MEDICINES ACCESS AND INNOVATION IN DEVELOPING COUNTRIES. A Review by Europe Economics

Transcription

1 MEDICINES ACCESS AND INNOVATION IN DEVELOPING COUNTRIES A Review by Europe Economics Europe Economics Chancery House Chancery Lane London WC2A 1QU Tel: (+44) (0) Fax: (+44) (0) September 2001

2 Table of Contents TABLE OF CONTENTS PREFACE...I EXECUTIVE SUMMARY...II 1 INTRODUCTION DISTINGUISHING ISSUES OF ACCESS, MANUFACTURE AND INNOVATION (R&D) Overview Access to Existing Medicines Development of New Medicines Developing the Industrial Base THE ROLE OF INTELLECTUAL PROPERTY PROTECTION Overview and Framework for Analysis Impact of IPP on Availability and Affordability Impact of IPP on Innovation Impact of International Exhaustion and Parallel Trade Conclusions COUNTRY CATEGORISATION Aims and Analytical Approach Summary of Existing Classification Systems Economic Indicators of Development A Broad Classification for Medicines Access Implications for Future Supply Conclusions CASE STUDY INDIA Politics and Macroeconomics Health and Medicines Industrial Policy, Industry Structure and Dynamics Conclusions CASE STUDY: SOUTH KOREA Introduction: India and Korea The Development of intellectual Property Protection in Korea Impact on the Development of the Domestic Industry Impact on imports, inward investment and technology transfer Conclusions CONCLUSIONS AND POLICY IMPLICATIONS...78 APPENDIX 1: SYSTEMS FOR COUNTRY CATEGORISATION

3 Preface PREFACE This report by Europe Economics contributes to the debate on how best to improve the availability of essential medicines to people living in low-income countries; and how to encourage more research and development of new medicines to treat the illnesses which are prevalent in these countries. Europe Economics is an independent economic consultancy, staffed with economists who have substantial experience in economic regulation, competition policy and the application of economics to public policy and business issues. The firm advises government departments, regulators, international bodies, leading law firms and major private sector companies. Advice to clients in the pharmaceuticals and healthcare sectors has concerned topics with important public policy components. Some examples are listed below: Analysis of economic issues in the regulation of the EU pharmaceuticals market, focusing on the consequences of differential pricing compared to an imposed uniform price. This analysis, relevant to policy debates on price controls and on parallel trade, was published in the European Competition Law Review in May Two studies on patient access to new pharmaceutical products in EU Member States, for a consortium of major research-based pharmaceutical companies. Our findings on the delays patients face were published in the European Business Journal in Analyses for the European Federation of Pharmaceutical Industries and Associations (EFPIA) of the competitive strength of the EU pharmaceutical industry; the welfare implications of requirements for a single brand name and packaging for medicines across Europe; and the consequences of phasing out national price controls. Detailed analysis for the UK Department of Health and the Association of the British Pharmaceutical Industry (ABPI) of the nature and extent of competition in the supply of branded medicines to the National Health Service. The principal author of the present paper was Dr Jim Attridge, a Senior Associate at Europe Economics. He can be contacted by at jattridge@europe-economics.com. The research on which this report is based was supported by the International Federation of Pharmaceutical Manufacturers Association. However, Europe Economics has sole responsibility for the analysis and views expressed. i

4 Executive Summary EXECUTIVE SUMMARY Introduction Disease has terrible effects in developing countries, causing widespread human suffering and premature death. It also inhibits economic development, which could in turn allow better healthcare and quality of life. Some diseases can be cured with known techniques and medicines already available; others require new treatments. Effective intellectual property protection (IPP) through patents and trademarks is fundamental to the incentives for investment by private sector companies in developing new medicines. However, effective IPP allows higher revenues to be earned from existing products than would otherwise be possible, so that the IPP regime finances and provides incentives for innovation. A number of organisations have proposed that patented products should be made available more cheaply in developing countries, including through an amendment or reinterpretation of the WHO TRIPS agreement. This report reviews some of the issues involved. Policy Objectives It is important to distinguish between the following policy objectives, since they sometimes conflict, and may require different policy instruments. Improving access of patients in developing countries to currently available drug therapies. Improving the prospects for the development of new medicines for diseases endemic in developing countries. Developing the industrial base in developing countries. Considering briefly each in turn, hundreds of millions of the world s poor, concentrated in the least developed countries and in the rural areas and city slums of emerging countries, have no access to medical facilities, no income to spend on medicines, or both. Developing the infrastructure of health provision is a priority : accessible hospitals or clinics, doctors, nurses and medical supplies are needed. Even if medicines were available free at the border of many countries, patients would currently have no effective access to them due to the lack of this infrastructure. The medicines most needed in developing countries are not primarily the relatively expensive patented medicines for heart disease, stomach ulcers or depression that dominate the pharmaceutical budgets of OECD countries. With the notable exception of drugs to treat HIV/AIDS, and new strains of TB and malaria, they are generally available vaccines and generic products. The large majority of medicines on the WHO list of essential molecules referred to as the essential drugs list (EDL) are generic (out of patent), so that suppliers compete on the basis of availability and cost as with any commodity product. Debate over the TRIPS agreement ii

5 Executive Summary is not relevant to the access to these medicines. 1 Along with support for medical staff and the provision of basic health care infrastructure, removing any unnecessary obstacles to the competitive supply of these vaccines and generic medicines should be a policy priority. Private sector companies will only invest in the development of new medicines where there is a potential market. Two conditions must be fulfilled for this to occur: there must be effective intellectual property protection (IPP) against copies, and funds must be available for customers or those acting on their behalf to purchase the products. These basic requirements have important economic implications: If companies are to invest in new patented medicines for which the market in developing countries would not currently justify the investment, then an effective alternative funding mechanism is needed. Even if there were an effective funding mechanism, widespread copying or compulsory licensing due to lack of IPP would substantially reduce the incentive to invest in new medicines. If significantly lower prices are to be charged for patented medicines in developing countries than elsewhere then the markets must be effectively segmented. Countries differ greatly in their current ability as pharmaceutical producers, furthermore, many of the Least Developed Countries (LDCs) typically have no prospect of developing their own capacity to manufacture pharmaceuticals. Other emerging low-income countries do have the capacity to produce generics for sale both domestically and in international markets (India is a good example). Some also have a limited capability to undertake research or development. We expect that in a future open competitive world market, some of the companies based in developing countries will be able to compete effectively with the established multinational corporations (MNCs) in supplying the out of patent medicines which comprise most of the WHO EDL. However, it is unlikely that many countries will become competitive as pharmaceutical manufacturers, mainly because economies of scale in this industry imply that relatively few manufacturing facilities could potentially supply the whole world, and there is already over-capacity in the industry. Moreover, industrial policy in developing countries should presumably seek to encourage investment in industries where they are likely to have a competitive advantage, and this is unlikely to be the pharmaceutical industry. Some countries have in the past pursued technology catch up and/or protectionist policies, including using weak IP laws, in order to try to develop an industrial manufacturing base. Whilst it may be argued that this has provided some jobs and helped the trade balance, if this approach to industrial development is pursued in the future in contravention of the 1995 WTO agreement it is likely to be harmful in at least two ways: 1 The EDL comprises some 300 molecules, embodied in thousands of different products and presentations. It is only recently that any patented molecules have been added. iii

6 Executive Summary Research-based international companies may limit direct investment in countries that allow copying, and will lack incentives to transfer technology and skills in any way. Weak IPP may hold back the development of the country s own research-based industry. Adopting weak IPP and high import barriers may encourage the development of firms which do not currently, and may never, have a competitive advantage in the world market, especially since protectionist policies usually imply that national industries are sheltered from external competition and do not face the appropriate incentives to be efficient. In the case of pharmaceuticals, in particular, such policies are likely to have adverse affects on access to medicines and/or the development of new ones, as discussed in this report. The Role of Intellectual Property Protection The intellectual property system is the fundamental arrangement through which private sector R&D into new and improved medicines is financed and through which incentives are provided for new research. Effective IP protection depends on the prevention of copying and on the medicines that are successfully patented finding a market. Where products are intended to treat diseases which are found predominantly in developing countries (e.g. tropical diseases) it is impossible for developing countries to free-ride on the development effort to meet the needs of OECD markets in a way that they might for, say, heart or stomach ulcer treatments. The essential contribution of effective IPP in developing countries is therefore to encourage R&D for medicines that meet the particular needs of these countries, although the second condition of the need for a commercial return still has somehow to be met. Effective IPP is thus an essential condition to achieve a substantial increase in the R&D effort directed towards discovering new treatments for diseases found predominantly in developing countries. International exhaustion of IP rights for patented medicines would permit arbitrage (parallel trade) between countries and thus lead to the tendency for equalisation of prices between rich and poor. In other words, its consequence would be the replacement of differentiated pricing, based upon ability to pay, by an (economically less efficient) uniform monopoly price, which would be even less affordable in poorer countries, and which may generate lower returns for the IP right holder. IP rights exhaustion would therefore act as a barrier to access to existing patented medicines as well as a barrier to innovation. 2 2 There is evidence that within the EU, where exhaustion rules apply, patients in lower-income countries do not have access to new medicines when they should. iv

7 Executive Summary Categorisation Systems In the current international debate on a proposed new Global Fund to improve healthcare access, the setting of priorities in its deployment will be an important issue; not least because the latest projections suggest that a fund of only about $1.3bn. may be raised as opposed to the figure of $7-8bn suggested by the WHO Macroeconomics and Healthcare Task Force. We have made an appraisal of the supply and demand dynamics for medicines to identify where market forces can radically improve the access situation and where, alternatively, the limited funds and resources available for an institutional intervention might be deployed to best effect. There is a clear distinction between the situation of the 50 or so poorest, LDCs and what we would broadly term the more affluent emerging nations, such as Brazil, China and India. That is not to suggest, as these examples graphically illustrate, that these latter countries do not face major healthcare challenges; there are large disparities between rich and poor within them, which contribute to much deprived access. Data for the LDCs show clearly why it is widely believed that a substantial new international, institutionally controlled, input of funding, infrastructure support and medicines is needed. Urgent action is required, although substantial progress will take decades. Case Studies New studies of the position in India and South Korea were carried out as part of this research project. In summary: India has hundreds of millions of people with little or no effective access to health care, a large number of well-off people who do have access to a high standard of care, and a growing pharmaceutical sector. Indian companies are well placed to supply the world market for vaccines and generics, and are expected to show large increases in sales including to US and European Union markets. Thus, in a future open world market for generic bulk drug and formulated products, the Indian industry, with its low cost base, large capacity units and growing reputation for sound quality, could make a major contribution by supplying a wide range of off-patent products at competitive prices. However, in relation to the need to encourage R&D investment into local diseases there is still considerable uncertainty in Indian and multinational companies about when and how the TRIPS provisions, requiring effective product patents, will become effective. Policy and legal changes to implement the 1995 TRIPS Agreement remain in process and current draft legislation leaves open the possibilities of extensive compulsory licensing, of patent protection applying only to medicines produced in India rather than imported, and of generic companies obtaining regulatory approval up to three years before patent expiry. v

8 Executive Summary This uncertainty is we believe inhibiting international R&D investment, and other inward investment and technology transfer to India. Pharmaceutical foreign investments in India have not increased in the second half of the 1990s, despite India s attractions in other respects (including a large domestic market, and a skilled labour force with low wages). South Korea exhibited exceptional economic and industrial development in the latter half of the last century, leading to its membership of the OECD in the late 1990s. It has long had a compulsory health insurance system. In the past Korean industrial policies have been strongly focused upon protection of local industry. Until the mid-1990s, wholly-owned foreign subsidiaries were not allowed, and reimbursement of imported products was subject to restrictive regulations. Controls on prices and discounts on domestic pharmaceutical products, and on over-prescribing by doctors, were weak. These factors had an important influence on the development of its pharmaceutical industry, leading the Korean industry to focus on its sheltered domestic market, which was able to licence on favourable terms the rights to produce major innovative medicines. The introduction of a product patent in 1987 took part in a context of general deregulation process, a process which later allowed foreign ownership and finally sought to limit the scope for too-easy profits for domestically-produced medicines. However, unauthorised copies of patented products continue to appear on the market and concerns about effective enforcement of patent and data protection are limiting investment in South Korea, particularly for high-technology products. Foreign direct investment has increased nonetheless, with multinationals wholly owning their Korean subsidiaries. The Korean industry is now diversifying into generics markets world-wide, offsetting the loss of sheltered markets and licensing opportunities. Larger Korean companies have begun to increase R&D investment, focusing on the domestic market. In essence, these two case studies generally support the view that: There is considerable scope for pharmaceutical companies based in countries such as India and in Korea to supply generic medicines to the growing world market. Stronger IPP in both countries would contribute to the prospects for local companies to be able to participate with confidence in R&D for new medicines. vi

9 Executive Summary Markets Versus Institutions The current discussions on the Global Fund and its role and governance raise important questions on the relative roles of market mechanisms and institutional interventions. There would appear to be two main situations in which more effective interventions by government or international institutions could make a positive contribution. In a number of emerging countries a stronger commitment to public information and education, and funding to improve access for the poorest sections of society, may be desirable. Where conflicts arise between health and other (e.g. industrial) policies, humanitarian concerns may indicate that greater consideration should be given to improving healthcare. In the context of the new Fund, institutional approaches to improving infrastructure and to funding, and even possibly purchasing medicines for the LDCs, may be effective. Policy Implications The main policy implications to be drawn from this review are: 1 Neither the problem of improving access to healthcare and to existing treatments, nor that of encouraging research which will lead to new medicines, is amenable to quick solutions. It will take a long time to improve healthcare infrastructure; and equally a long time to increase R&D expenditure and convert it into effective new products. A high quality, sustained strategy is required. 2 It is essential to be clear about policy objectives and to recognise that measures to encourage one objective may conflict with another. Notably, policies which might improve affordable access to patented medicines in the short term through copying or licensing would discourage future investment in R&D for new medicines. 3 The essential first step in many countries is to develop an effective healthcare delivery system, comprising trained nurses, doctors and well equipped clinics and hospitals. 4 The IP system is the fundamental arrangement through which private sector R&D into new and improved medicines is financed and incentives are provided for new research. It depends on a) the prevention of copying - i.e. the effective protection of the intellectual property which results from successful research, and b) on the medicines that are successfully patented finding a market. 5 Currently, despite the lack in many countries of effective national IPP, because there is no international patent exhaustion, companies are generally willing to make patented products available at much lower prices in developing countries than in developed markets; this is economically efficient. vii

10 Executive Summary 6 The great majority (over 90 per cent) of molecules on the WHO EDL are out of patent. These can be supplied by whichever producers can deliver the right quality at the most competitive price; this is likely to be achieved in future through international trade rather than local production. 7 Developing countries differ substantially with regard to healthcare. Some suffer from extreme poverty, have few resources, and may need institutional support. Others have sizeable numbers of relatively affluent people and better infrastructure, as well as much poverty, and may be the base for companies capable of supplying generics on a worldwide basis. 8 In addition to confidence in the long term commitment of developing country governments to effective IPP, new approaches to funding R&D and ensuring speedy and successful commercialisation of new products are needed. Much work yet needs to be done to further explore how packages of incentives and/or rewards such as up-front research grants, stage payments for development work, flexible product to product or country to country patent exchanges, and pre-commitment to purchase medicines in the R&D pipeline can be developed within new public-private structures. viii

11 Introduction 1 INTRODUCTION Improving the health status of the large proportion of the world s citizens who live in poverty has been a primary goal of the World Health Organisation (WHO) and its member states. There have been notable successes. However, in recent years, in the poorest regions, including sub- Saharan Africa, parts of Asia and even the transition economies of Eastern Europe, trends in health status indicators are turning from positive to negative. This is due both to economic factors GDP per capita has been falling in some cases - and to the emergence of illnesses which resist antibiotics and other established treatments. Much public attention has been focused on HIV/AIDS, from which 23 million people in Africa alone are estimated to be suffering, new and virulent forms of TB, and of malaria, but there are a large number of other problem areas which also require not only treatment with currently available techniques, but new medicines. The provision of established modern medicines to the poorest nations of the world, and the encouragement of innovation through investment in R&D programmes in order to find better response to these new disease challenges, are both essential. Effective demand meaning demand backed by money to pay for it is not the same thing as human need. Although research-based pharmaceutical companies are to a degree motivated by humanitarian objectives, it would be an unrealistic and poor public policy to expect private sector companies to devote substantial resources to researching and producing products for which there is little or no prospect of a commercial return. If the resources of private sector companies are to be more focused on developing new medicines for diseases prevalent in low income countries, then an effective demand has to be created. This will require: a major improvement in funding, backed by allocations from new or existing international funds; and the intellectual property systems of at least the major emerging countries providing effective patent cover. Economic theory and practical experience both suggest that the invention of new medicines, their development into saleable innovations and their manufacture and commercialisation (including delivery to doctors) are most effectively performed by private sector organisations. Whilst research in universities and other institutions funded by the taxpayer plays an important part in knowledge creation, the private sector finances the main long-term investment and risk taking needed to discover new medicines and to convert them into tested and efficacious products. 3 3 For a discussion of this issue see Schweitzer S.O., (1997), Pharmaceutical Economics and Policy, Oxford University Press. 1

12 Introduction The incentives for private sector enterprises to invest in such R&D are based on the system of Intellectual Property Protection (IPP), through patents, trademarks and copyrights, which protect innovations from imitations for a limited period. This allows the innovator the opportunity to make sufficient profits to provide a return and a visible incentive for further investments. These IP provisions have underpinned a cycle of investment, innovation and profit generation which has created the current R&D based multinational corporations (MNCs). These MNCs have been responsible for major advances in medicines as well as becoming reservoirs of accumulated knowledge and skilled human resources. Various academic studies over the past 20 years have sought to assess the long term financial returns to pharmaceutical R&D in order to help inform debate as to whether the IP system provides too much or too little protection for the sector as a whole. 4 Notable work includes that of Grabowski, Vernon and Di Masi. A key finding is that although a few molecules produce spectacularly high returns over a period of years, the majority do not generate sufficient income to cover the average sunk cost per molecule for the sector as a whole. In their most recent study Grabowski and Vernon find that average R&D costs per innovative molecule for the industry as a whole are continuing to rise, and are currently in the $ m range. 5 The latest work by Di Masi confirms these figures and also suggests that the average timescale for the complete R&D process is now of the order of years from the initial invention to entry of the product into the market. 6 On the demand side many countries have national health services that purchase medicines. 7 However, the range of public to private provision and funding of health care in general and medicines in particular varies greatly, as shown below in Table See Grabowski H, Vernon J. (1994) Returns to R&D on new drug introductions in the 1980 s. J. Health Economics, 13: 383; DiMasi J, Hansen R, Grabowski H, (1991) The cost of innovation in the pharmaceutical industry, J. Health Economics 10: 107; or Grabowski H, Vernon J (1996) Longer patents for increased generic competition in the US, PharmacoEconomics 10 Supp. 2, 110 Grabowski H, Vernon J, The distribution of sales revenues from pharmaceutical innovation. (2000) PharmacoEconomics 18: supp DiMasi J, Office of Health Economics Seminar, London, July 2001 For a Review see, WHO- Health Economics and Drugs,(1997) DAP Series No

13 Introduction Table 1.1 Regional Analysis of Expenditure on Health and Pharmaceuticals Health Expenditure Pharmaceutical Expenditure Region Per Cap (US$) As % GDP % Public % Private % Aid Per Cap (US$) % of Health % Public OECD Latin America % Private Asia Sub- Sahara Africa Source: WHO - Health Economics and Drugs DAP Series No.5, 1997 A further important ingredient in the mix of factors which influence the supply of medicines is the evolution of world trade in goods and services, and the role of the World Trade Organisation (WTO) as an international regulatory body. Current WTO rules are set out in the 1995 WTO Agreement, to which most national states of the world are parties. In particular, the WTO - TRIPS provisions establish IPP on a global basis. Our impression is that OECD governments increasingly perceive innovation, encouraged by IP protection and international trade, to be an important basis for future economic growth. Clearly, however, not everyone takes this view. Critics of the present regime attribute, at least in part, the economic problems of poor countries to the manner in which the WTO principles are applied or interpreted in practice by the richer nations. There is currently a vigorous debate as to how best to organise the public and private sector funds, human resources and the technologies available into configurations which best suit the task of achieving real health gains in a wide variety of national settings. There are indications of a stronger political will than in the past in the G8, and OECD more widely, to take effective action. 3

14 Distinguishing Issues of Access, Manufacture and Innovation (R&D) 2 DISTINGUISHING ISSUES OF ACCESS, MANUFACTURE AND INNOVATION (R&D) 2.1 Overview Debate about access to medicines in developing countries often appears confused by a failure to define clear objectives. Deficient access in developing countries to the best medicines results from several distinct problems. On the one hand there are problems of access to medicines, which are currently available elsewhere in the world, but which do not get to needy patients in developing countries. On the other, hand there is a separate issue of how to ensure that new medicines are developed in the first place. There is also a difficult interplay between health policies and economic/industrial development policies in many countries where, in the event of conflicting objectives, the latter often predominate. There is a common conception that to achieve the first of these objectives it is important to generate manufacturing capacity at a nation state level. However, in the modern world economy such an approach may be highly inefficient. Already leading companies have concentrated primary (bulk drug) manufacture into a few of the most attractive national locations, to seek economies of scale. Particularly for generics, the most efficient global approach to reducing costs and hence prices may well be to have a few very large efficient plants in the lowest cost locations compatible with the necessary technical infrastructure. 2.2 Access to Existing Medicines There are a number of reasons why people in low-income countries may be denied access to medicines that already exist. The necessary infrastructure to deliver the medicines may not be available. There may be a lack of trained medical staff (doctors or nurses) and medical facilities (clinics or hospitals) to ensure that patients can be diagnosed and appropriate treatment identified and provided; or there may not be a distribution system that can deliver medicines safely and in good condition, whether due to poor roads, no distribution network, or inadequate geographical coverage of pharmacies to stock and dispense medicines in adequate conditions. Other factors that can prevent medicines being available include war, political instability, and natural disasters; and controls that restrict the availability of the necessary medicines, e.g. through the licensing system or through restrictions on imports. Where the above conditions apply, the issue about access is primarily one of domestic infrastructure and systems. Proposals should be realistic in the context of the national health care infrastructure. The low efficiency of conversion of the initial funds or purchased goods into effectively treated patients continues to be a major concern for those responsible for managing projects. 4

15 Distinguishing Issues of Access, Manufacture and Innovation (R&D) A further problem for low income countries is the affordability of medicines. In many sub- Saharan countries average annual income per capita is estimated to be equivalent to less than $300 and annual healthcare expenditure is less than $10 per capita per annum. Even if facilities and medicines are present, such low incomes may prevent purchase of the medicines either privately or through public health expenditure. The problem may in some cases be exacerbated by the effects of import duties, exchange rate fluctuation or rules that deny reimbursement for imported medicines. 2.3 Development of New Medicines Even in developed countries some medical conditions are so rare that there is not an adequate market from which to recover the R&D costs of an effective medicine; this problem is addressed by orphan drug legislation that offers extra years of patent protection. A similar logic to that for orphan drugs has recently been introduced with great success in the USA to encourage research into the effects of medicines on children, and hence more reliable paediatric labelling. The WHO Commission on Macroeconomics and Health is examining the feasibility of possible new incentive mechanisms and is due to report later this year. In developing countries the problem is of a large volume demand for treatments for tropical diseases or diseases particularly endemic in these countries, but shortage of purchasing power of, or for, the patients who need treatment. Although major private sector companies donate some money and other resources for reasons of philanthropy and good corporate citizenship, it would be unrealistic to expect an increase of the order of magnitude needed to address the scale of investment needed for full scale R&D programmes. IPP is central to the incentives to develop new medicines. Actions that reduce or remove IPP to provide better access to existing medicines most obviously the manufacture and sale of copies of medicines still under patent would reduce the incentives to invest in new medicines. Additional measures are evidently necessary to encourage research into medicines that will predominantly benefit poorer countries. Possible mechanisms include a transferable patent extension, by which work done successfully on an uneconomic disease would qualify for reward by patent-term extension on another drug in the company s range, i.e. the return could possibly be secured via additional patent term on a product in a developed country. This type of transferable patent extension would improve the incentive for more R&D into diseases prevalent in low-income countries, and is clearly well worth careful consideration. For R&D programmes on new products for the diseases that are endemic in tropical countries, it is inevitably necessary to carry out the clinical trial programmes in the local countries. For such local trials to be effective there are some key requirements which again relate primarily to infrastructure: Hospitals, nurses and doctors able to conduct effective drug trials. Local facilities and the skills needed to organise and assess drug trials and possibly to make modifications to the final medicines either their composition or their presentation. 5

16 Distinguishing Issues of Access, Manufacture and Innovation (R&D) The means to supply the resulting, tailored medicine. Ethical principles in the form of Good Clinical Practice guidelines Insofar as most LDCs have little of the infrastructure needed for such trials, they could probably be carried out more effectively in the larger emerging countries. Overall such trials would probably be cheaper than those in developed countries if the essential infrastructure was in place, which might help to reduce the ever-increasing cost of average R&D per molecule for this type of product (although, if there were a major upsurge in candidate drugs of this type the lack of sufficient trial capacity could become a bottleneck in the process). 2.4 Developing the Industrial Base Prima facie the idea of encouraging local manufacturing of medicines in developing countries, where one would expect some costs to be considerably lower than in developed ones, appears attractive. However, if we consider the primary healthcare policy objective of improving low cost access in the light of the economics of the international pharmaceutical sector, the analysis becomes more problematic and leads to the conclusion that for all but the largest emerging countries, local manufacture is unlikely to be a cost-effective approach. As a means of ensuring access, such an investment will only be efficient if pharmaceuticals can be produced locally more cheaply than they can be bought on the world market. Local private companies, where they exist, must generally be expected to seek to optimise their profitable growth by selling to those customers who pay the best prices, regardless as to whether they are national or international. The notion that local manufacturers exist essentially to supply local markets has little relevance in this context. For emerging countries that have limited foreign currency and huge international debts, industrial policies to promote local manufacture are often given a high priority in an effort to manage trade balances and foreign currency reserves. Frequently, it appears that policies for pharmaceuticals (including restricting cheap imports) are mainly determined by the broader needs of managing the economy through industrial policies, i.e. the pharmaceutical sector is treated with virtually no concessions to its status within healthcare policy. However, for countries with limited investment resources there might well be a better return from investing in sectors other than pharmaceuticals. In the view of many experts, there is already an excess of manufacturing capacity in the pharmaceutical sector. A number of the more advanced emerging nations have, to varying degrees, established local pharmaceutical manufacturing. The key industrial policy issue for them now is to become more competitive in world generic markets, as they can certainly compete on cost. More generally, however, countries are likely to want to aim at developing the industries where they have a competitive advantage, and to invest in pharmaceutical manufacturing and or R&D only if this is the case. 6

17 The Role of Intellectual Property Protection 3 THE ROLE OF INTELLECTUAL PROPERTY PROTECTION 3.1 Overview and Framework for Analysis Objectives The objective of this chapter is to consider in some detail how access to medicines in developing countries, and investment in pharmaceutical R&D, may be affected by alternative regimes for IPP. We review some current economic theories in the light of the particular circumstances of IPP in the pharmaceutical sector and in developing countries. Some of the points made at the start of the analysis will be familiar to policy makers in the pharmaceutical industry and elsewhere, but perhaps not to everyone concerned with access to medicines in developing countries The Economics of Innovation in Pharmaceuticals The essential theory of the economics of technological innovation owes a good deal to Schumpeter and later researchers such as Nelson, Teece and Pavitt. 8,9 Central to their model is the idea that economic growth in real terms and social progress are driven, to a substantial degree, by waves of innovations in dynamic markets. Accordingly, it makes good sense for governments to encourage innovation, notably by providing economic shelters through legislation which grants IPP in the form of patents and trademarks, so as to prevent others from free riding on the efforts of successful innovators, before they have been able to earn their due rewards. The pharmaceuticals sector is particularly dependent on product patents as a means of ensuring an adequate return on sunk R&D investment (sunk in the sense that once the money has been spent, it cannot be recovered other than through the successful sale of new products resulting from the R&D). Thus patents provide incentives for on-going re-investment in R&D - sustaining the investment innovation reward cycle over the long term. 10 In the pharmaceutical sector over the past 50 years a series of such innovations have led to dramatic advances in the treatment of many serious diseases. 11 In many developed nations, the encouragement of innovation, underpinned by strong IPP in order to sustain powerful science and technology infrastructures, is seen as a cornerstone of economic policies that are aimed at achieving growth in an increasingly competitive global market Schumpeter J. (1943), Capitalism, Socialism and Democracy, Allen v Unwin, London. For a contemporary review see Dodgson M. and Rothwell, R. (eds) (1994), Handbook of Industrial Innovation, Edward Elgar, Aldershot UK. See for example Mansfield, E. (1986) Patents and Innovations: An empirical study, Management Science, 175. Sharp M.L. (1991), Pharmaceuticals and Biotechnology, in Freeman, C. Sharp, M. and Walker, W. (eds), Technology and the Future of Europe: global competition and the environment in the 1990 s, Pinter Publications, London. A recent Economist survey described innovation as the industrial religion of the late 20 th century, in which the rhetoric of innovation around the world had replaced the post-war language of welfare economics. A survey of Innovation in Industry, The Economist, February 20 th

18 The Role of Intellectual Property Protection There continues to be debate as to whether existing patent regimes, notably the period of exclusivity, are too long or too short to encourage what might be deemed an acceptable level of progress. Both in the USA and in Europe during the 1990 s regulators granted extensions to the patent term for medicines based upon a recognition of an inadequacy of reward and incentives for R&D in general in the face of factors including new competition from generics, which effectively devalued the secondary value of trademark IP. Also, specific extensions have been introduced to encourage R&D into rare diseases (orphan drugs) and paediatric use of medicines. Emerging nations, such as India and Korea, have spent many years building competitive low cost manufacturing capabilities. In some cases they now seek to establish indigenous knowledge-based industries that will also allow them to compete in the global market as innovators. For most of the LDCs, however, there currently seems to be little prospect of moving away from their current position as suppliers of raw materials and commodities Key Issues In the pharmaceutical sector, the relationship between the level of IPP and the behaviour of competing firms is complicated by the high degree of government regulation of the markets; most notably, direct involvement of governments as customers and also regulation of pharmaceutical prices. Three issues have been the subject of theoretical analysis which is relevant here: the relationship between static welfare losses associated with potentially higher prices under conditions of strong IPP and the dynamic gains resulting from greater incentives for investment in innovation. 13 the extent to which giving IPP to one innovator may, for a period of time, slow down or deter further innovations, flowing from the knowledge associated with the initial innovation. This argument hinges upon the extent to which primary innovators can deny would-be followers access to this knowledge. the impact of IPP upon diffusion of the innovation into markets, or the rate of adoption by the potential customer base. Weak IPP leads to lower profit opportunities for innovating firms and thus, other things being equal, to a reduction in their incentives to invest in R&D. Since patents provide only a limited period of protection, after which other suppliers are able to enter without constraint, a loss of investment incentives would be very likely to operate against the long-term interest of potential users. Concerns regarding restricted access to information delaying further innovations do not apply equally to all industries, and patent regimes may alleviate them by requiring that patented inventions be fully and publicly disclosed. In the case of pharmaceuticals, for instance, the particular nature of the R&D process requires a high level of disclosure of information on both the patented invention and on the subsequent product development activities. In addition to the 8

19 The Role of Intellectual Property Protection initial disclosure in the patent, which would normally occur some 7-10 years prior to the commercialisation of the product, the clinical research programme, which takes 3-5 years at the latter end of the process, is conducted by clinicians in hospitals around the world and is published by them on an on-going basis throughout this period. Hence, competitors who are working in the same disease area or on similar products are aware of the progress of other candidate drugs during their year R&D phase The WTO Trade Related Aspects of Intellectual Property Agreement (TRIPS) This Agreement is an integral part of the 1995 World Trade Agreement, which aims to provide a framework within which the member states of the WTO can develop national IP law and associated administrative procedures. Some emerging nations have been reluctant to make the necessary changes to upgrade the effectiveness of their national law on IP. There are two types of objection to TRIPS. Firstly that quid pro quo concessions to improve access for export of commodity products from developing countries to developed ones are inadequate, or have not been honoured in practice. Secondly that implementing TRIPS itself will directly damage the economies and industrial progress of developing countries. This chapter is only concerned with the latter, specifically in the context of the implications of stronger IPP for health and industrial development. In this context three important aspects of the TRIPS agreement are: the nature of the legislative protection effective administration areas of flexibility within TRIPS for alternative interpretations For the first of these, in the medicines sector the fundamental nature of the chemical and biological entities involved leads to an important distinction between product patents and process patents. As the names imply, this is the distinction between granting a patent, which gives exclusivity to the use of the entity itself, in the form of a product, as opposed to merely granting one for a specific method of manufacture. The provisions of TRIPS are clear on this point. Effective protection for innovators is only possible within a system that grants both product and process patents and national law must include both to be TRIPS compliant. The effective administration of a national patent system represents a vital and substantial initiative for those countries in which it does not exist currently. However, as will be noted in the case of India, unless would-be infringers of IP can clearly see that there is in practice an effective system of enforcement, with speedy action and serious penalties, then enacting the legislation of itself is limited value to the innovator. Minimum standards of enforcement are set out in Articles of the TRIPS agreement. 9

20 The Role of Intellectual Property Protection On the third point of areas of flexibility of interpretation, there are two contentious issues. One is of patent holders being able to use their patents to prevent unauthorised importation of a pharmaceutical products. Article 28 of the TRIPS agreement specifies the protection afforded by a product patent as a prohibition on making, using, offering for sale, selling or importing for these purposes the product without the consent of the patent holder. However, case law in many countries has extended the concept of consent beyond its direct meaning, through the doctrine of exhaustion. For example, in all jurisdictions, national exhaustion applies, which allows a wholesaler that has purchased a legitimately produced or imported patented product to re-sell that product without infringing. However, in the USA contracts between manufacturers and insurance companies or health management organisation (HMO) frequently prevent re-sale, so that the adverse consequences of exhaustion as it applies within Europe are largely avoided. Case law from the European Court of Justice indicates that the exhaustion doctrine permits parallel trade of genuine products within the EEA, but not the importation of products from outside without the consent of the intellectual property right holder. Also, specifically for medicines, there is currently no mechanism whereby a parallel importer of packed products from outside the EEA can obtain an independent regulatory license from the health authorities to commercialise the product. In the USA the principle of international exhaustion is not generally accepted, based primarily upon case law. Also, there are specific health regulations, strictly enforced by the FDA, which limit the importation of packed products by traders. The interpretation of international exhaustion rules for other countries varies considerably. It will often depend on detailed regulations, for example, if the packaging is marked not for export by the licence holder. (The implications of international exhaustion in terms of parallel trade and prices are discussed further in Section 3.4 below.) A second area of dispute at present concerns the interpretation of the article on emergency situations in which a nation state would be justified in over- ruling the IP rights of companies for certain individual products or categories of products. This issue has been highlighted by the specific case of access to patented AIDS/HIV drugs. It has been suggested that in such exceptional circumstances consideration should be given to invoking the provision for granting compulsory licenses to local manufacturers if a satisfactory agreement for supply at affordable prices cannot be achieved with the patent holders. The language of TRIPS on this point is open to significantly different interpretations as to what constitutes a national health or medical emergency situation. Practical experience in the case of the AIDS pandemic would suggest that in such eventualities specific negotiations, which recognise the peculiar circumstances, are likely to lead to more rapid and effective progress than prolonged wrangles in the courts. However, as indicated in chapter 5, for countries such as India, which are in the process of redrafting national IP law, getting the balance right on this issue 10