Professor Margaret Kyle on Whether Pharmaceutical Innovations are Rewarded

Our friends at Oxfirst are hosting another interesting webinar on March 14, 2018 at 15.00 BST and 16.00 CET.  The webinar is titled, “Are Important Innovations Rewarded?  Evidence from Pharmaceutical Markets.”  The presenter is Professor Margaret Kyle. 

Here is a description of the presentation:

This research focuses on the relationship between therapeutic value and different measures of market rewards (the number of patents, price, market share, and total revenues) of a new treatment. Using an assessment of therapeutic value provided by the French Haute Authorité de Santé (HAS), I find a weak relationship between most measures of rewards and this assessment of therapeutic value, suggesting that the returns to developing a “me-too” product are not very different from developing treatments with greater therapeutic effects. One interpretation is that the HAS score is a poor assessment of therapeutic value, in which case the use of similar health technology assessments by governments and other payers should be re-examined. Alternatively, if the HAS score is informative, the results suggest countries are spending too much on less innovative products, and that a re-balancing of innovation incentives may be worth considering if therapeutic value is highly related to social welfare.

Here is Professor Kyle’s biography:

Prof. Margaret Kyle (MINES ParisTech and CEPR) currently holds the Chair in Intellectual Property and Markets for Technology at MINES ParisTech. Her research concerns innovation, productivity and competition. She has a number of papers examining R&D productivity in the pharmaceutical industry, specifically the role of geographic and academic spillovers; the firm-specific and policy determinants of the diffusion of new products; generic competition; and the use of markets for technology. Recent work examines the effect of trade and IP policies on the level, location and direction of R&D investment and competition. She also works on issues of innovation and access to therapies in developing countries. Her papers have been published in various journals of economics, strategy, and health policy, including the RAND Journal of Economics, Journal of Public Economics, Review of Economics and Statistics, Journal of Public Economics, Journal of Law and Economics, Antitrust Law Journal, Management Science, and Health Affairs. Margaret holds a PhD in economics from the Massachusetts Institute of Technology and is an associate editor of the International Journal of Industrial Organization. She previously held positions at Carnegie Mellon University, Duke University, London Business School, and the Toulouse School of Economics, and is a visiting professor at the Kellogg School of Management, Northwestern University. She has also been a visiting scholar at the Center for the Study of Innovation and Productivity at the Federal Reserve Bank of San Francisco and at the University of Hong Kong.

Registration is available, here.  Space is limited and you must register with a professional email address.

U.S. Antitrust Division Chief Makan Delrahim: Making Patents Great Again?

Makan Delrahim, the leader of the Antitrust Division of the U.S. Department of Justice of the Trump Administration, has made several interesting comments concerning patents and the antitrust interface.  In a recent post on the Patently Obvious Blog, Professor Dennis Crouch discusses some debate concerning Mr. Delrahim’s positions as to when patent holders may create antitrust issues: “[Delrahim] explained that the DOJ’s historic approach has been a “one-sided focus on the hold-up issue” in ways that create a “serious threat to the innovative process.””  Professor Crouch includes links to documents concerning Delrahim’s positions as well as some responses. 

A few days ago, Mr. Delrahim spoke to the College of Europe in Brussels.  His speech is titled: “Good Times, Bad Times, Trust Will Take Us Far: Competition Enforcement and the Relationship Between Washington and Brussels.”  Most of the speech concerns the successes of cooperation between the DG Competition and the US DOJ Antitrust Division.  However, he does note some divergence in approach concerning intellectual property:

In the intellectual property area, we each have licensing guidelines; DG Competition’s guidelines were revised in 2014; ours just last year.  Both sets of guidelines highlight the benefits of robust IP protection, the importance of innovation incentives, and the risk that certain hardcore conduct poses to competition.

Intellectual property rights and innovation are topics I have cared about for a long time.  Intellectual property rights are enshrined in the U.S. Constitution, and I believe that strong protection of these rights drives innovation incentives, which in turn drive a successful economy.

A deep-seated concern for protecting incentives to innovate underlies many of the changes in U.S. antitrust law over the past several decades, and it is no coincidence that we have enjoyed a period of staggering innovation over that time.  But in an ever-evolving marketplace, success is not a static outcome.  We must continue to think critically about how best to calibrate our enforcement decisions to promote competition and innovation.

As you may know from what I have said publicly, a particular concern of mine is how we use antitrust enforcement in the context of standard setting.  In particular, I worry that we have strayed too far in the direction of accommodating the concerns of technology licensees who participate in standard setting bodies, very likely at the risk of undermining incentives for the creation of new and innovative technologies.  We continue to better our understanding of this important field.

The dueling interests of innovators and implementers always are in tension, but the tension is best resolved through free market competition and bargaining.  And that bargaining process works best when standard setting bodies respect the intellectual property rights of technology innovators, including the very important right to exclude.  To the extent a patent holder violates its commitments to a standard setting organization, remedies under contract law, rather than antitrust remedies, are more appropriate to address licensees’ concerns.

I am aware that there may be some distance between my position and that of some of my European counterparts.  If that is the case, however, we can look to our long history of effective and productive collaboration for guidance about how to proceed.  I will make every effort to work with our counterparts at DG Competition to narrow any gap between Brussels and Washington in this area.  We must maintain our close dialogue on the cutting-edge issues—innovation, intellectual property rights, and digital markets—that will occupy much of our time in the future. Innovators and consumers in both of our unions deserve nothing less.        

Mr. Delrahim also discussed the purpose of antitrust or competition law, and digital markets:

We also continue to work to narrow the differences between us on policy and substance.  Mr. Kolasky’s speech identified a “sharp divergence” between the EU approach and “the central tenet of US antitrust policy – that the antitrust laws protect competition, not competitors.”  But since those remarks, European Commissioners have again and again affirmed their commitment to the consumer welfare standard.  Starting with then-Commissioner Mario Monti and continuing with Commissioners Neelie Kroes, Joaquin Almunia, and on to Commissioner Margrethe Vestager today, Commissioners have expressed their commitment to the same consumer welfare standard that guides U.S. competition enforcement.  As Commissioner Vestager has stated, “we don’t always do things the same way.  But I think our goals are very similar: We want to protect competition and consumers.”

This is not to say that we have overcome all of the differences between us.  We still do have differences, but we talk about them regularly and respectfully, so that we can understand what motivates them.  

For example, we have not yet closed the gap in the area of unilateral conduct. European competition law still imposes a “special duty” on dominant market players, while we in the U.S. do not believe any such duty exists.

With respect to unilateral conduct, we have particular concerns in digital markets.  We continue to advocate for an evidence-based approach based on existing theories, which are sufficiently flexible to apply to new forms of doing business in the digital economy.  Where there is no demonstrable harm to competition and consumers, we are reluctant to impose special duties on digital platforms, out of our concern that special duties might stifle the very innovation that has created dynamic competition for the benefit of consumers. 

But the benefit of our close relationship with DG Competition is that we can and do talk about these differences, making progress along the way.  For example, in the ICN’s Unilateral Conduct Working Group, we spent significant time working together to develop an Analytical Framework for Unilateral Conduct.  Even though we have different views on how dominant players should be treated, we nevertheless reached agreement on a fairly significant policy document.

Will Mr. Delrahim Make Patents Great Again? 

Trump White House Releases Biopharmaceutical Pricing Reform White Paper

The White House Council of Economic Advisers recently released a report titled, “Reforming Biopharmaceutical Pricing at Home and Abroad.” [Report]  The Report points to basically two problems: 1) overpricing in the United States; and 2) underpaying outside the United States.  The Report states:

U.S. patients and taxpayers alike have mainly financed the returns on R&D investments to innovators. Unlike other developed countries with single payer systems, which nearly all impose some sort of price controls on pharmaceuticals, the U.S. drug market is less financed by the public sector and more open to private market forces. In a free market, prices of products reflect their value as opposed to prices in government-controlled markets, which reflect political tradeoffs. CEA estimates that because of the American market system, more than 70 percent of OECD patented pharmaceutical profits come from sales to U.S. patients even though the United States only represents 34 percent of OECD GDP at Purchasing Power Parity (OECD 2016). Thus, innovators across the world rely heavily on Americans paying market prices to underwrite the returns on investments into products that improve their health because governments abroad use their monopsony power to set prices below market-levels. The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just.  Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area. In addition, prices paid by Americans for many drugs are too high, particularly so when paid for in government programs. This is the result of poorly designed reimbursement policies and regulations that inhibit price competition, and it is therefore a poor use of taxpayer money. 

The Report further notes that, “The U.S. market makes up 46 percent of OECD sales of brand name innovative drugs, funds about 44 percent of world medical R&D, invests 75 percent of global medical venture capital, and holds the intellectual property rights for most new medicines (BMI 2017; Moses et al. 2015; TEC 2017). Furthermore, publicly funded medical research in the United States has produced two-thirds of the top-cited medical articles in 2009, underlying the university research that often leads to medical breakthroughs (Moses et al. 2015).”

The Report points to issues regarding Medicaid, including opportunity for pharmaceutical companies to game and artificially raise prices.  The Report further provides suggestions concerning Medicare as well as the Pharmacy Benefit Manager Market.  Notably, the Report fails to address biosimilars in very much detail, but notes that there may be two more years before final regulations concerning interchangeability are issued.  This delay is raised as a potential reason why interchangeability approval may be slow.

This Report could drive the Trump Administration's approach to dealing with the high cost of health care.  

Federal Circuit Pushes Back on U.S. Supreme Court’s Alice Decision on Procedure

In a pair of interesting software-related cases, the U.S. Court of Appeals for the Federal Circuit appears to push back on one of the supposed goals of the U.S. Supreme Court’s Alice v. CLS Bank International decision.  In Alice, the U.S. Supreme Court clarified and restated the Mayo Collaborative Services v. Prometheus decision’s test concerning patent eligible subject matter.  In doing so, the Supreme Court started a new era of U.S. patent law which made patent eligible subject matter a very important inquiry with respect to the patentability of inventions, particulary those in the software space—although Alice’s impact is felt in other technological areas.  Since Alice issued, the U.S. Court of Appeals for the Federal Circuit has clarified the Alice test and notably provided guidance to patent lawyers on how to “avoid” or “comply” with Alice. 

Importantly, one of the purported benefits of Alice was to allow for the early dismissal of claims based on patent eligible subject matter.  An alleged infringer could conceivably quickly raise patent eligible subject matter and get a claim dismissed on either a 12(b)(6) motion for failure to state a claim or a motion for summary judgment.  In additional push-back to Alice, the Federal Circuit in Berkheimer v. HP (February 8, 2018) has recently held that even after claim construction a motion for summary judgment on patent eligible subject matter may be improper because of genuine issues of material fact.  While this is standard law concerning motions for summary judgment, the case provides a blueprint for how genuine issues of material fact can be created with patent eligible subject matter.  Because of this possibility of creating that genuine issue of material fact, patentees will have additional settlement leverage to realistically threaten a case through trial—a costly endeavor.  What will the effect of this case be on Alice’s attempt to curb so-called patent troll litigation? 

In another recent case, the Federal Circuit in Aatrix Software v. Green Shades Software (February 14, 2018) remanded a case because the district court did not allow the patentee to amend its complaint to survive a 12(b)(6) motion on claim construction.  While the Federal Circuit was careful to note that a complaint can be dismissed on a 12(b)(6) motion to dismiss, this case cautions district court judges to carefully consider motions to amend complaints. 

It will be interesting to see if the Federal Circuit’s decisions about the procedural challenge of patents based on patent eligible subject matter in the courts will have an impact on the analysis in the pending Oil States case before the U.S. Supreme Court. 

Exposing Children to Innovation More Likely to Lead to Innovation than Financial Incentives?

In a fascinating article titled, Who Becomes an Inventor in America? The Importance of Exposure toInnovation, economists Alexander M. Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova, and John Van Reenen, argue that exposing children to innovation may be more likely to lead to innovation than financial incentives such as reducing tax rates.  The authors provocatively ask whether we are “losing Einsteins.”  

Dywer Gunn’s explanation of the article appears in The NBER’s Digest and states:

Children who grow up in particularly innovative geographic areas, or who are exposed to inventors via family connections, are more likely to become inventors.

American inventors are disproportionately likely to be white men who grew up in financially successful families. In Who Becomes an Inventor in America? The Importance of Exposure to Innovation (NBER Working Paper No. 24062), Alexander M. Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova, and John Van Reenen find that children from families in the top 1 percent of the income distribution are 10 times more likely to become inventors than those from families in the bottom 50 percent, and that over 80 percent of 40-year-old inventors are male.

The study examines three possible explanations for the demographic disparities: differences in genetic ability, differences in career preferences, and differences in the financial or human capital constraints faced by different demographic groups.

The researchers find that neither innate ability nor financial constraints fully explains the disparities. Using data from the New York City public schools, they find that while third grade math test scores are predictive of the probability of securing a patent as a young adult, test score differences explain "less than one-third of the gap in innovation between children from high- vs. low-income families." Among students who score well on third grade math tests, students from low-income families are significantly less likely to become inventors than their wealthier peers. While the explanatory power of test scores grows over time, the researchers estimate that only 5.7 percent of the demographic gap in who becomes an inventor can be explained by differences in ability at birth. And they find financial constraints faced during childhood likewise do not explain the gap, as students from low- and high-income families who attend colleges with large numbers of inventors become inventors at similar rates.

Instead, the researchers point to a powerful causal exposure effect. Using nationwide data on where an individual grew up and patent awards in early adulthood, they find that children who grow up in particularly innovative geographic areas, or who are exposed to inventors via family connections, are more likely to become inventors. This finding applies even among technology categories. Among people living in Boston, those who grew up in Silicon Valley are especially likely to patent in computers, while those who grew up in Minneapolis — which has many medical device manufacturers — are especially likely to patent in medical devices. Moreover, children whose parents hold patents in a particular subclass, such as amplifiers, are more likely to obtain a patent in that same subclass than in another. There is also a strong gender-specific exposure effect: women are more likely to patent in a technology class if they were exposed as children to female inventors who held patents in that same type of technology.

The researchers estimate that if young girls were exposed to female inventors at the same rate as young boys are currently exposed to male inventors, the gender gap in invention rates would be halved. More broadly, if women, minorities, and children from low-income families were to invent at the same rate as white men from high-income (top 20 percent) families, the rate of innovation in America would quadruple.

I wonder if other countries have started offering innovation classes to children at a young age.  In the United States, there has been quite a bit of innovation in the primary and secondary school systems for several reasons, including the growing popularity of home schooling and charter schools as alternatives to the public school system.  I do know that there are field specific charter schools in California.  For example, there is one in Sacramento that is focused on the arts, relatively broadly defined.  There is also one focused on law.  And, even our public school system in Sacramento has a School of Engineering and Sciences.  [Hat Tip to Professor Paul Caron's TaxProf Blog.]