Posner on pharma patents

There's been a bit of buzz (e.g., Derek Lowe) about a posting on Judge Richard Posner's blog about pharma patents. Posner advocates shortening the patent term and writes:

--Now suppose that as a result of a shortening of the patent term, the prospect for the successful inventor is for making only an $800 million profit [instead of a billion for a longer term]. Less will be spent on the patent race. Yet consumers as a whole may be better off, because the investment saved may have greater value elsewhere in the economy. The entire patent “prize” goes to the firm that crosses the finish line first, and so a firm might spend a huge amount of money to beat its nearest rival by one day even though the value to the public of having the invention one day earlier might be negligible. This danger is greater, the bigger the prize. Shortening the patent term would reduce this potential waste by reducing the revenue from a patent; it would also reduce the transaction costs of licensing, because more inventions would be in the public domain.--

Consider the text --The entire patent “prize” goes to the firm that crosses the finish line first--. Sepracor made a business model of identifying enantiomers (or metabolites) of racemates (or parents) that were discovered by other companies. The patent "prize" got split up. Think also of Albany's role in fexofenadine (Allegra). Similarly, in the Hatch-Waxman business, a generic company which successfully challenged a proprietary company would frequently turn right around and cut a deal with the proprietary company, and proprietary and generic would split up the patent "prize." That sort of thing is now scrutinized. Also, in the various crystallographic cases (such as the paroxetine case decided by Judge Posner sitting by designation), someone other than the first finisher can exploit the work of the first finisher. There are all kinds of reasons why "first finishers" cut deals with later comers and split up the patent prize. Further, there are all kinds of reasons why first finishers don't end up with a prize at all (see the Wright Brothers. And, one remembers the nabumetone (RELAFEN) case wherein the first finishers were two Indian chemists, rather than SmithKlineBeecham.)

If one thinks about various business method patents in the computer area, one notes that once most of these go into the public domain, they are probably superceded and nearly useless. Drugs that go into the public domain still hopefully have their value, but do they contribute to lower transaction costs? Celebrex and Vioxx had no pain relief superiority over other NSAIDs (proprietary AND public domain), were probably not cost effective at the margin for the 80% of the people who don't have serious GI problems, but nevertheless came to dominate the market.

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Some comments on Derek Lowe's blog are critical of Posner's suggestion.

One poster "SRC" concludes: -->So I would dispute the contention that these two [Becker, Posner] are knowledgeable about either drug discovery or patents. Dismal science, indeed.<--

SRC's analysis includes the following.

-->First, it’s not clear what Posner means by “cross the finish line” (does he mean file a patent application, identify the class of compounds, identify the ultimate drug candidate, or God help us, achieve regulatory approval?). He seems to think that researchers beaver away in the lab, checking their competitor’s progress on precisely the same class of compounds, until they find just the right one and race to the Patent Office to pip their competitors at the post. Surely he knows U.S. patent law awards priority to the first to invent, not first to file. (Two applicants filing on the same matter would commonly find themselves in an interference proceeding to determine which invented first.) <--

I think that Posner meant the "finish line" to be patent issuance. As SRC notes, the US is not a "first to file" country, so that there is no race to the patent office. Recall also that there was an interference over COX-2 inhibitors, even though the players had different drugs (Celebrex, Vioxx), and both ultimately were able to sell.

SRC also states --Competing companies at the stage of filing patent applications don’t generally know what compound classes other companies are filing on at the same time, so the notion that they would spend huge sums to beat their competitors to do so is nonsense.-- I suspect that in the COX-2 case, there was some cross-knowledge about intention to file on classes. Also, there may be general synthetic goals (e.g., Albany creating a better way to make fexofenadine; achieving Taxol synthesis) that are known to everyone.

SRC challenges the "race" metaphor and suggests draw poker might be better: --Posner’s footrace metaphor implies perfect information about competitors, each straining to cross the finish line before the other, watching the other’s progress out of the corner of his eye. A better metaphor would be a five card draw poker game: each player has to make his decisions with no more than an educated guess what cards the others might be holding, and only finds out who wins at the very end, after all decisions have already been made. --

SRC also points out that the major portion of R&D money is spent long after the patent application is filed. Separately, one generally knows that more money is spent by pharma on marketing than on research and development. Combining these two, we see that the patent race is a small (but significant) part of the pharmaceutical picture. One has to have the patent to keep others from free riding on those drugs that become commercial successes, but money-wise, the bigger investments are elsewhere. Thus, Posner's text --a firm might spend a huge amount of money to beat its nearest rival by one day-- probably gives an improper impression of "when" and "for what purpose" the "huge" amount of money is spent. We already know that the money for R&D work leading to patent applications is not "huge" relative to other amounts.
SRC: -->Third, patent applications are filed long before the major expenses are incurred. I would guess that when applications are filed less than 5% of the total R&D expenditure has taken place. The big bucks fly out the door years after the patent applications are filed. “Huge amounts” are spent then, not to gain a day’s advantage in patenting, but to try to establish a marketing advantage (e.g., greater safety or efficacy, broader indications).