Innovation, IPR and public good—A perspective from Indian IP owners

Innovation, IPR and public good—A perspective from Indian IP owners

Are patent monopolies and access to new technologies justified in developing economies? The first of a three part CII White Paper presents some interesting research

Anjan Das, K Subodh Kumar

Patent rights have always been interpreted as monopolistic or exclusionary rights. The debate is, whether these rights restrict the access of new technologies that are essential for public good. New technologies can encompass all areas of importance to mankind. But when we debate on its impact on a developing economy, it is important to address the critical technologies in areas like healthcare, disease management, poverty alleviation, and unemployment which are the high priority areas for a developing economy.

In the same context, this article is an attempt to address the issue of accessibility of new technology versus the monopolistic restriction of patent protection, especially in a developing economy. The methodology adopted is to bring out the positive side of patents and its impact on the economy with case studies from Japan and even smaller countries like Jordan. The perceived adverse effect is highlighted through myths and realities surrounding the patents and their impact on drug prices. The article also stresses on the interventions which are needed to create a balancing mechanism to enable critical technologies accessible and affordable to the society.

Cutting edge technologies are those which give that unique competitive edge in the market. For example, the plasma screen technology is at present providing the cutting edge to television manufactures in the world. The need to innovate and develop cutting edge technologies is perhaps one of the important means to attain leadership position in the global market place. Creativity and innovation need to be nurtured and channelised into proprietary assets. There are no exceptions and no excuses; the reality needs to be accepted and proactive steps is the need of the hour for a developing economy to chart out a course to enter the league of developed economies.

Are patent monopolies and restricting access to new technologies justified in a developing economy? We recommend that the answer to this crucial debate is that we have to accept the reality of need for IPR protection and see how best this can be balanced with needs of the nation.

Developing economies—priorities and how patent monopoly affects these priorities

Some of the very important priorities of developing economies are healthcare, unemployment and poverty. If patent rights affect these basic priorities, then the extent of their impact will be a relevant analysis. One has to keep in mind that in the poorest regions of the world (Sub Saharan Africa, India, Bangladesh, etc), where people live on less than a dollar a day, less than five percent of economic activity relates to manufacturing. In addition, these countries usually have large informal sectors. More important issues for these countries include increasing savings rate and disseminating knowledge, which is in the public domain.

Since 1995, however, public opinion against TRIPS has hardened across the globe. In large measure this is because of the outcry regarding the HIV/AIDS epidemic. Since the 90s, almost the whole continent of Africa has come under the grip of this epidemic, and in some countries an estimated third of the adult population is infected by AIDS. The tragedy was compounded when drugs to contain AIDS started being developed. These drugs allowed AIDS patients the opportunity to live normal lives even if they were infected. But there was a catch. Because of patent protection these drugs were priced beyond the reach of patients in developing countries. The ridiculous effect of patent protection was evident when one found that the cost of treating AIDS patients in some African countries was many times their total gross national product (GNP), which was even more ridiculous and tragic, especially after knowing that these drugs can be produced at one fortieth of prices being charged by MNCs.

AIDS has become a rallying point for activists from all parts of the world and developing country governments alike. The coalition that was built around the AIDS issue then pressed for clarifications from the WTO that the TRIPS accord did not prevent country governments from legislating in favour of protection of public health. In this they were supported by almost the entire community of developing nations. Global drug MNCs fought to the last to prevent this,but the momentum of the global movement was able to force the adoption of a declaration at the WTO Ministerial Conference in Doha in November 2001 that clarified that countries could legislate to curb the monopoly powers provided by patent protection to drug MNCs, in order to safeguard public health.

In manufacturing, it could be argued that IPRs would facilitate the improvement of machinery. On the other hand, it is not clear whether it pays for labour-abundant countries with low wages relative to capital rents to buy capital intensive equipment. Another potential area, where IPRs play a role is in consumer goods, mainly pharmaceuticals. However, it should be kept in mind that life expectancy would be much more improved by establishing access to clean water, better health services, or distributing drugs which are not protected by patents. Similar caveats hold for copyright protection for computer software, although IPRs have significant price impacts, most people in poor countries do not have access to electricity and even less to computers.

Of a total of 8,926 patent applications in the Indian mailbox, a majority of 7,520 belong to foreign entities, while the balance 1,406 is Indian applications. Expectedly, the US which is home to a host of leading pharma MNCs, took a considerable lead over other countries, including hosts India, which was in the second slot. This was one of the issues which were widely debated before and after the introduction of product patent regime in India.

In November 2003, a team of economists published a paper on the effects of patent protection for drugs in developing countries, using India as a case study. This is the first such paper based on empirical data on prices and market shares. The economists—Shubham Chaudhuri of Columbia University, and Pinelopi Goldberg and Panle Jia of Yale University—selected a specific class of antibiotics, fluroquinolones, to figure out the impact on consumers and domestic companies if just patented antibiotics remained in the market. Fluroquinolones account for over 20 percent of the antibiotics market in India. The economists’ concluded that in the absence of any price regulation or compulsory licensing, the total annual welfare losses to the Indian economy would be greater than the sales of all systemic (oral or injected) antibiotics in 2000. The team pointed out that while the prices of patented drugs would definitely rise post 2005, prices of cheaper off-patent drugs in the same class too would increase when consumers opt for them. The study found that consumers had more to lose than copycat manufacturers; availability of drugs will be as big an issue as prices, if not bigger; the Government needs to monitor market penetration, not just prices; post patents compulsory licensing can be a tool to improve product reach; and local companies can use retail reach as a lever to tie up with patent owners.

Interestingly, the study concluded that availability of drugs would become an issue in a patent regime. Normally, customers who cannot access a domestic brand of a drug substitute it with another brand. So if a domestic brand of a kind of fluroquinolone, say, norfloxacin, is not available, they buy a domestic brand of, say, ciprofloxacin, instead of the foreign brand of norfloxacin. The researchers believe this is because domestic drugs are more widely available than foreign ones, and there are more Indian companies than foreign firms. The product patents would prevent any copies of the patented products in the market. Innovators would have to make up for this by widening the distribution reach of their drugs.

At the beginning of the Uruguay Round of the GATT in 1986 (subsequent to which the World Trade Center was formed), the mandate of the negotiating group on intellectual property was to discuss the trade-related aspects of intellectual property rights (IPRs) in the context of promotion of growth and development, a formula which seemed to leave both the economically developed nations and the economically developing nations plenty of negotiating room. From the very beginning, the focus of the developed nations (particularly the US) in the negotiations was upon strengthening standards of legal protection for IP across the board. That was not the view of the most articulate voices in the developing countries—particularly Brazil and India. For them, the key issue was the latter part of the mandate, the one providing them with access to technology—not IPRs. The stance of Brazil and India, among others, on IPRs was following—

  • Rigid IP protection impedes access to latest technological innovations, and therefore restricts the participation of developing countries in international trade

  • Abusive use of IPRs distorts international trade

  • What is ‘trade-related’ about IPRs is the ‘restrictive and anticompetitive behaviour of the owners of IP’ and not the behavior of commercial interests in developing countries or that of their governments

  • Patent systems can have adverse effects in critical sectors such as food production, poverty alleviation, health care and disease prevention, and have a dampening effect on the promotion of R&D in developing countries and in improving their technological capabilities

  • Systems for the protection of IPRs are by nature monopolistic and sovereign nations should be free to attune their own systems of intellectual property protection to their own needs and conditions.

Case Study 1—Japan

Japan introduced a patent system at a relatively early stage in its economic development, with the promulgation of an ordinance relating to trademarks in 1884 and to patents in 1885. Japan’s modern economic growth began in the mid-1890s, and a patent system designed to promote technological development was introduced at that time as part of a broader effort to build infrastructure, including railways, harbours and the postal system. These systems have provided the foundations for Japan’s subsequent economic development. The Japanese economy started to grow rapidly in the 1950s. With the growth of the Japanese economy and its technological advancement, Japan’s patent system started to change. The first major change was the introduction of substance patents in 1975. This took place earlier than in countries such as Switzerland, the Netherlands, Sweden and Canada. This step was taken partly as an effort to ‘internationally harmonise’ the Japanese patent system, but most pharma and chemical companies in Japan welcomed it as well. Japan’s patent system has continued to adapt to the changing nature of companies’ technological capabilities and it has contributed to the country’s technological progress.

As shown in the figure below, the number of patents increased dramatically throughout the 1970s and 1980s, supported by R&D expenditures, which also grew rapidly. In the 1990s, the growth of both R&D expenditures and patents slowed amid the economic downturn, but Japan still maintained one of the highest levels of R&D expenditures and patent applications in the world. Since the introduction of substance patents, various aspects of the patent system, including its enforcement, have continued to change. The general trend has been toward stronger patent protection, a broader range of patentable inventions, extended patent periods for medicines, broader scope of patents, and larger amounts of compensation for damages. In particular, effective enforcement has been necessary to ensure that the system continues to provide incentives for innovation. Adam B Jaffe of Brandeis University and Josh Lerner of Harvard University, highlight in their publication the ways in which the so called pro-patent orientation of the US patent system, has wreaked havoc on economic productivity due to the combination of low quality examinations of patents and the strong protection given to patents. It argues that the patent system, which was originally intended to promote innovation, is in fact obstructing it. The US Federal Trade Commission and European commentators have also raised these issues.

Problems with the patent system in the US are also damaging economic productivity in Japan and Europe. Thus, the well-intentioned introduction of speedy examinations, which was intended for customers, has ultimately led to these negative consequences. Working with limited resources, and faced with more complex and advanced technologies, as well as enormous numbers of examination requests, it is no easy task to provide examinations that are both speedy and accurate. The need for timely examinations has been stressed, and these are of course necessary.

Conclusions from Japan

The patent system plays a vital role in our society. It enhances incentives for innovation and ultimately contributes to a higher standard of living. At the same time, care must be taken to ensure that the system promotes continuous creation of superior technologies that will be widely used throughout society and thus improve our lives. The aim must be to create a pro-innovation patent system.

Case Study 2— Jordan

A few years ago, the Hashemite Kingdom of Jordan had a pharma sector that employed reverse engineering to create generic drugs at low prices. But Jordan’s generic companies had to compete with numerous generics from all over the developing world, not to mention those in the developed world. Facing severe economic difficulties, the Jordanian government came up with an economic development plan that included implementation of strong IPRs to foster research and development and expansion of the knowledge-based economy. With assistance from the US, the government created a world-class patent system through legislation, infrastructure development and enforcement. The result is a dramatic increase in foreign investment from major pharmaceutical firms, most of which have now opened offices or expanded their commercial and research activities in Jordan. Jordanian exports of pharmaceuticals increased from $150 million in 1999 to $200 million in 2001, a significant increase for a country with a population of five million. The most encouraging news, however, is that the concerns of the nay-sayers, concerns that strong patent protection would increase drug prices, have proven unfounded. In fact, prices for new, patent-protected medicines have not exceeded pre-patent prices, and prices have actually fallen for medicines on the market before patent protection. The generic industry has also benefited from introduction of patents, as the increase in foreign investment has generated work for these companies.

Jordan is only one example of how strengthened IPR laws can foster growth. Both Japan and Mexico saw a tripling of US pharmaceutical investment and R&D after they improved patent laws. In contrast, many countries of the developing world that do not have strong IPR regimes remain mired in economic stagnation and worse yet, have suffered the negative effects of the ‘brain drain’. Talented scientists, engineers, artists and inventors leave their home countries where their work is unprotected and migrate to those countries where it is. While this is certainly a boon for those countries—like the US—that receive these immigrants, this process does little to help the developing world.

(These are the view points of the authors and not be construed as the opinion of the organisation they represent. The next article will cover Patents and Prices and myths surrounding the patent protection regime. Anjan Das is Senior Director and Head-Technology, Innovation & IPR at the Confederation of Indian Industry. K Subodh Kumar is Head IPR & Andhra Pradesh Technology Development & Promotion Centre, Confederation of Indian Industry. They can be contacted at anjan.das@ciionline.org and subodh.kumar@ciionline.org respectively)