Abstract:    The patent is considered as a key policy instrument to encourage new drug innovation; however, pharmaceutical invention patents present the characteristics of "difficult to authorize but easy to invalidate", the invalidation rate of drug invention patent rights of innovative pharmaceutical companies in China is as high as 86%. What is the effect of drug patent rights invalidation on follow-on innovation? Does it match the patent system′s goal of stimulating innovation? In this paper, we selected enterprises with innovative drug R&D ability in China′s market as the research unit, and drug patents of innovative pharmaceutical enterprises that have been requested for invalidation in China were taken as samples. Using the data on requests for invalidating the drug patent rights of innovative pharmaceutical enterprises at the Patent Reexamination and Invalidation Department of the Patent Office, China National Intellectual Property Administration (CNIPA), we studied the causal impact of a drug patent′s invalidation on the follow-on innovations by other innovators. The biggest challenge in our empirical work identifying the causal effect of patent rights invalidation on later innovation is the potential endogeneity of invalidity decisions. For instance, drug technologies with greater commercial values are both more likely to be heavily defended by the patent holders and to be an attractive target for follow-on innovations. To address this potential endogeneity of invalidity decisions, we need an instrument that affects the probability of patent invalidation, but at the same time does not affect follow-on innovation especially citations by other downstream innovators directly, therefore creating exogenous variation in patent invalidation. There is a fortunate institutional fact that the Patent Reexamination and Invalidation Department adopts collegiate examination, cases that are collegially examined by a panel consisting of three or five members, including a chairman, a first member, and one or three second members respectively. The first member is responsible for comprehensive examination of the case. We construct our instrument around the variation in the first member′s propensity to invalidate patents. Furthermore, we instrument invalidated with the predicted probability of invalidation obtained from the probit regression on the fractions of invalidity by the first examiner of panel, to control for the endogeneity of invalidation. We showed empirically in the study that there is substantial variation in the age distribution of challenged patents at the time of the CNIPA decision. Drug patents involved in invalidation requests cases are highly valuable. Patent invalidation leads to a 50% decrease of forward citations to the focal patent from other innovators, on average, which is not in line with previous studies based on the developed countries such as the United States and Europe. This means that patent rights of innovative drug companies in the Chinese market can stimulate the follow-up innovation of other innovative entities in the pharmaceutical industry. Our study will contribute to the literature on the effect of patent invalidation on cumulative innovation in several ways. First, compared to previous work, the underlying data in our study comes from post-grant invalidation requests at the CNIPA, instead of patent validity litigation before US courts or post-grant opposition at the EPO. Second, CNIPA citation data used in this paper will alleviate a key point of criticism concerning the analysis of cumulative innovation proxied by forward citations. In contrast to the US patent system, CNIPA citations are made by CNIPA during the substantive examination phase and not by the applicant. On the one hand, potential bias in citations by applicants is avoided. On the other hand, with no obligation of the applicant to disclose prior art, the average number of CNIPA patent citations is lower, whereas their technological relevance with focal patents appears to be higher. Third, we employed an instrumental variable which is new in that it represents the first instrument for patent invalidation in the context of the China patent system, which not only lacks the randomized administrative processes that allow for a proper identification of judge fixed effects, but also lacks the event of administrative personnel overlap in the substantive examination and invalidation requests procedure. Fourth, we showed in the paper that in the emerging market environment, under the circumstance that the follow-on innovators have low ability to innovate and tend to adopt a defensive-oriented patent application strategy, the causal effect of a patent′s invalidation of pharmaceutical companies on follow-on inventions by other innovators is so different. The different influence effects on innovation behaviors will enrich the theoretical understanding of the relationship between patent rights and innovation activities.

Key words: innovative pharmaceutical company, drug invention patent, patent invalidation, follow-on innovation