Patents Can Be a Pill

The world of drugs isn’t easy. One day you’re a patent challenger, the next you’re a patent defender.

The Wall Street Journal reported today that Teva Pharmaceutical Industries, an Israeli company that became wealthy by challenging patents and manufacturing generic drugs, is now trying to safeguard a patent it holds on a drug called Copaxone. The Journal called it a case of Teva “getting a taste of its own tactics.”

Photo credit: Jean/Flickr

Peter Drucker viewed patents as significant in the world of business, but he emphasized that they were often of secondary importance. In fact, patents can give companies a false sense of security, allowing upstarts—like Teva—to come in and steal market share. Take the chemical industry in the 1920s. “Anyone who then tried to pick a winner would have chosen Allied Chemical, which emerged from World War I as a very big company with an almost impregnable patent position in the major areas,” Drucker wrote in Management: Tasks, Responsibilities, Practices. “Yet Allied Chemical never succeeded in building on its strengths. It had neither management nor strategy, and floundered.”

[EXPAND More]Even a company with a solid patent should resist the temptation to squeeze too much money out of it. This, according to Drucker, was the sin of “mispricing a new product by charging ‘what the market will bear.’” In Managing in a Time of Great Change, Drucker explained why this was a mistake, even if your company has a patent. “Given enough incentive, a potential competitor will find away around the strongest patent,” Drucker maintained.  “The Japanese have the world’s fax-machine market today because the Americans who invented the machine, developed it and first produced it charged what the market would bear—the highest price they could get.”

A better model to follow was that of DuPont. “In the mid-1940s, it offered its new and patented nylon on the world market for the price at which it would have to be sold five years hence to maintain itself against competition,” Drucker said. “This was some two-fifths lower than the price DuPont could then have gotten from the manufacturers of women’s hosiery and underwear.” As a result, DuPont not only created a huge market but remained its leader, too.

What do you think: Can patents be bad for the patent holder? [/EXPAND]