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Venture capital funding for life sciences startups plummeted after legal changes weakened the patent system, according to new research that confirms the close relationship between intellectual property protections and biotech innovation.
The importance of this relationship motivates the Biotechnology Innovation Organization (BIO) to hold an annual IP Conference, which this year runs Nov. 17-19 in Southern California. The only industry-sponsored conference focused specifically on intellectual property in biotechnology, the event allows biotech IP experts to share insights and network with industry colleagues.
BIO actively advocates for robust patents because a research-dependent industry like biotech can only operate when new discoveries enjoy the reliable protection that investors need.
“Stronger IP protection encourages drug research and investment, and enables patent holders to share medical breakthroughs worldwide,” says Dr. Hans Sauer, BIO’s Deputy General Counsel and VP for Intellectual Property. “Ultimately, IP is what gets new medicines to patients.”
The new research clearly quantifies the way litigation and legislation that diminished U.S. IP protections have driven a shift in venture capital, away from startups working in pharma and other patent-heavy industries.
“Between 2004 and 2017, venture capital investment in patent-intensive industries fell from over 50% to 28% of total U.S. VC funding. The share of VC for pharmaceutical startups collapsed from 7% to under 1%,” writes Mark F. Schultz in his study on “Declining Patent Reliability and Venture Capital Reallocation,” part of a forthcoming book from Cambridge University Press highlighted by the EIRA initiative.
Schultz’s analysis was based on PitchBook’s venture capital database, which aggregates deal information from diverse sources. It shows a shift away from patent-intensive industries like pharmaceuticals, biotechnology, medical devices, semiconductors, and related hardware. As those industries dropped from receiving more than half U.S. VC to just around a quarter of the total, less patent-dependent fields, such as software, gained in overall VC investment.
The resulting loss of treatments can only be reversed through patent reform, Schultz argues. BIO supports legislative proposals designed to deliver that reform and strengthen America’s global leadership in biotech.
We need startups; startups need VCs; VCs need IP
Strong patents ultimately enable the development of innovative new drugs.
By most estimates, small and medium-sized biotech firms are behind the majority of new drugs. One study shows 55% of drugs gaining Food and Drug Administration (FDA) approval between 2011-2022 were developed by companies with less than $500 million in revenue.
Venture capitalists, who are willing to trade higher risks for higher rewards, are essential for these startups and small firms, as Schultz’s research notes.
“Venture capital plays a critical bridging role in life sciences innovation. While large pharmaceutical companies conduct substantial R&D, venture-backed startups frequently develop the platform technologies and early-stage therapeutics that larger firms later acquire and scale,” he writes.
If they are going to invest in biotech, venture capitalists need to know their investments are protected, as the report highlights in an interview with Dr. Derrick Rossi, the academic founder of Moderna Therapeutics and a key player in developing mRNA technology.
“Developing innovative medical treatments costs hundreds of millions and is a 10-year road. That’s a lot of investment. If you could not protect it at the end of the day, you would not have an industry,” Rossi is quoted as saying. “You could be working on the coolest thing in the world, but if you don’t have IP, you don’t have a company.”
The report also cites a survey of 475 venture capitalists and private equity investors by Professor David Taylor of SMU Law School. About three-fourths of the respondents said patent eligibility is an important consideration in investment decisions, and 33% said Supreme Court decisions changing patent eligibility had encouraged them to shift out of investment in technology industries.
Court decisions harming the patent system
As Schultz explains, a series of Supreme Court rulings in the last two decades curtailed the ability of innovators to acquire and protect patents.
With its decision in eBay Inc. v. MercExchange (2006), the Court made it harder for patent holders to obtain injunctions against patent infringers. Then the types of ideas that could be patented was reduced by three rulings: Mayo Collaborative Services v. Prometheus Laboratories, Inc. (2012), Association for Molecular Pathology v. Myriad Genetics, Inc. (2013), and Alice Corp. v. CLS Bank International (2014).
“In diagnostics and personalized medicine, claims that rely on correlations between biological markers and health outcomes were characterized as unpatentable laws of nature,” Schultz writes. “The Court also held that isolated, naturally occurring DNA sequences are not patent-eligible, although complementary DNA (cDNA) may be.”
These decisions make it harder to determine what sort of inventions can be patented, which means VCs cannot feel secure about the patents that are supposed to protect their investments.
Schultz’s research includes an interview with Cleveland Clinic’s Mary Kander, a medical diagnostics commercialization specialist who explains how the Mayo ruling prevents progress in the promising field of personalized medicine.
“Personalized medicine is based on being able to determine the presence of biomarkers in a patient,” says Kander. “That’s the future—being able to determine which drugs to use and the dosage to administer based on a patient’s individual characteristics. The unavailability of diagnostic patents, or uncertainty regarding their validity, is likely to affect an important component of personalized medicine.”
Concerned federal judges who have no choice but to uphold the Supreme Court’s decisions, have urged Congress to address the resulting uncertainty through clarifying legislation, according to the Congressional Research Service (CRS).
A remedy BIO supports: PERA
BIO has supported a proposed legislative solution, The Patent Eligibility Restoration Act (PERA Act).
PERA would spell out what types of ideas are simply inadmissible for patenting—a short list that includes an unmodified gene as it exists in the human body or an unmodified natural material as it exists in nature. Other biological materials and processes that meet the ordinary requirements for a patent would be patentable.
“PERA will finally clarify which inventions are eligible for patent protection,” BIO has said. “At a time when the American people are demanding that critical industries be brought home, we cannot afford to place our innovators at a disadvantage with overseas competitors.”
Legislation harming the patent system
Another legal change that weakened patents is the America Invents Act of 2011, which created new proceedings at the Patent Trial and Appeal Board (PTAB), particularly inter partes review (IPR), that allowed third parties to challenge patents.
“In its early years, the PTAB invalidated patents at high rates, leading critics to call it a ‘death squad’ for patent rights,” Schultz writes. “For investors, this raised the risk that even carefully vetted patents could be struck down after large sums had already been committed.”
The report details an interview with Barney Cassidy, who served as General Counsel at Juno Therapeutics, a CAR-T cell therapy company that was acquired by Celgene for $9 billion in 2018. A rival company had challenged Juno’s patents through an IPR proceeding. Juno successfully defended its patents in the IPR, and won a $1.2 billion verdict for willful infringement, but only after a costly, time-consuming court fight.
Cassidy maintains that IPRs pose great difficulties for startups with modest resources.
“A company facing a series of IPRs faces a choice of funding litigation or innovation. There is a more direct tradeoff for early-stage companies,” he says, noting that fighting even spurious patent challenges can drain a small firm’s capital. “The purpose of the IPR system was to reduce litigation, but it became a playground for opponents.”
A remedy BIO supports: PREVAIL
BIO supports the Promoting and Respecting Economically Vital American Innovation Leadership Act (PREVAIL Act) to address this situation.
The Act would make PTAB hearings more transparent, prevent patent challengers from introducing the same case in two different courts, harmonize PTAB and federal court interpretations of patent claims, and require patent challengers to show legitimate legal standing in a case.
“Over the past decade and a half, entrenched corporations have abused PTAB proceedings, using them to harass innovators with expensive, duplicative patent challenges in two forums at once,” according to a statement from BIO. “The PREVAIL Act will empower startups and small businesses by realigning the Patent Trial and Appeals Board with Congress’s original intent.”
IP challenges tackled at BIO’s conference
The need for patent reform to address the negative impact of court decisions and legislation is one issue of many that experts are expected to take on during BIO’s IP Conference.
Sessions at the conference will investigate further topics such as:
- “Navigating the Road of Joint Inventorship” in an evolving landscape of inventorship law.
- “Fireside Chat: How to Work with Academics in IP Policy Research,” with discussion of strategies for fostering collaboration with academia and initiatives such as IPPI and EIRA that are helping shape the conversation.
- “BPCIA Litigation Update: Key Cases, Trends, and Takeaways from 2024–2025,” looking at the current impact of the 2010 Biologics Price Competition and Innovation Act on biologics and biosimilars.
- “Using AI In Patent Practice: Practical and Ethical Issues.”
There will also be panels on evolving patentability standards, U.S. vs EU rules on disclosure, and the scope of genus claims and other means of patenting antibody inventions.
Bio.News will give further coverage of the proceedings.
