Incentivizing Failure

Abstract

Patents should incentivize success; they are not intended to be a participation trophy. But when it comes to pharmaceuticals, courts, law-makers and industry researchers alike operate under the assumption that the patent incentive should compensate drug-makers for their failures, too. This understanding comprises a dramatic departure from the theory and history of patent law.

The idea that innovators should be compensated for their failures creates an incentive to fail more, eroding the mandate toward efficient and successful drug development that pharmaceutical patents supply. Incentivizing failure is especially problematic in an industry that features few buy-side constraints and significant value leakage in its new drug development pipeline. It should be no surprise that drug prices have continued to climb.

This article proceeds as follows. Part I will describe the prevailing narrative of failure, as courts and researchers consistently accept the logic that the patent incentive in the pharmaceutical industry ought to compensate drug manufacturers for their failures. Part II will demonstrate how this notion clashes with patent law, stretching back to its inception. Part III illustrates how incentivizing failure reduces efficiency in the drug development pipeline, pushing prices higher and discouraging basic, high-risk research efforts in turn.

Keywords: Patent, Incentives, Pharmaceutical, Drug, Failure