Valuing Intellectual Property Rights in an Imperfectly Competitive Market: A Biopharming Application

Article excerpt

Small research firms developing biotechnology applications often focus on establishing intellectual property rights (IPRs), which can then be sold to more established firms with existing market channels. This paper presents a method for valuing the IPRs for an innovation that lowers product production costs below those associated with the patented process of a monopolist. The application to Glucocerebrosidase enzyme from transgenic tobacco suggests an IPRs value of about $1.75 billion. Despite the innovator's market power, significant surplus gains also accrue to consumers. Further, U.S. antitrust laws that prohibit IPRs acquisition by the current monopolist increase consumer welfare by almost 50%.

Key Words: biopharmaceuticals, biopharming, economic surplus, imperfect competition, intellectual property rights

JEL Classifications: D23, M13, D43, D60

Small research firms in the biopharmaceutical industry commonly strive to establish intellectual property rights (IPRs) on innovative technologies that can then be sold to larger firms with existing market channels. For example, in 2005, the value of the top 10 acquisitions and product alliances between large pharmaceutical companies and biotech firms was $15 billion (Zimm, 2007). In 2004 the large pharmaceutical company Pfizer paid $1.3 billion for Esperion Therapeutics, a small firm with a drug that boosts levels of "good" cholesterol (Alpert, 2004). In 2003, companies paid over $5 billion for six biotech firms (Alpert, 2004). In 2001 Amgen Inc., a large biotech company bought Immunex Corp. with its very successful drug Enbrel for about $16 billion (Gillis, 2002), while in 2000, a total of $2.7 billion was paid by pharmaceutical companies for seven biotech acquisitions.

Usually small biotech firms generate biopharming applications to produce lower cost drugs for markets that are currently served by just a few (or only one) firms with substantial market power. At the same time, the U.S. antitrust laws prohibit mergers and acquisitions if they substantially lessen competition or tend to create a monopoly (Clayton Act 1914).1 The acquisitions of Astra by Zeneca (1999) and of Marion Merrell Dow by Hoechst (1995) are examples of proposed mergers that potentially inhibited new competition and were blocked by the U.S. Federal Trade Commission (FTC) (Balto and Mongoven, 1999). Thus, FTC regulations requiring that buyers of small biotech firms be nonparticipants in the intended market suggest the acquiring firm will enter as an oligopolist.

In this paper we assume an innovator enters the market and competes in quantity using either a Cournot or Stackelberg strategy to estimate the potential ex-ante value of IPRs for a small biotech firm. While a vast literature exists on the emergence of Cournot and Stackelberg strategies in oligopoly markets (e.g., Allen, 1992; Hamilton and Slutsky, 1990; Kreps and Scheinkman, 1983; Qin and Stuart, 1997; Robson, 1990; Saloner, 1987; Tasnádi, 2006), to our knowledge, these strategies have not been employed in ex-ante evaluations of process innovations, especially in the presence of antitrust laws. This study also contributes to the literature on innovative and competitive marketing strategies of biotech firms (e.g., Begemann, 1997; Renkoski, 1997) as well as IPRs evaluation under different market situations (e.g., Oehmke and Wolf, 2004) by examining a specific emerging biopharming innovation. In this case, the value of IPRs is estimated for an innovating firm that obtains a patent on the production of Glucocerebrosidase enzyme (Gaucher's disease treatment) from transgenic tobacco. The current market for Gaucher's disease treatment is served by one firm, Genzyme, which has the most efficient preinnovation process of production. Genzyme might potentially offer the 'highest' price for the innovator's D?Rs, but acquisition by the incumbent is likely a violation of the Clayton Act and would be considered illegal by the FTC. …