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Abstract. Due to the unprecedented success of US economy in coming up with patent protected new
innovations it is intriguing to study the patterns of innovations in a given knowledge and capital intensive
industry such as pharmaceuticals. The pharmaceuticals industry is pivotal to longevity of life, lowering
hospital costs and mortality rate. Contrary to other sectors, pharmaceutical products take somewhere thirteen
to fifteen years to receive FDA approval. In the US strong patent protection mechanisms are present in
comparison to Japan and Italy, where only processes can be protected not products. It has been learnt that
strong appropriablity regime drives innovation by acting as an incentive for research and development
investments. However, on the flip side of the tight control only two out of ten launched drugs generates sales
that are equal to or exceed their research and development costs. Rise in the number of patents maybe due to
patent overlapping for “patent evergreening” purposes. Positive correlation has been found in the
specialization of US Pharmaceutical sector, the investment in the industry and the Revealed Comparative
Advantage (RTA>1). The highly regulated industry with longer product development cycles and greater
R&D investment has not only differentiated it from other industries in the US, but also has provided it with a
lead over pharmaceutical industries in other countries.
Keywords: Innovation, Pharmaceutical, US, Patterns
Background
Abraham Lincoln, who himself received a patent for a device used to lift boats over shoals in (1849),
once mentioned in a speech that patents, “added the fuel of interest to the fire of genius”. Providing a
stimuli for protecting innovations through intellectual property rights. The need for protecting inventions is
also included in the US constitution (Article I, Section 8, Clause 8, also called the Copyright Clause) where it
states, “Congress shall have power to promote the progress of science and useful arts, by securing for limited
times to authors and inventors the exclusive right to their respective writings and discoveries”.
According to World Intellectual Property Organization report (2008) in the year 2006, 425,966 patent
applications were put up in America and out of these 173,770 applicants were successful patents, that make
almost 24% of all the patents granted worldwide. Due to the unprecedented success of the United States in
coming up with patent protected innovations it would indeed be intriguing to study the pattern of innovations
in a US industry. For the purpose of the study the US Pharmaceutical industry has been selected due to its
innovative potential and its importance to the US economy. The importance of pharmaceutical industry to
US can be judged from its economic impact of creating 686,422 direct and 3.2 million indirect jobs in the
year 2006 alone (phRMa, 2006).
1. Introduction
In the domain of evolutionary economics the question “why and how innovation differs in industries”
has always remained an active topic of discussion. Pavitt (1984) and Malerba (1997) have discussed the issue
and have identified the dimensions that highlight the important factors contributing to differences in
industries. Therefore, different patterents of innovation are observed in various industries, in some
industries innovative activities may be concentrated in few large firms and in other industries, small
businesses seem to be actively involved in innovation. Overall innovation in an industry requires
technological oppurtunities and appropriability of innovation. Breshi et al, (2000) pointed out that
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technological opportunities denote the probability of creating innovation for a particular sum of money
investment in research. Similarly, the appropriability of innovations denotes opportunities to reap the
benefits of an innovation. In the same manner Malerba and Orsenigo (1990) describes that knowledge
created today is accumulated and used for creating new knowledge in future.
The pharmaceutical industry is complex and highly regulated industry in almost all developed
economies of the world. Governments control pricing and drug development. Similarly, there are restrictions
on marketing products without the involvement of learned middlemen such as doctors and pharmacists. This
unique controlled nature of the industry makes it an interesting specimen for study.
Figure 2: R&D
R Spendingg Trends in Ph
harmaceuticalls Sector in US
S
13
(Source: adopted from
m phRMA 20110 Key Facts)
2. Analyysis
For the purpose of task II of thhe paper ISICC 24 (Chemiicals and cheemical produucts) has beeen chosen ass
approximatiion of pharmmaceutical inndustry. In coonformance with task I ofo the paper the authors have chosenn
to analyze and
a comparee the pattern of innovations in the phaarmaceuticall industry in the US. It is importantt
to note that market econnomy was asssumed as tottal economy y. In the first place the deevelopment of
o number off
t US pharrmaceutical industry hass been analy
patents in the yzed with thhe help of ddata provided d on Jibsnett
(Provided by
b Jonkopingg Internationaal Business School,
S Swedden).
Figure 2.1: The Num
mber of Patentts between 1980-1999
14
(Sourcce: The authors own creatioon for this pap
per)
me range for analyzing thhe number off patents perr year was chhosen from 11980 to 1999
The tim 9. The graphh
indicates a positive
p trennd in the num
mber of patennts for the US
U pharmaceeuticals startiing from 590 05 patents inn
the year 19980 with a gradual increase year by year until 1995 where it i suddenly sstarted to acccelerate andd
experiencedd a sharp risee in the nummber of patennts reaching 14752. Thiss is in confoormance with h Mainsfieldd
(1998) whoo suggests thhat in the Unnited States there
t ong protectioon mechanism
are stro ms (tight app
propriabilityy
regime) avaailable whereeby both prooduct and proocess orienteed patents caan be patenteed. On the other
o hand, itt
can be arguued that the sudden risse during thee mid nineties might be due to overrlapping pattents grantedd
which can result
r in prevventing effecctive cooperaative usages of such pateents. This gooes in conforrmance withh
Kesselheimm (2007) whoo argues thaat in the phharmaceuticall sector the patent holdders stretch their t markett
exclusivity further by sttrategies suchh as “patent evergreeningg,”. This resuults in greateer number off patents andd
it might be the case thaat during miid 1990s thiss was the caase. Ever sinnce, (1995) aas the graph depicts, thee
industry is showing a deteriorating
d g trend but still the num mber of pateents have remained abov ve the meann
average of patents
p grantted between (1980) and (1999).
(
Figure 2.2
2 depicts the t relationshhip between the R&D in nvestments and
a the numbber of patentts developedd
between (19980 & 1999)). There seem ms to be a positive
p correlation betw
ween the inveestment in R&D R and thee
number of patents
p creatted per year. This trend goes
g in confformance witth Breshi et aal. (2000) who
w state thatt
high approppriablity driives innovattion by actinng as an in ncentive; as a result thee R&D inveestments aree
encouraged. Therefore it i can be arggued that in the
t United Sttates there iss a tight apprropriablity reegime wheree
patents are strictly
s proteected.
15
(Source: autthors own creation for this Paper)
P
16
F
Figure 2.3. A comparisonn between pattents registered in EPO annd PCT from
m 1987 to 200
03
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The graph indicates that US has a Revealed Technological Advantage in Pharmaceuticals as the results
are above 100 on a consistent basis from 1987 onwards. That implies US specialization in pharmaceutical
sector and the likelihood of fostering new innovation is higher. This notion is supported by Shapiro and
Hassett (2005), who argue that nations with weak intellectual property protection attract less foreign
investment and countries with strong IP protection are more inclined to spend on Research and Development
(R&D) when compared to nations where there is Strong patent and IP laws are helpful protecting consumers
from fake drugs such as in US.
3. Conclusions
The pharmaceutical Indusrty is very R&D intensive in nature as it involves creating new knowledge, and
therefore the viability of pharmaceutical sector depends upon protection of intellectual property rights, as
they provide cusion to the inovating firm to recover the initial costs. Patents are useful for the development
of new medicines, sometimes patents can add extra expenses and serve as barriers to for new research. This
paper indicates that pharmaceutical industry can be characterised as having extended new product
development cycles (10-15 years), coupled with higher degree of regulations and requires great initial R&D
investments, patience and risk in developing a new drug. There has been a constant increase of ~5% in
investment in US Pharmaceutical Industry since mid 1980s on annual basis with a corresponding increase in
Pantent. Additionally, Government intervention in terms of pricing, regulation and promotion mechanisms
are relatively strict and demands stringent compliance in the United States. These characteristics serve to
differentiate pharmaceutical industry in the US from other sectors which are mostly unregulated, with lower
R&D investments and shorter product development cycles. Due to high protection and technological
opportunities United States has taken the lead from other countries in the domain of international
competition in Pharmaceuticals industry leading to a RTA greater than (1) on a consistent basis.
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