Cheap Drugs at What Price to Innovation: Does the Compulsory Licensing of Pharmaceuticals Hurt Innovation?

Abstract:     
The patent system is built on the premise that patents provide an incentive for innovation by offering a limited monopoly to patentees. The inverse assumption that removing patent protection will hurt innovation has largely prevented the widespread use of compulsory licensing - the practice of allowing third parties to use patented inventions without patentee permission. In this Article, I empirically test this assumption. I compare rates of patenting and other measures of inventive activity before and after six compulsory licenses over drug patents issued in the 1980s and 1990s. As reported below, I observe no uniform decline in innovation by companies affected by compulsory licenses and find very little evidence of a negative impact, which is consistent with earlier empirical work. While anecdotal, these findings suggest that the blanket assertion that licensing categorically harms innovation is probably wrong. Based on the data, I comment on the use of compulsory licensing to reduce the price of AIDS and other drugs for developing countries. I suggest that, based on past experience, compulsory licenses need not result in a decline in innovation and that this policy option for increasing access to medicines deserves greater exploration.

Keywords: Compulsory licensing, patents, aids, innovation

Accepted Paper Series