Working Paper: NBER ID: w21103
Authors: Vincenzo Palermo; Matthew J. Higgins; Marco Ceccagnoli
Abstract: Existing research has focused on why and when firms may choose to access the external technology market. Surprisingly, however, less is known about the reliability of the patents attached to these external technologies in the face of litigation. “Weak” external patents expose a firm to the potential loss of downstream revenues. To address this question we construct a novel dataset of patent litigation in the pharmaceutical industry. We exploit a change in U.S. patent law as a natural experiment to test whether external patents are more reliable than those developed internally. We find that acquired patents are more likely to fall during litigation; they are less reliable then internal technologies. Losses lead to an average reduction in market capitalization of $450 million. Overall, our results demonstrate the critical importance of the underlying reliability of external patents and provides a cautionary note to the potential benefits of accessing external technology markets.
Keywords: patent reliability; technology acquisition; pharmaceutical industry; litigation; market capitalization
JEL Codes: L10; L24; L65; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| externally acquired patents (O36) | likelihood of being invalidated during litigation (K41) |
| internally developed patents (O36) | likelihood of being invalidated during litigation (K41) |
| external patents (O36) | risk of successful challenges by generic manufacturers (L65) |
| likelihood of being invalidated during litigation (K41) | firm revenues (G30) |
| externally acquired patents (O36) | reliability of patents (O34) |