July 15, 2008

News & Opinion: Excerpt from The Gridlock Economy

By: Dylan Schleicher @ 4:17 PM – Filed under: Management & Workplace Culture

The following excerpt is the beginning of Chapter 3 in The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Cost Lives by Michael A. Heller. The publisher writes "Every so often an idea comes along that transforms our understanding of how the world works. Michael Heller has discovered a market dynamic that no one knew existed. Usually, private ownership creates wealth, but too much ownership has the opposite effect--it creates gridlock. When too many people own pieces of one thing, whether a physical or intellectual resource, cooperation breaks down, wealth disappears, and everybody loses."
chapter three

You, or someone you love, may die because of a gene patent that should never have been granted in the first place. Sound far-fetched? Unfortunately, it's only too real. Gene patents are now used to halt research, prevent medical testing and keep vital information from you and your doctor. Gene patents slow the pace of medical advance on deadly diseases.

-- Michael Crichton
New York Times Op-Ed

Where are the life-saving cures promised by the biotech revolution? Perhaps biomedical gridlock is blocking the way. Drugs that should exist are not being created. The stakes could hardly be higher.
On one side, advocates argue that Congress should limit patent rights generally or even bar new gene patents altogether. At the other extreme, the biotechnology industry lobby says there's no problem to speak of and pending legislation will make things worse. The debate on Capitol Hill is a furious, life-or-death showdown over your health and the financial health of many leading industries. It's biotech versus telecom; big pharma against software. Everyone is struggling with the gridlock issue. As the Los Angeles Times editorial noted, the legislative conflict
reflects a growing sense in Washington that the patent system has lost its moorings. That's due in part to rapidly changing technologies that prompt patent holders to make novel and unanticipated claims. But it also reflects the nature of patents and intellectual property generally. With a plot of land or a string of pearls, it's easy to tell where one person's property ends and another's begins. With something as abstract as an invention, however, those lines are fuzzy and likely to shift over time.

This chapter brings you up to speed on drug patent gridlock. A decade ago Rebecca Eisenberg and I helped launch today's debate when we cautioned in Science that "privatization of biomedical research must be more carefully deployed to sustain both upstream research and downstream product development." Otherwise, we wrote, "more intellectual property rights may lead paradoxically to fewer lifesaving drugs."
The danger we uncovered is that privatization can address one tragedy (underinvestment) but cause another (an anticommons). These polar outcomes are not our only choices. Careful definition of property rights can make a difference. In recent years, private industry and public regulators have come up with many smart solutions. We've learned a lot. But progress remains partial and tentative. How many more lives could we save if we were to get biotech property rights right?
Gridlock in Drug Research. First, consider Figure 1 below. (In the figure, horizontal bars represent gene patents; the labels mark highly patented regions.) Now imagine trying to create a medical diagnostic product that requires access to all the patented areas on some chromosome--that might be harder even than assembling the original big inches. In the past thirty years, over 40,000 DNA-related patents have been granted. Any discovery that relies on database creation is vulnerable. Gene patents are not the only area at risk. More and more, invention requires assembling scattered bits of intellectual property from across the biotech frontier.

FIGURE 1: Patent Activity on a Short Stretch of Chromosome 20

If gridlock blocks research, then where does entrepreneurial energy in the drug industry go? Figure 2 suggests part of the answer: firms spend a lot of resources threatening, initiating, responding to, settling, and pursuing litigation. Affymetrix, the firm at the center of the figure, is not an unusual case. Every pioneering biotech company sits in the middle of its own litigation web. According to Nicholas J. Naclerio, head of the BioChip division at Motorola, the recent increase in biotech patenting has lead not to more drugs but to "a bewildering web of lawsuits--and it may only get worse." He continues, "If we want to make a medical diagnostic with 40 genes on it, and 20 companies hold patents on those genes, we may have a big problem. It isn't at all clear how this is going to work out." If everyone invests in the litigation merry-go-round, innovation gets tossed aside, gridlock sets in, and we all lose out.

FIGURE 2: A Snapshot of Gene Patent Microarray Litigation, 2000

Keep in mind that this litigation snapshot covers only one corner of gene microarrays (a diagnostic device in which multiple gene probes, tools for identifying sequences of the bases that make up DNA, are attached to microchips and used to sift through information contained within a genome). Whether you update the microarray story from 2000 to the present or look at other biomedical fields, the story is the same--a lot of innovative energy is being diverted to worrying about litigation.
And note that litigation is only a side show. The process by which patents are granted can cause gridlock just as easily as the content of the patents themselves. For example, in America, there are long delays between the filing and issuance of biotechnology patents. While patents are pending, no one knows what scope of rights will ultimately be given, if any. Pending patents do not by themselves create enforceable rights. Nevertheless, firms and universities will license rights to their research results before patents have been granted. Firms even raise capital based on the hope that their applications will lead to valid patents. Thus, each potential patent creates a specter of rights that can activate bargaining and gridlock. Given the time crunch in biomedical research, the potential rights created by applying for a patent may be more important than the actual rights, if any, eventually conferred by the U.S. Patent and Trademark Office (PTO).
The exponentially rising level of patent applications in recent years means not only that delays are increasing, but also that the quality of issued PTO patents may be decreasing. Figure 3 shows all live patents from the founding of the U.S. to the present across all fields. As two leading patent theorists, Mark Lemley and Carl Shapiro, point out, patents are "probabilistic," that is, they are far less certain than people assume when they think about property. (It's much easier to know if your neighbor is on your side of the fence). The PTO grants most patent applications, then let's people fight over their validity later on. Almost half of patents litigated to judgment are invalidated; of those found valid, half are found not to be infringed. But litigating each patent is expensive, time consuming, and uncertain. So, an owner of a weak patent that is likely invalid or not infringed nevertheless can use it to extract license fees and hold up innovation.

FIGURE 3: Live U.S. Patents by Year

The most important cause of gridlock in biomedical research, however, is not any particular lawsuit or even uncertainty about patent scope or validity, but the sheer multiplicity of rights that must be acquired to undertake innovation of any sort, including drug development. A firm might be confident it will win any particular patent suit, but not that it will prevail against every single one of 100 weak claims. Fragmented ownership can be enough, by itself, to deter innovation. Consider another example, this one from the world of neurotransmitters in the brain. Bennett Shapiro, Merck's vice-president for worldwide basic research, explains the stifling effect of patents on brain receptors (proteins in cells that respond to certain molecules and stimulate the cells' response),
People who take compounds for schizophrenia often develop other disorders, some of which resemble Parkinson's disease, another disease involving the dopamine system. A rational approach to discovery of improved schizophrenia drugs would be to target specific dopamine receptors. But if different companies hold patents on different receptors, the first step on the path to an important and much needed therapeutic advance can be blocked.

Suppose Merck finds a compound that shows promise against schizophrenia. The company then needs to uncover the compound's potential side effects before committing hundreds of millions of dollars to clinical testing and bringing the drug to market. But if the relevant receptors are patented and controlled by different owners, the research phase can quickly become expensive. Before they can test their compound, Merck must strike a deal with every single receptor patent owner. Each can block Merck's progress because the FDA will require, quite reasonably, that the drug be tested for side effects against all known, relevant receptors. From Merck's perspective, each patent or pending patent may act like a phantom tollbooth; together, the owners can be modern-day robber barons. If Merck calculates that it is too costly to overcome gridlock in schizophrenia research, they simply reallocate their limited research funds to other areas where the property rights environment is less fragmented. In short, too many overlapping patents can push drug makers away from the most medically promising lines of research to those that are least legally challenging.
Gridlock also can become a hot issue whenever lethal new diseases appear. For example, Severe Acute Respiratory Syndrome (SARS), a form of atypical pneumonia, emerged in southern China in late 2002. Over the next six months, over 700 people died from the new disease, including Carlo Urbani, the doctor who first identified SARS. Experts feared that the disease could become a global pandemic. Laboratories all over the world cooperated in a successful race to find the pathogen. This great public health achievement was soon marred by patent controversy:
It is likely that patent rights incorporating the SARS genomic sequence will be fragmented across several groups. Sorting out these rights will be complex and may require intervention of the law courts. . . . [For firms considering whether to develop a SARS vaccine], uncertainty over patent rights makes this decision even more difficult, because it is neither possible to determine the future cost of licensing the patent rights, nor whether all necessary patents will be available for licensing. . . . The incentive for vaccine developers is therefore to delay the decision to invest.

Concerned with preventing the next global pandemic, the World Health Organization (WHO) issued a statement in 2003 saying, "In the longer term, the manner in which SARS patent rights are pursued could have a profound effect on the willingness of researchers and public health officials to collaborate regarding future outbreaks of new infectious diseases." Just a year later, in 2004, researchers became concerned that "patent rights are impeding efforts to prevent an outbreak of bird flu--avian influenza." SARS and avian flu have not mutated into global killers, at least not yet, but potential super-bugs are emerging all the time. They won't wait for us to sort out fragmented ownership.
Excerpted from The Gridlock Economy
Copyright © 2008 by Michael Heller
Published by Basic Books
A Member of the Perseus Books Group

About Dylan Schleicher

Dylan Schleicher has been a part of the 800-CEO-READ claque since 2003. Even though he's stayed on at the company, he has not stayed put. After beginning in shipping & receiving, he joined customer service and accounting before moving into his current, highly elliptical orbit of duties overseeing the ChangeThis and In the Books websites, the company's annual review of books and in-house design. He lives with his wife and two children in the Washington Heights neighborhood on Milwaukee's West Side.