Timing and payoff of patent purchases: the role of firm size and composition

ABSTRACT

While large pharmaceutical companies continue to dominate drug development and patent acquisition, their timing of drug patent acquisition and subsequent payoffs remain poorly understood. We analysed the effects of firm characteristics on the timing of patent purchases, with a unique data set constructed using publicly available data provided by the United States Patent and Trademark Office (USPTO). We focused on the role of firm size and composition in affecting the timing of patent purchases and the subsequent payoff; particularly, how firms’ R&D intensity and overall scale affect purchasing decisions and commercial success of the drugs. The quantitative results show that, on average, firms with larger scale and stronger R&D departments are more likely to purchase drug patents later; furthermore, a strong R&D department contributes positively to drug sales and market shares through a better selection process of patents. The economics intuition is that firms with a larger scale and greater emphasis on R&D investment have advantages in producing in-house innovation, so they tend to be more selective when buying from outsources. This results in buying patents later and better subsequent commercial performance on the drugs that firms purchased.

KEYWORDS:

• Patent Transfer
• R&D
• Timing of Purchase
• Commercial Performance

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Aggregation both division expenditure takes more than 60% of overall revenue on average.

² Due to the availability of data collected. Top 200 drugs from 2003 to 2010 and top 100 drugs from 2011 to 2013.

³ Normally 20 years and can be extended due to different situations. For example, if it is an orphan drug, it would have a 12 year extension to remain market exclusivity.

⁴ If the patent owners do not pay for the patent renewal fee and maintenance fee, the patents would expire, or be terminated.

⁵ Licencing behaviours in which the user-ship of the patent is assigned to other companies while the ownership never changes are not observed. It could be the case that for some drugs, the actual seller is different from the drug patent owner, and such scenario would be discussed if licencing data are available. At this point, I need to assume such behaviour is not a common case as sellers would prefer a hostile takeover if the drug is really profitable and would stop marketing the drug if it has a bad demand.

⁶ Orange Book.

⁷ Orange Book Database has the applicant firm for the drug, which can be double-checked from the NBER Patent Database or USPTO, to ensure the current ownership.

⁸ Such omitted conveyance includes but not limited to change of name, change of address, change of information noticed, corrective message.

⁹ Overall, about 14% of the transfers are under the ‘merger’ category.

¹⁰ Including but not limited to Barclay banks, BOA, CIT Bank, JPMorgan, Deutsche Bank, The Bank of New York Mellon.

¹¹ For instance, Pfizer can allow GSK to assist with a drug development and can assign GSK to apply for drug approval to the FDA using GSK as applicant name. Through the whole process, Pfizer is the only drug patent owner, and GSK works as an assistance.

¹² Since patents usually have an expiration period of 20 years. I exclude transfer that is too early compared with drug approval date.

¹³ The data have been discounted by CPI to constant dollars.

¹⁴ Marketing-related expenditure is obtained by subtracting R&D expenditure from selling, General and Administrative Expense, value adjusted to be non-negative.

¹⁵ e.g. Some of the top-selling drugs in the years 2012 and 2013 are generic ones, and when match drug names with patents, the generic drugs are excluded.

¹⁶ The range is set as 3 years ahead and 3 years afterwards.

¹⁷ For instance, if only two drugs A and B belong to category anti-infection drugs, and annual sales as 100 million, respectively, then the market share for drug A will be 50%, and same applies to drug B.