The U.S. and most other industrialized nations try to create environments that will encourage innovation and research for cures of dreaded diseases. One of the most important ways nations do that is through a system of patents and other intellectual property rights that provide incentives for individuals to perform such research. Patents grant exclusive property rights to the innovator for a limited number of years. Thus, the patent system encourages creativity and investment in innovations. [World Intellectual Property Organization (WIPO) 2002] The period of market exclusivity allows pharmaceutical companies to recapture some of their investment costs. After a patent expires, less expensive generic products can be produced and sold in the marketplace, effectively competing with brand name drugs. Since patents are granted on a territorial basis, inventors (pharmaceutical companies) must apply for a patent in each country or state separately. As a result, not all innovations are patented in every country. Moreover, some countries deem certain products, including drugs, exempt entirely from patent protection. (WIPO 2002)
Patent policy inevitably affects how much money investors will gamble on research and development of new pharmaceuticals. Moreover, patent policy potentially influences the categories or types of diseases for which pharmacological treatments are sought. Pharmaceutical companies will be more apt to develop treatments for diseases that have a relatively high prevalence in the population. (WIPO 2002)
The tenure of a patent will affect the ability of a pharmaceutical company to recoup its investment and finance development of new products. In the United States the term of patent protection is 20 years. However, the effective patent term—the time remaining after a product has gained market approval—for a specific product may be less, depending on the time it takes to bring that product to the market. Other countries may have different patent terms, which may further limit the period of effective market exclusivity. (USITC 2000) Over the last two decades, the duration of patent exclusivity among different countries has been converging, although some differences remain. Patent restoration laws have restored some of the erosion in the period of exclusivity.
At the same time, for diseases with relatively low prevalence in the population, other governmental policies can provide the necessary incentives for drug research and development where the market may not. The U.S. Orphan Drug Act of 1983, for example, has been successful at stimulating research and development on rare diseases by awarding market exclusivity to the developer of the first drug for a condition unless subsequent drugs are clinically superior. (Kremer 2000)