to transform this understanding into patentable discoveries that can be used as targets for drug development. In addition, combinatorial chemistry and high throughput screening techniques have dramatically increased the number of potential drugs for further development. Reflecting this increase in technological opportunity, the number of drug candidates in phase I clinical trials grew from 386 in 1990 to 1,512 in 2000. 8 The consequence of these changes is that progress in biomedical research is now more cumulative; it depends more heavily than heretofore on prior scientific discoveries and previously developed research tools (Drews, 2000; Henderson et al. 1999). As the underlying science and technology has advanced, policy changes and court decisions since 1980 have expanded the range of patented subject matter and the nature of patenting institutions. In addition to the 1980 Diamond v. Chakrabarty decision that permitted the patenting of life forms, and the 1988 Harvard OncoMouse patent that extended this to higher life forms (and to a research tool), in the 1980s gene fragments, markers and a range of intermediate techniques and other inputs key to drug discovery and commercialization also became patentable. Moreover, Bayh Dole and related legislation have encouraged universities and national labs, responsible for many such upstream developments and tools, to patent their 8 We thank Margaret Kyle for making these data available to us. 5

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inventions. Thus coincident changes in the science underpinning biomedicine and the policy environment surrounding IP rights have increased both the generation and patenting of upstream developments in biomedicine. Conceptual When is either an "anticommons" problem or restricted access to upstream discovery likely to emerge and why, and what are the welfare implications of their emergence? Consider the anticommons. The central question here, as posed by both Heller and Eisenberg (1998) and Eisenberg (1999), is, if there is a cooperative surplus to be realized in combining property rights to commercialize some profitable biomedical innovation, why might it not be realized? They argue that biomedical research and innovation may be especially susceptible to breakdowns and delays in negotiations over rights for three reasons. First, the existence of numerous rights holders with claims on the inputs into the discovery process or on elements of a given product increases the likelihood that the licensing and transaction costs of bundling those rights may be greater than the ultimate value of the deal. Second, when there are different kinds of institutions holding those rights, heterogeneity in goals, norms, and managerial practice and experience can increase the difficulty and cost of reaching agreement. Such heterogeneity is manifest in biomedicine given the participation of large pharmaceutical firms, small biotechnology research firms, large chemical firms that have entered the industry (e.g., DuPont and Monsanto), and universities. Third, uncertainty over the value of rights, which is acute for upstream discoveries and research tools, can spawn asymmetric valuations that contribute to bargaining breakdowns and provide opportunities for other biases in judgment. Contributing to this uncertainty is the fact that the courts have yet to interpret the validity and scope of particular patent claims. Regarding the restriction of access to upstream discoveries highlighted by Merges and Nelson (1990; 1994), one can ask why that should be a policy concern. From a social welfare perspective, nothing is wrong with restricted access to IP for the purpose of subsequent discovery as long as the patentholder is as able as potential downstream users to fully exploit the 6

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potential contribution of that tool or input to subsequent innovation and commercialization. 9 This, however, is unlikely for several reasons. First, firms and, especially, universities are limited in their capabilities. Second, there is often a good deal of uncertainty about how best to build on a prior discovery, and patentholders will be limited in their views about what that prior discovery might be best used for and how to go about exploiting it. Consequently, a single patentholder is not able to exploit fully the research and commercial potential of a given upstream discovery, and society is better off to the extent that such upstream discoveries are made broadly available. 10 For example, if there is a target receptor it is likely that there are a variety of lines of attack, and no single firm is likely capable of mounting or even conceiving of all of them. The notion that prior discoveries should be made broadly available rests, however, on an important assumption that broad availability will not compromise the incentive to invest the effort required to come up with that discovery to begin with (cf. Scotchmer, 1991). In this chapter, we are therefore concerned with whether the access to upstream discoveries essential to subsequent innovation is restricted. Restriction is, however, a matter of degree. If a discovery is patented at all, then it is to be expected that access will be restricted reflecting the function of a patent. Indeed, any positive price for a license implies some degree of restriction. Therefore, we are concerned with more extreme forms of restricted access that may come in the form of exclusive licensing of broadly useful research tools, high license fees that may block classes of potential users, or decisions on the part of a patentholder to itself exploit some upstream tool or research finding that it developed. Historical The possibility that access to a key pioneering patent may be blocked, or that negotiations over patent rights might break down even when a successful resolution would be in the collective interests of the parties concerned is not a matter of conjecture. There is historical 9 That patents imply some type of output restriction due to monopoly is taken as given. The question here is whether there is any social harm if the patent holder chooses to exploit the innovation himself exclusively. 10 The premise of this argument, well recognized in the economics of innovation (Jewkes et al., 1958; Evenson and Kislev, 1976; Nelson, 1982), is that, given a technological objective (e.g., curing a disease) and uncertainty about the best way to attain it, that objective will be most effectively achieved to the extent that a greater number of approaches to it are pursued. 7

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precedent. Merges and Nelson (1990) and Merges (1994), for example, consider the case of radio technology where the Marconi Company, De Forest, and De Forest's main licensee, AT&T, arrived at an impasse over rights that lasted about ten years and was only resolved in 1919 when RCA was formed at the urging of the Navy. In aviation, Merges and Nelson argue that the refusal of the Wright brothers to license their patent significantly retarded progress in the industry. The problems caused by the initial pioneer patent (owned by the Wright brothers) were compounded as improvements and complementary patents, owned by different companies, came into existence. Ultimately, World War I forced the Secretary of the Navy to intervene to work out an automatic cross licensing arrangement. "By the end of World War I there were so many patents on different aircraft features that a company had to negotiate a large number of licenses to produce a state of the art plane." (Merges and Nelson, 1990, p. 891) Although breakdowns in negotiations over rights may therefore occur, rights over essential inputs to innovation are routinely transferred and cross licensed in industries, such as the semiconductor industry, where there are numerous patents associated with a product and multiple claimants (Levin, 1982; Hall and Ziedonis, 2001; Cohen et al., 2000). In Japan, where there are many more patents per product across the entire manufacturing sector than in the United States, licensing and cross licensing are commonplace (Cohen et al., 2002). Thus the historical record provides instances of both where the existence of numerous rights holders and the assertion of patents on foundational discoveries have retarded commercialization and subsequent innovation and where no such retardation emerged.. The history suggests several questions. Have anticommons failures occurred in biomedicine? Are they pervasive? To what degree do we observe restricted access to foundational discoveries that are essential to the subsequent advance of biomedicine? What factors might affect biomedicine's susceptibility (or lack thereof) to either anticommons or restrictions on the use of upstream discoveries in subsequent research? DATA AND METHOD To address these issues, we conducted 70 interviews with IP attorneys, business managers, and scientists from 10 pharmaceutical firms and 15 biotech firms, as well as university researchers and technology transfer officers from 6 universities, patent lawyers, and government and trade association personnel. Table 1 gives the breakdown of the interview respondents by 8

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organization and occupation. These interviews averaged over one and a half hours each. The interviews focused on changes in patenting, licensing activity and the relations between pharmaceuticals, biotechnology firms, and universities, and how patent policy has affected firm behavior. We used the interviews to probe whether there has been a proliferation and fragmentation of patent rights and whether this has resulted in the failure to realize mutually beneficial trades, as predicted by the theory of anticommons. We also looked for instances in which restricted access to important upstream discoveries has impeded subsequent research. In addition, we asked our respondents how these conditions may have changed over time, including whether the character of negotiations over IP rights have changed. Finally, we asked about strategies and other factors that may have permitted firms to overcome challenges associated with IP. FINDINGS Preconditions for an Anticommons Do conditions that might foster an "anticommons" exist in biomedicine? The essential precondition for an anticommons is the existence of multiple patents covering different components of some product, its method of manufacture, or inputs into the process through which it is discovered. Eisenberg suggests that other conditions that would tend to spawn an anticommons include multiple, heterogeneous rights holders and uncertainty with regard to the value of the relevant IP. We have no direct measure of the number of patents covering a new product. There has, however, been a rapid growth in biotechnology patents over the past fifteen years, from 2,000 issued in 1985 to over 13,000 in 2000. 11 Such rapid growth is consistent with a sizable number of patents granted for research tools and other patents related to drug development. Our interview respondents also suggest that there are indeed now more patents related to a given drug development project. One biotechnology executive responsible for IP states: The patent landscape has gotten much more complex in the 11 years I've been here. I tell the story that when I started and we were interested in assessing the third party patent situation, back then, it consisted of looking at . If none were working on it, that was the extent of 11 9

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