Pharmacogenomics, Genetic Tests, and Patent-Based Incentives

Abstract:     
Pharmacogenomics promises to revolutionize medicine by using genetic information to guide drug therapy. Genetic tests will help doctors improve drug safety and efficacy by better matching patients and drugs. This Article evaluates the effectiveness of patent-based incentives to create genetic tests, and the optimal mix of public and private sector pharmacogenomic R&D. Drug patent owners have a strong incentive to develop genetic tests that predict adverse drug reactions and allow them to market drugs that otherwise would be shelved. Incentives are also strong for genetic tests that are created as part of the drug development process. Incentives tend to be weaker for genetic tests that are used in conjunction with existing drugs. Drug patent owners might gain or lose profit from introduction of genetic tests into existing drug markets. Profits may fall because of lost sales; or profits may rise because drugs are more valuable to appropriate patients, and because drugs become more differentiated.

Public sector R&D should target genetic tests that are likely to be underprovided by the private sector because private returns are low relative to social returns or private costs are high relative to social costs. Private returns are relatively low when the rate of adoption of a genetic test is apt to be low, when test results increase consumer heterogeneity and consumer bargaining power, and when a test reveals information relevant to the use of more than one drug. Private costs are relatively high when test innovators need to obtain costly patent and trade secret licenses.

Keywords: patent, genetic test, pharmacogenomics, pharmaceuticals, research subsidy

JEL Classifications: H4, I1, K2, L65

Working Paper Series