How Does Intellectual Property Protection Influence Biotechnology Investment Decisions?

The process of bringing a drug pipeline asset to market has been estimated to cost between hundreds of millions to more than two billion dollars and take years before any returns are realized. Investment in this process is driven by future expected returns, which is driven by a period of exclusivity enabled by both regulatory and patent protection. Many believe that these protections are essential to maintaining the investment needed to continue to develop new life-saving treatments. However, it remains unclear as to what the optimal amount of exclusivity is required to maintain this investment in part because there have been few opportunities to assess how intellectual property protections affect biotechnology investment decisions. This paper looks to exploit the recent implementation of a newly streamlined version of inter partes review (IPR) in order to better understand how intellectual property protection affects the biotechnology investment decision.

Since patent protection is a key component of returns to investment, reducing that protection would lower the returns and, by extension, raise the costs of that investment because of the increased risk of losing patent exclusivity. As a result, in theory, the IPR process should raise the costs of capital for drug investment, which would be reflected in market valuations of biotechnology firms.

We test this proposition by examining the trends in asset betas (a measure of volatility or risk) for publicly traded biotechnology firms before and after the adoption of the streamlined IPR process. To control for market-level trends unrelated to this change, we compare these trends with averages in asset betas for non-biotechnology sectors, both in the aggregate and with sectors that are more dependent on intellectual property protections and those that are not.

We find mixed evidence that the implementation of the IPR process has raised the costs of capital for biotechnology investment. Overall, we find that trends in the asset betas for the biotechnology sector (as defined by Standard & Poor’s) remained unchanged before and after the streamlined IPR process was instituted. However, preliminary analysis indicates that asset beta trends can vary based on the firm’s depth and type of drug pipeline assets. Further analysis will explore whether pre- and post-IPR trends vary for companies based on their underlying assets. If they do vary, we will estimate the additional costs of capital associated with the implementation of the IPR. We will also examine whether sector-level volatility is increased conditional on the likelihood that the average biotechnology-related IPR challenge is upheld.

Finally, conditional upon whether there are observable effects from the new IPR process, we will examine whether the increases in costs of capital have had any downstream effects on both the quantity and composition of pipeline assets reported by biotechnology firms.