American Journal of Law & Medicine

The Economic Theory of Patent Protection and Pandemic Influenza Vaccines: Do Patents Really Incentivize Innovation in the Field?

The creation of new vaccines is one of the key challenges in the battle against global infectious diseases. Therefore, creating the optimal conditions for innovation in vaccines is one of the most important roles law may undertake in this battle. In relation to pharmaceuticals, the economic theory of patent protection is commonly cited by industry and in the academic literature to justify the patenting of life-saving medicines and vaccines. The economic theory of patent protection holds that innovation occurs due to patents protecting the research and development investment made by the innovator. Proponents of this theory claim that without patents such innovation in medicines and vaccines would occur at a significantly reduced rate. This Article considers the applicability of the economic theory of patent protection to pandemic influenza vaccines. This Article examines a number of factors relevant to patent law, theory, and innovation including: the patent landscape for pandemic influenza vaccines: the market dominance enjoyed by manufacturers: the actual risk posed by imitators making generic vaccines if patent protection were not in place; and, the licensing and regulatory' provisions for creating generic vaccines.

According to the economic theory of patent protection, a patent incentivizes innovation by providing an innovator with a temporary monopoly regarding their innovation, and by protecting them from the threat posed by imitators who wish to make a cheap replica of the product. However, even without a patent, pandemic influenza vaccine manufacturers are in this position. Due to economies of scale and the complicated regulatory and licensing frameworks relevant to bringing a pandemic influenza vaccine to market, manufacturers are at little to no risk from generic imitators. Moreover, there is a very strong incentive to innovate because pandemic influenza vaccine manufacturers are selling a product for which demand exceeds supply to a captive market of nations and organizations, each of which is hoping to secure as much vaccine as possible. The unique conditions associated with pandemic influenza vaccines appear to provide more of an incentive to innovate and research in this field than the fact that the innovations can be patented.

  I. INTRODUCTION
 II. PATENTS AND ACCESS TO KNOWLEDGE
III. THE ECONOMIC THEORY OF PATENT PROTECTION
 IV. CRITICISMS OF THE ECONOMIC THEORY OF PATENT PROTECTION
  V. THE ECONOMIC THEORY OF PATENT PROTECTION AND PANDEMIC
     INFLUENZA VACCINES
     A. A VIABLE MARKET
     B. ENTERING THE MARKET
     C. THE RISK FROM IMITATORS
     D. THE ROLE OF PATENT THICKETS
 VI. THE EFFECT OF PATENTS ON ACCESS TO PANDEMIC INFLUENZA
     VACCINES
VII. CONCLUSION

I. INTRODUCTION

The effects of an influenza pandemic can have a significant impact on individuals and the wider community. At an individual level, "[h]uman infection with influenza virus can vary from asymptomatic infection, to uncomplicated upper respiratory tract disease, to serious complicated illness that may include exacerbation of other underlying conditions and severe viral pneumonia with multi-organ failure." (1) At a societal level, influenza pandemics are characterized by increased hospitalizations (2) and mortality; (3) and global economic impact has been estimated to be $800 billion USD when considering anticipated quarantines and interruptions in global trade. (4) Vaccines are the key component in the response to an influenza pandemic; systematic reviews of clinical studies demonstrate that the timely administration of an influenza vaccine is the most effective public health intervention to halt the spread of infection and to prevent mortality from influenza in adults, (5) the elderly, (6) and children. (7) Therefore, states that have sufficient access to pandemic influenza vaccines are in a significantly better position to limit the effects of pandemic influenza and limit their reliance on expensive drugs to manage the complication of an outbreak, than those without access to pandemic influenza vaccine. (8) This is particularly important for developing states as many lack health systems with sufficient capacity to manage a pandemic. (9) Therefore, prevention via vaccinations is essential for the developing world. In order to establish full immunity against a pandemic strain, a two-dose strategy may be required. (10) With pandemic influenza vaccine costing approximately $5.54 USD per dose (excluding the cost of administration), (11) the cost of such a vaccination program is likely to be very high and, in some instances, may be prohibitive, particularly in developing states.

Despite the importance of vaccination, during the 2009-H1N1 pandemic influenza outbreak, there were significant disparities in vaccination coverage between developed states and developing states. Developing states tended to purchase less pandemic influenza vaccine, and that vaccine was procured by developing states later than it was by developed states. (12) Significant concern has been expressed that intellectual property rights play an integral role in hampering developing states ability to access medicines in such a scenario. At the World Health Organization, developing states have advanced the argument that patent protection on pharmaceutical products negatively impacts a developing states' ability to provide cost-effective medicines to their populations. (13) Indeed, the academic literature concerning intellectual property and access to medicines is largely split into two distinct, and somewhat opposing, camps. One side argues that patent rights are justifiable because without such patents incentivizing innovation, new medicines would not be created, as there would be a lack of incentive to invest in their creation. (14) The other side argues that pharmaceutical patents negatively impact the ability of developing states to procure the drugs they require for their population, as a result of the exclusive rights granted to the patent holder. (15) It should be noted that opinions regarding the justification for the patent system sit along a spectrum and the dichotomy highlighted above represent some of the most polarized opinions.

Patents have the potential to negatively impact the procurement of pandemic influenza vaccine by developing states because patents grant a temporary monopoly to the patent holder, thereby preventing generic market entry, which has the effect of increasing competition amongst pharmaceutical manufacturers and driving down prices on products. (16) It is, therefore, important to consider the role patents play in the development of pandemic influenza vaccines and to determine if the existence of patent protection for vaccines, components within the vaccines, or vaccine related technology will provide a net benefit to pandemic influenza vaccine procurement by incentivizing vaccine research and development.

II. PATENTS AND ACCESS TO KNOWLEDGE

Patents provide a property right in knowledge generated by way of an invention. In pure economic terms, knowledge is a public good--an intangible asset that can be consumed by anyone to the extent desired without diminishing the amount available for others. (17) For example, the knowledge required to manufacture Aspirin could be transferred from Person A to Persons B, C, D, and E without diminishing Person A's knowledge.

Once a public good is created, it is difficult or impossible for the creator to stop people who have not paid for the good from using that good. (18) This is commonly known as the free rider problem. (19) The free rider problem is considered undesirable within economic markets, as businesses cannot charge for each unit of a public good that is consumed, meaning that there is little incentive to generate, produce, or enhance public goods. (20) If a public good is just as useful to society as a comparable private good, then it can typically be said that the public good is under-produced and that this is inefficient for the society as a whole. (21)

Patents prevent knowledge from becoming a public good, where there is no legal control over its dissemination, to creating an intangible asset in which an individual or organization may have property rights. A patent grants the patentee the right to exclude others from utilizing the knowledge for the life of the patent. (22) Patents in the field of pharmaceuticals are at times controversial because of the importance of the knowledge that they exclude others from utilizing. As Kevin Outterson notes on this point: "[t]he goal of IP laws should be to maximize nonrival access to pharmaceutical knowledge, with just enough legal support for the appropriation of rents to protect socially optimal R&D. Since pharmaceutical knowledge is nonrival, it should be disseminated in the widest possible fashion at the lowest possible cost for the greatest possible benefit to global public health." (23)

The first recorded patent in England was granted by the Monarch in 1449. (24) Since then, there has been debate regarding the benefits and drawbacks of the patent system, as well as whether such a system for granting property rights in knowledge is justifiable at all. (25) A number of theories that attempt to justify the patent system have been proposed, including the contract theory of patents, (26) natural rights, (27) and intellectual property and personhood. (28) Despite this plethora of theories, this section is limited to considering the economic theory of patent protection only (the "economic theory") only, as this is the most common justification for the patent system. (29)

III. THE ECONOMIC THEORY OF PATENT PROTECTION

The economic theory of patent protection originates from the work of Jeremy Bentham, who at the end of the eighteenth century wrote:

   protection against imitators [is necessary because].... [h]e who
   has no hope that he shall reap, will not take the trouble to sow.
   ... the inventor would almost always be driven out of the market by
   his rival, who finding himself, without any expense, in possession
   of a discovery which has cost the inventor much time and expense,
   would be able to deprive him of all his deserved advantages by
   selling at a lower price. (30)

Supporters of this theory claim that if imitators have the same production costs as innovators, but none of the initial development costs for the product, then imitators would be able to sell the imitation product at significantly lower prices than the innovative product. (31) Therefore, potential investors would not fund the development of innovator products as they know they will not recoup their initial investment, thereby leading to stagnation in research and development, which would halt the progress of modern medicine. The economic theory of patent protection has widespread support in the literature, (32) government reports, (33) and the courts, in both the United States (34) and the United Kingdom. (35) It is also specifically argued in relation to pharmaceutical research and development by academics, (36) and by the pharmaceutical industry itself. The Bioindustry Association claimed in Human Genome Sciences Inc. v. Eli Lilly (37) that "funding for research and development on the potential therapeutic value of a newly discovered and characterized protein or its antibodies is dependent on the funders being reasonably confident that the patent ... concerned will be reasonably safe from attack (or likely to be granted)." (38) More specifically, in the field of pandemic medicine, the CEO of Roche claimed that "without patent protection, there is no research." (39)

Peter Drahos claims that the economic theory of patent protection adequately justifies the existence of patents because people respond to positive incentives and rewards. (40) He further claims that, if profit is to be made from abstract objects which are "non-rivalrous" (41) in their consumption, then in order to maintain a system of incentivization the rights to these public goods "have to be locked up in some way, at least temporarily." (42) The "locking up" of knowledge via a patent system is not without drawbacks, as William D. Nordhaus notes: "[t]he patent system may give a level of research that is close to the optimum, but--as shown--only at the expense of higher prices, lower output, and the inefficiencies usually associated with monopoly." (43) Nordhaus further claims that patents provided a net benefit to society by increasing the flow of innovations, which is desirable because the market system might otherwise provide too little new knowledge. (44) Nordhaus weighs this benefit against the fact that, by giving the patentee exclusive rights on the exploitation of a unique economic good that is still non-rivalrous in consumption, a patent creates a monopoly situation that adversely affects the efficient use of new knowledge by restricting access to innovations. (45)

The claims made by Drahos and Nordhaus that patents adversely affect the efficient use of knowledge by restricting or "locking up" knowledge have some merit. After all, the fundamental purpose of a patent is to control the use of the knowledge generated by the patentee for the life of the patent. Supporters of this theory assume that the patent is the only thing preventing the patented knowledge from being utilized by others. Additionally, these supporters assume that but for the patent, the knowledge required to manufacture and use the invention would consequently revert to a public good that could be freely utilized by anyone. This, in turn, would disincentivize the creation of new inventions. In practice, this is not the case, and there are many barriers to using an invention, regardless of whether patent protection has been granted.

Firstly, the technology needed to utilize the knowledge may be inaccessible, due to price barriers or the technological know-how required for the invention to work. (46) Secondly, elements of the technology required to use the patent may be "locked up" by trade secrets, non-disclosure, or an inability to be reverse engineered. (47) Finally, the knowledge may be disseminated in jargon or impenetrable language. (48) Each of these factors impacts the extent to which knowledge can be utilized, regardless of whether the patent protection has been granted. Indeed, as this paper later argues, other barriers exist to utilizing knowledge related to pandemic influenza vaccine manufacturing that have nothing to do with the patent system. Even if the patents for pandemic influenza vaccine technology did not exist, or could be lawfully circumvented, it would be impossible for imitators to produce generic pandemic influenza vaccines without established pandemic influenza vaccine manufacturers providing the requisite knowhow.

IV. CRITICISMS OF THE ECONOMIC THEORY OF PATENT PROTECTION

While the economic theory of patent protection is "probably the most quoted argument in support of patents," (49) it is not without critics. Firstly, it has been noted by Alexander Tabarrok that: "the current system ties returns to innovation to the benefits of a patented idea, i.e., as the value of the idea increases monopoly profits increase. Yet the economic theory of patents implies that returns should be tied to the sunk costs (50) of research and developing the patented idea." (51) This is particularly relevant to pharmaceutical research and development where a significant amount of research and development funding is provided by public institutions, (52) yet this is not reflected in the patent term granted. The time for which the patent is granted is not reduced to account for the fact that research and development investments came from public financing, which leads some commentators to claim that the public pays for its medicine twice: once at the research and development stage, and again at the point of purchase. …

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