Co-authored by summer associate David Magagna
Originally published on Law360
For all of the optimism in recent years regarding worldwide innovation and advancements in technology across all industries, would it surprise you to learn that total global patent volume increased by a meager 3 percent in 2014? Or that this 3 percent growth rate represents the worst patent volume growth rate since 2009, one year removed from the worst global recession since the Great Depression-Stunted growth in patent volume in 2014 did not confine itself to one specific industry, as many traditional innovators, such as semiconductors, aerospace and defense, struggled to produce new patents. In fact, in 2014 semiconductors and aerospace and defense saw their patent volume plummet by 5 percent and 1 percent, respectively.
Innovation in the Life Sciences Industry
Not all of 2014's innovation and patent news disappointed, however, as the life sciences industry posted strong results. The pharmaceutical and biotech sectors of the industry in particular saw patent growth rate increases of 12 percent and 7 percent, respectively. This strong growth is due to a number of factors, including (1) a strong boost from substantial government spending in the life sciences industry in the U.S., (2) significant shifts in the manner in which governments are paying for medical products and services, (3) an aging worldwide population that continues to need health care and related medical treatments to address an increasing number of medical conditions and improve lifestyle and (4) the existence of an inelastic demand for products and services offered by companies operating within the life sciences industry. This article briefly examines each of these factors and presents the case that the innovation and patent growth seen in the life sciences industry in 2014 will not be slowing down any time in the near future.
1. Government Spending
The recent influx of both federal and state health care spending in the U.S. has had an immense impact on innovation in life sciences. The Affordable Care Act has substantially increased dollars devoted to health care as a result of the expansion of Medicaid coverage and the provision of financial incentives to states for establishing government-backed insurance exchanges. The ACA also implicitly drives additional private financial resources towards health care spending since it requires all U.S. citizens to carry some form of health insurance. This insurance mandate alone has dramatically expanded the life sciences industry's market as a result of a substantial majority of the 16.5 million previously uninsured Americans gaining coverage. These newly insured individuals will be much more likely to access health care and medical products and services offered by the life sciences industry. These additional financial resources have allowed such companies to maintain strong cash positions, thereby permitting them to explore and experiment with innovative new therapies and ultimately file new patents.
2. Shifts in Government Payment Methods
While cash certainly remains king, the manner in which that cash is expended by the government has also greatly impacted the life sciences industry. Under the ACA, the U.S. government no longer reimburses medical care providers based purely on volume or the amount of patients treated. Instead, the government has shifted its focus to the total value of the medical treatment with respect to the volume of patients treated. This value model is intended to allow both medical care providers and the government to evaluate the products and services offered by life sciences companies based on both quality and cost and inherently provides an incentive to these companies to develop high-quality products and services in the most efficient and cost-effective manner possible. Life sciences companies are therefore in a prime position to take advantage of this paradigm shift and to pave the way for the new age value-based medical marketplace envisioned by our medical care providers and government alike. Innovation and patent growth are logical outcomes and will surely continue to follow.
3. Aging Populations
As is likely the case with successful companies operating in most other industries, life sciences companies have seen the writing on the wall for some time. For years, these companies have studied demographic trends and are keenly aware of the impact that an aging worldwide population will have on general economic conditions, health care developments and the medical marketplace in particular. In the U.S., the largest demographic population, the so-called"baby boomers,"are retired or approaching retirement age, causing dramatic changes in the health care field. As these baby boomers age and increasingly encounter problems that are traditionally associated with old age and challenge their lifestyle, such as Alzheimer's disease, diabetes, arthritis, hypertension and other chronic medical conditions, their demand for quality health care and innovative medical products and services will also continue to increase. This rising demand present in aging populations throughout the world is therefore one of the key factors driving revenue growth and expanding market opportunity among successful life sciences companies.
4. Inelastic Demand for Products and Services
While the aging worldwide population is a market development that most other industries have seen for some time, the life sciences industry is in a unique position when compared with other industries because it enjoys the benefit of a generally inelastic demand for its products and services. Most consumers purchase medical products and services out of necessity and not as a result of a personal desire or want. Since health care and medical treatments are often a necessity, many of these purchases are made regardless of price. For example, most diabetics consider their insulin injections to be a necessity and treat the expense associated with these injections as a fixed cost that is simply part of their lives. This relatively stable market position allows financial analysts to more accurately predict and forecast future revenue streams for life sciences companies, thereby allowing the companies to attract further capital and invest in innovation and patents, even in tough economic times.
Of course, not all industries are as fortunate. For example, consider the automotive industry and the mistakes several well-known U.S. automobile manufacturers made prior to the financial crash of 2008. These companies built automotive brands based on bulk and not on practical consumer needs, generally focusing on large trucks and sport utility vehicles. When gas prices later spiked dramatically, sales for these companies plummeted, most notably with respect to these large, gas-guzzling vehicles. Successful companies in the life sciences industry, on the other hand, have focused and continue to focus on consumer needs and have therefore positioned themselves to be less sensitive to general macroeconomic pressures that often affect other industries.
Conclusion
With a rapidly increasing and largely inelastic demand resulting from health-conscious and aging populations located throughout the world (many of which typically have access to an ever-increasing amount of medical research and information) and the relative availability of capital, the life sciences industry is in an enviable position, especially when compared with other industries competing for revenues. It is therefore no surprise that the sector has seen patent growth that has outpaced many other industries and there is no reason to believe that this growth will not continue in the future. For all of the aforementioned reasons, there can only be one word used to describe the life sciences industry's outlook: healthy.
Originally published by Law360
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