November 1, 2010 (Vol. 30, No. 19)

Patents on IP Necessary to Drive Innovation and Move Field Forward

The subtitle of Michael Sable, Ph.D.’s Point of View column in the September 15 issue of GEN, “Current patent policies stymie innovation and are detrimental to the well-being of societies,” summarizes his argument clearly and concisely.

Almost 30 years ago, in 1981, I presented a similar case in congressional testimony against the then relatively new emphasis on university initiatives to patent and license out federally funded research findings. Then, in 1983 at a biotechnology patent conference sponsored by ATCC, I argued that “the more widely disseminated the technology, the faster one is able to put out a superior version of the product of interest.” I concluded that “unproductive time and wasted dollars are spent on the pursuit of patents in biotechnology.”

I was wrong then, and Dr. Sable is wrong now. I believe, contrary to Dr. Sable’s position, that adapting the open-source model that is prevalent in the software industry to biotechnology will more often than not be impractical.

I should point out that regardless of my argument in 1983 that patenting was anachronistic in the context of high technology, the biotech company I then headed pursued an aggressive patent strategy. At that time we had a portfolio of over 100 patents, patents pending, and patent applications in preparation.

Such a patent strategy was essential to attract investors. Without it we never would have been able to complete the various rounds of private and public financings that we required. Thus, the overwhelming reason I am against the applicability of the open-source model to biotechnology is based on economics.

First, with very few exceptions, IP protection is de rigueur for biotech companies seeking investors. Over the past 17 years, I have worked closely with CEOs of 71 companies, 31 of which were biotech firms. All of these biotech firms held patents and/or patents pending, and all were seeking capital. In every instance, the strength of the IP rights was of utmost importance to the potential investors.

Why was this so? As is typically the case, the businesses of these companies were dependent on relatively long and costly product-development stages and subject to lengthy government regulatory approvals. Investors wanted some degree of assurance that their innovative portfolio companies would be able to enter the marketplace without competition from copycat manufacturers. Otherwise, the latter would easily be able to underprice the innovator companies, since they would not have to recoup the same magnitude of R&D expenses in their pricing models.

In addition to these 31 biotech companies, I have also worked with CEOs of six software firms. In contrast to the biotech companies, these software firms held no patents or patents pending, and in many instances they did not pursue copyright protection. As long as these firms maintained proprietary technologies, the absence of patents did not deter potential investors from considering investing in them.

What is more important to an investor in a software company is how quickly the software can evolve to compare favorably with competing software in the marketplace. For example, one of my client software companies, which has obtained three rounds of investment capital, upgrades its software approximately every 1.5 years. The development expense is trivial compared to upgrading a regulated biotech product. The software product is essentially not subject to government regulation.

Moreover, the cost of producing copies of software is negligible. Thus, with respect to software, planned obsolescence is key to competing effectively in the marketplace—selling version N while troubleshooting version N+1 and developing version N+2.

Regarding adaptation of the open-source model to biotech-related sectors, Dr. Sable proposes that “results of government-funded research remain in the public domain…so as to allow generic manufacturers to produce it.” Unfortunately, such a policy would only impede product development. The vast majority of government-funded research seldom includes clinical trials.

By virtue of their business model, generic manufacturers minimize their R&D expenses. They essentially file abbreviated new drug applications for products in the marketplace that have come off patent, without having to go through the gamut of full-blown clinical trials. If such research remained in the public domain, even nongeneric pharmaceutical and biotech companies would likely pass up the opportunity to exploit such discoveries. These companies are unlikely to spend huge sums of money on risky development projects without patent protection, that is, if they cannot exclude others from working on the same projects.

Dr. Sable does propose that the government award drug-development contracts to the private sector based on competitive bids. This already is the case for some vaccines, particularly against biowarfare agents. However, it cannot be expected that the government adopt a policy of essentially underwriting all the R&D for the pharmaceutical and biotech sectors.

Nevertheless, if the government did underwrite all of this R&D, and generic manufacturers marketed the resulting products, it is almost a sure bet that healthcare innovation would suffer. There would be little incentive for scientists in the private sector to think outside the box and proactively create new medicines and diagnostics, contrary to Dr. Sable’s argument that the status quo in biotechnology inhibits innovation.

Finally, Dr. Sable closes his article by promulgating the ethical obligations of the biomedical private sector to alleviate the suffering of “billions of poor and disease-stricken people” such as those suffering from “AIDS, hunger, and malaria.”

I would argue that the benefits of IP protection enable biotech and pharmaceutical companies to help such persons from the profits they make in their established markets.

For example, Merck & Co. began an initiative in Africa in 2000, committing over $100 million, in addition to donating relevant medicines toward reducing AIDS. Genzyme announced in 2006 that it had initiated a program “to discover and advance novel treatments for neglected diseases affecting the developing world,” and that it would “grant all commercial and intellectual property rights in neglected disease areas to nonprofit partners.”

There are plenty of other examples of biomedical corporations fulfilling their social responsibilities, but without appropriate IP protection, these companies would neither have been able to produce innovative products that they sometimes give away to those who are unfortunate, nor would they have been able to generate the kinds of profits that enable them to commit substantial resources to helping the needy.

J. Leslie Glick, Ph.D.

J. Leslie Glick, Ph.D. ([email protected]), is an independent corporate management advisor.

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