PROPOSAL TEMPLATE Proposal Name: Patent Duration and Collusive Behaviour to Postpone R&D for Innovative Treatments Submitted by: Pr. Patrick Leoni - Euromed Management (France) E-mail: patrick.leoni@euromed-management.com Pr. Alvaro Sandroni Kellogg School of Management, Northwestern U. (USA) E-mail: sandroni@kellogg.northwestern.edu Description of the proposal This project identifies a key strategic deterrent to initiate R&D for innovative treatments. We argue that the current patent system induces, at industry level, collusive behavior to postpone R&D for innovative treatments. We recommend the reduction of patents duration to prevent collusion at industry level, while maintaining minimal incentives to initiate R&D. We consider the case of many pharmaceutical firms, each owning a large pool of patents to treat some aspects/symptoms of a specific disease as well patents on other diseases for which they compete. Those firms are capable of engaging into a R&D race for an innovative treatment; if successful, this treatment eventually seizes
the whole market for treating this disease and it renders the whole set of existing patents obsolete. A typical example is HIV/AIDS, where over 2000 patents for available treatments are owned by few firms, and limited efforts to develop a therapeutic vaccine have been observed. We argue that, unless the market size is big enough, there is a collusive equilibrium among the industry to postpone R&D for the innovative treatment whenever the time horizon of the current patents is long enough. We also argue that, as the average time horizon of those patents decreases, the stability of this collusive equilibrium for postponing R&D decreases until it becomes optimal to unilaterally start the R&D. We thus point out that there exists a minimal patent duration below which no collusion for postponing R&D is possible. Moreover, this minimal patent duration is independent (to a large extent) of market returns, but it corresponds instead to the minimal financial incentive to reward innovation. This collusive behavior is thus dependant on the legal requirement for patent duration, and reducing enough the duration fosters R&D race. Our theory is consistent with observed episodes in the pharmaceutical industry. 2
Describe and justify the potential public health impact 1 of the proposal: The proposal aims at fostering R&D for innovative treatments, by designing stronger financial incentives to pharmaceutical companies to initiate R&D race. The consequences thus are 1- Potential public health impact in developing countries Early availability of innovative treatments 2- Potential for de-linking R&D costs and price of products Price of products are irrelevant to a firm seeking to maintain its market power through innovation. 3- Impact on capacity building in, and transfer of technology to, developing countries Generics are available sooner to developing countries thanks to a lower patent duration Describe and justify the technical feasibility 2 of the proposal: Basically, changing the regulations for pharmaceutical products at international level is needed. This involves negotiations with WTO to coordinate this effort across countries Describe and justify the financial feasibility 3 of the proposal: There is no direct cost to the regulator, except the cost of engaging negotiations with the parties. The cost is on the pharmaceutical companies, which will mower the return on their current pool of patents Describe in what way the proposal addresses cross-cutting issues 4 : The proposal indirectly allows generics to be available sooner to developing countries. It is compatible with, and adds to every other effort to foster availability of innovative treatments. 1 Principally CEWG criterion 1 but others may be relevant e.g. Equity/distributive effect including on availability and affordability of products and impact on access and delivery. 2 Principally CEWG criterion 4 but others may be relevant e.g. Rational and equitable use of resources/efficiency considerations 3 Principally CEWG criterion 5 but others may be relevant e.g. Cost-effectiveness. 4 Cross-cutting Issues refers principally to CEWG criteria 7-12, if not addressed elsewhere in the submission e.g. Potential for delinking R&D costs and price of products. 3
Identify key steps necessary to begin implementation and key issues to be resolved for implementation to begin: The project requires to modify the whole legislation on patent rights, so as to reduce patent duration. The legal work may be extensive, and reluctance from pharmaceutical companies is to be expected. Provide the evidence base for the proposal including literature references and other relevant information: The proposal is based on a working paper by the 2 authors, entitled Can Patent Duration Hinder Medical Innovation for Neglected Diseases? Additional references are given below: [1] American Pharmaceutical Research Companies (2007) Pharmaceutical researchers are testing 92 medicines and vaccines for HIV and related conditions. Report on Medicines in Development for HIV/AIDS. [2] Bain, J. (1956) Barriers to New Competition. Cambridge, MA: Harvard University Press. [3] Borrell, J.-R. (2007) Pricing and patents of HIV/AIDS drugs in developing countries. Applied Economics 39, 505-518. [4] Chamberlin, E. (1933) Theory of Monopolistic Competition. Cambridge, MA: Harvard University Press. [5] Grabowski, H. (2003) Innovation and R&D incentives for orphan drugs and neglected diseases. Mimeo, Duke University. [6] Grabowski, H. and J. Vernon (1992) Brand loyalty, entry and price competition in pharmaceuticals after the 1984 drug act. Journal of Law and Economics 35, 331-50. [7] Hudson, J. (2000) Take-up in the pharmaceutical market following patent expiry: A multi-country study. International Review of Law and Economics 24, 103-112. [8] Ito, B. and T. Yamagata (2005) Who develops innovations in medicine for the poor? Trends in patent applications related to medicines for HIV/AIDS, tuberculosis, malaria and neglected diseases. Institute of Developing Economies working paper 24. [9] Klausner, R.D. et al. (2003) The need for a global HIV vaccine enterprise. Science 300, 2036-2039. 4
[10] Kremer, M. and R. Glennerster (2004) Strong Medicine: Creating Incentives For Pharmaceutical Research On Neglected Diseases. Princeton University Press. [11] Lamptey, P., Johnson, J. and M. Khan (2006) The global challenge of HIV and AIDS. Population Bulletin 6, 1-24. University of Stellenbosch. [12] Leibowitz, A. and N. Sood (2007) Market power and state costs of HIV/AIDS drugs. International Journal of Health Care Finance and Economics 7, 59-71. [13] Leoni, P. (2010) Economic Challenges in the Fight against HIV/AIDS. Nova Science Publishers. [14] Matsushima, H. (2001) Multimarket Contact, Imperfect Monitoring, and Implicit Collusion. Journal of Economic Theory 98, 158-178. [15] Tirole, J. (1988) The Theory of Industrial Organization. MIT Press. [16] Sherer, F. (1980) Industrial Market Structure and Economic Performance (2nd edition). Chicago: Rand-McNally. [17] United States Patent and Trademark Office (1998) Lehman to leave Patent and Trademark Office by the end of the year. Online: http://www.uspto.gov/news/pr/1998/98-20.jsp 5