In this third post on reverse settlements, I examine whether traditional legal standards for judging whether a drug patent is valid captures the social value from a drug patent. This is important because the FTC takes the position that reverse settlements extend the expected life of a drug company’s patent as compared to litigation over patent validity under traditional legal standards for judging patent validity. I conclude that those standards may seriously undervalue the social benefit of drug patents, even invalid ones. First, patent validity standards do not appreciate that all drug patents – valid or not – are necessary to compensate drug companies for conducting clinical trials, which are half the cost of all R&D and are socially valuable even if the drug patent is not valid. Second, profits from a drug patent – even if the patent is invalid – sustains research on a large number of other drug patents – which may be valid. That cross-subsidization suggests a branded drug company ought be judged on their portfolio of patents, not on individual patents. Traditional patent validity standards fail to do that.
To be clear, I understand that patent law standards for validity are not perfect, and I do not expect them to be. What I suggest is that there is a worse fit between patent validity standards in the pharmaceutical industry than in other industries. This is relevant for antitrust analysis because, if patent validity standards undervalue drug patents, then eliminating reverse settlements undervalues them even further since these settlements putatively extend the expected patent life of drug patents.
Let me begin with my first substantive claim: all drug patents, whether valid or not, are socially useful. All drug patents encourage production of useful public goods, specifically information about whether a drug works. The main reason is that, unlike patents for other products, a patent for a drug is obtained before research on the drug is completed. Specifically, drug companies obtain patents on molecules after lab and animal testing, but before clinical test, i.e., testing on humans. Yet human testing is roughly half the cost of all drug R&D (DiMasi, Hansen, & Grabowski, 2003). Moreover, the results from clinical trials, which are made public as part of the drug approval process, are a public good. Once a drug is shown to be effective, everyone knows whether the molecule is medically valuable. If a company did not have a patent that could prevent other companies from producing that molecule, it would never conduct the trial in the first place!