Penny Goldberg

1
Intellectual Property Rights Protection in
Developing Countries The Case of
Pharmaceuticals.  
Marshall Lecture European Economic Association
Congress, Barcelona August 27, 2009

• Penny Goldberg
• Princeton University, NBER and BREAD

2
Background and Motivation

• IPR protection has emerged as a principal issue
  in domestic competition policy.
• In the international context TRIPS WTO (1995).
• Member countries had to recognize and enforce
  product patents in all fields of technology,
  including pharmaceuticals.
• Developing countries had an extension of 10
  years. Had to have patent protection by 2005.
• Here Focus on pharmaceuticals because of the
  public policy importance of this sector.
• Question Is there a case for harmonization of
  patent policies across countries at different
  stages of development?

3
Why is it a highly contentious issue? 

• One side of the argument...
•  
• Patent enforcement in developing countries will
  lead to higher prices.
• The idea of a better-ordered world is one in
  which medical discoveries will be free of patents
  and there will be no profiteering from life and
  death. Indira Gandhi (1982)

4
Why is it a highly contentious issue?(continued)

• The other side of the argument...
•  High priced medicines after change in patent
  laws is a misconception. Organization of
  Pharmaceutical Producers of India.
• TRIPS compliant patent laws attract foreign RD
  investment in developing countries, and promote
  technology transfer.  
• Patents may provide incentives for research on
  developing-country specific diseases 

5
Thesis of this talk

• Existing arguments reflect the trade-off between
  static efficiency loss (higher prices) and
  potential dynamic gains (research, new products).
• But Higher prices are unlikely to materialize
  because of price regulation
• Dynamic gains also unlikely. Developing country
  markets too small to change research priorities
  of pharmaceutical concerns.
• Potentially largest effect on distribution and
  availability of new products in the developing
  world
• Distribution over time (launch of new drugs)
• Distribution over space (rural versus urban)
• Then what is the fuss about?
• Global reference pricing
• Long-run concerns about exports from developing
  markets

6
Road Map

• Theoretical arguments regarding IPR in developing
  countries
• The challenges on the empirical side
• What makes developing countries special?
• Lessons from a Case Study India and Quinolones
  (newer generation of antibiotics)
• Analyze patterns in the data
• Impose structure to estimate welfare effects
• Do the results generalize? Some cross-country
  evidence
• Policy implications
• What has happened since new patent legislation
  was signed in 2005?

7
Theoretical Arguments

• Standard analysis of patents in the closed
  economy
•  
• static (short-term) pricing distortions
• dynamic (longer-term) innovation gains
• optimal policy equates the marginal static
  efficiency loss to the marginal dynamic benefit
  (Nordhaus 1969).
• Complications in multi-country setting
• Note Most trade economists not in favor of
  TRIPS
•  

8
Theoretical Arguments (continued)

• Fundamental Externality Benefits of innovation
  are spread beyond national boundaries. Countries
  differ in their capacity for innovation because
  of
• Skill endowment and technical know-how
• relative size of domestic market
• Is Patent Length Harmonization (PLH) a necessary
  condition for global efficiency? Global
  Efficiency Regime that provides the optimal
  aggregate incentives for innovation throughout
  the world
• Answer NO (Grossman and Lai 2003)
• However PLH has important implication for
  the distribution of welfare between
  developed and developing countries.
• Global Reference Pricing
• Further complications with differentiated
  products such as pharmaceuticals 

9
On the Empirical Side  

• Very few empirical studies on drugs in developing
  countries.
• Arguments based on assumptions, rather than
  estimated parameters. Main limitations of this
  approach
• Domestic and foreign products are assumed to be
  perfect substitutes. Any welfare losses
  associated with patent enforcement stem from
  price increases of foreign products alone.
• Substitution towards other drugs and therapeutic
  segments ignored.
• Work on pharmaceutical markets in developed
  countries (plenty of papers) not pertinent to the
  TRIPS debate, because developing countries differ
  from developed countries in five critical
  respects

10
(Some) Important Differences between Developed
and Developing Countries

• Per-capita health expenditures lower
• No health insurance coverage
• Different diseases
• Storability, transportation and administration of
  drugs different.
• People may not purchase full dosage. As a result
• - long-run elasticity may be smaller than
  short-run elasticity
• - externalities

11
Comparing the health sector in low-income and
developed economies
India Pakistan Pakistan Canada Canada U.S.A.
Information on health expenditures Information on health expenditures Information on health expenditures Information on health expenditures Information on health expenditures Information on health expenditures Information on health expenditures Information on health expenditures
Total health expenditures as of GDP Total health expenditures as of GDP 4.9 4.1 4.1 9.1 9.1 13.0
Per-capita total health expenditures () Per-capita total health expenditures () 23 18 18 2058 2058 4499
Public health expenditures as of total Public health expenditures as of total 17.8 22.9 22.9 72.0 72.0 44.3
Private health expenditures as of total Private health expenditures as of total 82.2 77.1 77.1 28.0 28.0 55.7
Out-of-pocket expenditures as of total Out-of-pocket expenditures as of total 82.2 77.1 77.1 15.5 15.5 15.3
Top ten leading causes of burden of disease all ages Top ten leading causes of burden of disease all ages Top ten leading causes of burden of disease all ages Top ten leading causes of burden of disease all ages Top ten leading causes of burden of disease all ages Top ten leading causes of burden of disease all ages Top ten leading causes of burden of disease all ages Top ten leading causes of burden of disease all ages
India India India India U.S.A. and Canada U.S.A. and Canada U.S.A. and Canada U.S.A. and Canada
Cause DALYs (000) DALYs (000) DALYs (000) Cause Cause DALYs (000) DALYs (000)
Acute lower respiratory infection 24,806 24,806 24,806 Ischaemic heart disease Ischaemic heart disease 2,955 2,955
Perinatal conditions 23,316 23,316 23,316 Unipolar major depression Unipolar major depression 2,511 2,511
Diarrhoeal diseases 22,005 22,005 22,005 Alcohol dependence Alcohol dependence 1,736 1,736
Ischaemic heart disease 11,697 11,697 11,697 Road traffic injuries Road traffic injuries 1,670 1,670
Falls 10,897 10,897 10,897 Cerebrovascular disease Cerebrovascular disease 1,651 1,651
Unipolar major depression 9,679 9,679 9,679 Osteoarthritis Osteoarthritis 1,029 1,029
Tuberculosis 7,578 7,578 7,578 Diabetes mellitus Diabetes mellitus 1,017 1,017
Congenital abnormalities 7,454 7,454 7,454 Trachea/bronchus/lung cancers Trachea/bronchus/lung cancers 996 996
Road traffic injuries 7,204 7,204 7,204 Dementias Dementias 940 940
Measles 6,474 6,474 6,474 Self-inflicted injuries Self-inflicted injuries 858 858
12
Shares of Major Therapeutic Segments in Retail
Sales India versus the World Market
Therapeutic segment Share of retail sales () Share of retail sales () Share of retail sales () Share of retail sales ()
Therapeutic segment World 2001 World 2001 India 2000 India 2000
Therapeutic segment Rank Share() Rank Share()
Cardiovascular system 1 19.6 4 8.0
Central nervous system (CNS) 2 16.9 6 6.7
Alimentary tract and metabolism 3 15.3 1 23.6
Respiratory system 4 9.5 3 10.4
Anti-infectives 5 9.0 2 23.0
Musculo-skeletal 6 6.1 5 7.3
Genito-urinary 7 5.7 9 3.1
Cytostatics and immunosuppressants 8 4.0 13 0.1
Dermatologicals 9 3.3 7 5.6
Blood and blood-forming agents 10 3.1 8 3.9
Sensory organs 11 2.1 10 1.6
Diagnostic agents 12 1.8 12 0.1
Systemic hormonal products 13 1.6 11 1.5
Others including parasitology . 2.3 . 5.4
13
What we have done in the context of India

• Use detail product-level data from India to
  estimate key demand and supply parameters own
  and cross-price elasticities, expenditure
  elasticities, marginal costs
• In the period covered by our data, India did not
  recognize pharmaceutical product patents hence
  many products available that were under patent in
  the U.S.
• Carry out counterfactual analyses of what prices,
  consumer welfare, firm profits would have been
  had patents been in effect

14
The Basic Thought Experiment

• Had patents been in effect, domestic products
  that were in violation of patents would have to
  be withdrawn from the market
• Estimates of key demand and supply parameters can
  then be used to simulate the effects of product
  withdrawal on prices, consumer welfare and
  profits
• Limitation of Analysis
• TRIPS applies only post-1995. Most of the
  products that will be affected are still
  undergoing clinical trials in the U.S. and hence
  not in our data
• Does not tell us what will actually happen,
  but only what would have happened if patent laws
  had been enforced earlier

15
Case Study Indian PharmaceuticalsQuinolone
sub-segment of Systemic Anti-Bacterials

• Why India?
•  
• Leading example of a low-income developing
  country that had not recognized patents.
• Strong opposition to TRIPS. 
• Disease profile of Indian population mirrors that
  of many low-income countries. 
• Domestic Indian pharmaceutical industry was as of
  2002 the largest producer of generic drugs
  (followed by Brazil). Market structure many
  small and medium-sized domestic firms selling
  drugs that are patented elsewhere.

16
India s pharmaceutical sector

• Indian Patents Act (1970) excluded
  pharmaceutical product patents, recognized
  process patents for a term of 7 years
• Leftward tilt in policy during 1970s drug price
  controls, restrictions on foreign equity shares,
  capacity expansion
• Liberalization since early 1990s
• Dramatic growth of Indian pharmaceutical industry
  in the last 30 years
• Indian firms are major exporters
• India the largest producer of formulations, by
  volume, and a leading bulk drug producers

17
Production, exports, imports and domestic
sales of pharmaceutical formulations (Rs.
Billions)\s (Rs. billions)formulations\s
(Rs. billions)

• \s

18
Production, exports, imports and domestic
sales of bulk drugs(Rs. Billions)\s (Rs.
billions)formulations\s (Rs. billions)

• \s

19
India s pharmaceutical sector

• Market structure also changed
• declining share of multinational subsidiaries
  from about 80 to 90 in 1970 to roughly 30 in
  2000
• increase in number of firms in organized sector
  of the industry (roughly 400 firms)
• mushrooming of very small-scale units

20
Top 20 firms by domestic retail pharmaceutical
sales in India
Rank Year Year Year Year Year Year Year Year Year Year
Rank 1971 1971 1981 1981 1981 1981 2001 2001 2001 2001
Rank Company Origin Company Company Origin Origin Company Company Company Origin
1 Sarabhai Dom Glaxo Glaxo For For Glaxo SKB Glaxo SKB Glaxo SKB For
2 Glaxo For Hoechst Hoechst For For Ranbaxy Ranbaxy Ranbaxy Dom
3 Pfizer For Pfizer Pfizer For For Cipla Cipla Cipla Dom
4 Alembic Dom Alembic Alembic Dom Dom Nicholas Piramal Nicholas Piramal Nicholas Piramal Dom
5 Hoechst For Geoffrey Manner Geoffrey Manner For For Aventis Aventis Aventis For
6 Lederle For Burroughs Wellcome Burroughs Wellcome For For Sun Sun Sun Dom
7 Ciba For Ranbaxy Ranbaxy Dom Dom Dr. Reddys Dr. Reddys Dr. Reddys Dom
8 May Baker For Boots Boots For For Zydus Cadila Zydus Cadila Zydus Cadila Dom
9 Parke Davis For German Remedies German Remedies For For Knoll Knoll Knoll For
10 Abbott For Richardson Hindustan Richardson Hindustan For For Pfizer Pfizer Pfizer For
11 Sharp Dome For Parke Davis Parke Davis For For Wockhardt Wockhardt Wockhardt Dom
12 Sudrid Geigy For Warner-Hindustan Warner-Hindustan For For Alkem Alkem Alkem Dom
13 Unichem Dom Roche Roche For For Lupin Lupin Lupin Dom
14 East India Dom Merck, Sharp Dome Merck, Sharp Dome For For Novartis Novartis Novartis For
15 Sandoz For Cynamid Cynamid For For Aristo Aristo Aristo Dom
16 Deys Dom Unichem Unichem Dom Dom Pharma Marketing Pharma Marketing Pharma Marketing Dom
17 Boots For Cadilla Cadilla Dom Dom Torrent Torrent Torrent Dom
18 T.C.F. Dom Standard Standard Dom Dom Alembic Alembic Alembic Dom
19 Warner Hindustan For E. Merck E. Merck For For Cadila Pharmaceutical Cadila Pharmaceutical Cadila Pharmaceutical Dom
20 John Wyeth For East India East India Dom Dom USV USV USV Dom
Year Year Year Year
Year Year Year Year 1970 1970 1981 1981 1991 2000 2000
Foreign subsidiaries share of domestic retail sales () Foreign subsidiaries share of domestic retail sales () Foreign subsidiaries share of domestic retail sales () Foreign subsidiaries share of domestic retail sales () 75-90 75-90 60-75 60-75 49-55 28-35 28-35
21
Systemic Anti-Bacterials (Antibiotics)

• Focus on the systemic anti-bacterials segment of
  the market, and within that on the quinolones
  sub-segment
• Systemic anti-bacterials include all the original
  miracle drugs (for treatment of bacterial
  infections) that sparked the development of the
  research-based pharmaceutical industry as well as
  later generations of molecules
• Systemic anti-bacterials accounted for about 20
  of retail pharmaceutical sales in India in 2000
• Systemic anti-bacterials segment divided into
  several sub-segments, each representing a family
  of related molecules

22
Therapeutic Categorization
All Pharmaceutical Products
Cardio- vascular system
Central nervous system
Anti-infectives
Respiratory system
Others

Quinolones
Cepha- losporin
Penicillin
Trime- thoprim
Ampi- cillin
Macro- lides
Tetra- cycline
23
Why Quinolones?

•  
• Systemic anti-bacterials (i.e., antibiotics)
  important in a country where infections a major
  cause of disease.
• (life quality enhancing drugs, such as
  anti-depressants, Viagra, etc. will presumably be
  affected more by patents however, less important
  from a public health policy perspective)
•  
• Antibiotics important in terms of revenue share
  in Indian market (2 in revenues). Within
  antibiotics, quinolones one of the largest with
  20.8 revenue share.
•  
• Quinolones belong to the latest generation of
  antibiotics. Drug of choice for most infections ?
  there should be many substitutes available.
• Several quinolone products still under patent
  protection in the U.S.
•  

24

• The idea behind our exercise Imagine that
  patents had been enforced in India as they were
  enforced in the U.S. Simulate market outcome (we
  are not deriving the effects of actual TRIPS
  enforcement in 2005, since most patents had
  expired by then). But can get a sense of what the
  effects will be when important life-saving drugs
  are introduced in the future.

25
Methodological Approach

• Explicitly model consumer and firm behavior.
• Detailed estimation of the demand and supply
  structures own-price and cross-price
  elasticities and bounds on marginal costs.
• Counter-factual analysis price changes, consumer
  welfare losses, firm profit gains/losses.
• Decompose consumer welfare losses into three
  components

26
Loss of Variety Effect
-
Expenditure Switching Effect

Reduced Competition Effect

Consumer Welfare Loss of TRIPS
27
Key Demand Estimation

• Two-Stage Budgeting and AIDS
• Natural therapeutic categorization.
• Flexible functional form and very general demand
  patterns.
• Can be applied to both household-level data and
  market-level data.
• Finite virtual prices

28
How we Define a Drug

• Data is highly disaggregate information at the
  SKU level
• Differentiate along two dimensions molecule and
  nationality.
• Aggregate over dosage forms syrup, capsule,
  tablet strength 100 mg, 500 mg packet size 10
  tablets, 24 tablets
• Aggregate over domestic / foreign firms Ranbaxy,
  Cipla Bayer, Glaxo

29
Two-stage Budgeting Approach
Anti-biotics
Penicillins
Macrolides
Ampicillin
Quinolones
Cepha- losporins
Others
Trimetho -prim
Dom Cipro
Dom Spar
For Cipro
For Oflo
Dom Norflo
Dom Oflo
For Norflo
30
Some Interesting Patterns in the Data

• Four main molecules.
• Domestic share in each case SUBSTANTIALLY larger
  than share of foreign subsidiaries.
•  Domestic CIPRO by far the biggest (53 revenue
  share).
•  Yet, prices of domestic products higher by ca.
  10 (last 2 rows of the table).
•  Note also
• VERY large number of domestic firms.
• Foreign firms violate patent laws in India while
  respecting them in their own countries.
• Products often introduced in India by Indian
  firms. Foreign firms follow years later.
• General impression from these tables Domestic
  drugs sell at a premium. Distribution networks
  and ease of access a possible explanation.

31
The Quinolone Sub-Segment
Molecule Share () of sales of quinolones Share () of sales of quinolones Sales (Rs. millions) 2000 Sales (Rs. millions) 2000
Molecule Domestic firms Foreign subsidiaries Domestic firms Foreign subsidiaries
Ciprofloxacin 53.0 2.7 3,030 156
Norfloxacin 11.2 0.1 640 3
Ofloxacin 11.6 3.1 665 177
Sparfloxacin 10.8 0.1 620 4
32
Ciprofloxacin Ciprofloxacin Norfloxacin Ofloxacin Sparfloxacin

U.S. or European patent-holder U.S. or European patent-holder Bayer Merck Ortho-McNeil Rhone-Poulenc
Year of U.S. patent expiry Year of U.S. patent expiry 2003 1998 2003 2010
Year of US-FDA approval Year of US-FDA approval 1987 1986 1990 1996
Year first introduced in India Year first introduced in India 1989 1988 1990 1996

No. of domestic Indian firms 75 75 40 17 25
No. of foreign subsidiaries 8 8 2 2 1
No. of products of domestic firms 90 90 48 21 30
No. of products of foreign subsidiaries 10 10 2 2 1
Sales weighted average price per-unit API of products produced by Sales weighted average price per-unit API of products produced by Sales weighted average price per-unit API of products produced by Sales weighted average price per-unit API of products produced by Sales weighted average price per-unit API of products produced by Sales weighted average price per-unit API of products produced by
Domestic Indian firms 11.23 11.23 9.04 88.73 78.11
Foreign subsidiaries 10.29 10.29 4.99 108.15 .
33
Main Demand Side Results

• (drive counterfactual simulation results and
  conclusions)
• VERY large cross-price elasticities between
  domestic products with different molecules. In
  fact, some domestic products appear to be closer
  substitutes to one another, than domestic/foreign
  products containing the same molecule
• ? Domestic Products closer substitutes to one
  another than to foreign products with the same
  chemical composition. Genuine empirical result.
• Possible Interpretation Differences between
  domestic and foreign products in the distribution
  networks. The retail coverage of domestic firms
  (as a group) is much more comprehensive than that
  of multinational subsidiaries.
•  
• Quite possible therefore that local pharmacies
  more likely to have in stock domestic products
  containing different molecules than they are
  domestic and foreign versions of the same
  molecule.
•  

34
In Sum

• Consumers seem to prefer domestic to foreign
  products (as indicated by the higher prices and
  higher market shares)
• Domestic Products close substitutes to one
  another
• Likely reasons for these patterns
• Delay in launch of new products by multinational
  patent-holders in India, possibly due to
  reference pricing.
• Lack of well developed distribution and marketing
  network by multinationals.
• Important policy implication loss of variety as
  a result of patent protection likely to be
  substantial.
• New drugs will be available to Indian consumers
  with a delay
• Even after their launch, their distribution
  especially in rural areas may be lacking

35
Evidence from other countries

• How general are the previous findings?
• No direct evidence on consumer preferences in
  other countries.
• However, evidence on firm/product entry from
  cross-country studies
• Two studies particularly relevant
• Lanjouw (2005) 68 countries of all income levels
  and drug launches between 1982-2002
• Danzon and Epstein (2008) 15 countries and drug
  launches in 12 different therapeutic classes
  between 1992-2003.

36
Evidence from other countries (continued)

• Main findings
• Launch timing is influenced by price regulation.
  If price regulation reduces prices, it
  contributes to launch delay.
• Global reference pricing is particularly
  important here Manufacturers delay launch in
  low-price countries to avoid undermining higher
  prices in other countries. Hence, referencing
  policies adopted in high-price countries impose
  welfare costs on low-price countries.
• Effect of IPR is ambiguous.

37
Implications for Welfare

• Consumer welfare losses are substantial 400M
  when we remove all domestic quinolones from the
  market -- 65 of the sales of the entire
  anti-bacterial market in India in 2000.
•  
• Consumer welfare loss not that large as long as
  some domestic competition remains. Loss largest
  when all domestic products disappear from the
  market.
• ? Driven by large cross-price elasticities
  across domestic products.
•  
• A substantial fraction of the loss is due to the
  loss of product variety. Again, driven by large
  cross-price elasticities for domestic products ?
  Corresponds to the case where strict price
  regulation would keep the prices at their
  pre-TRIPS level.
•  
• Conclusion Price regulation alone not sufficient
  in order to mitigate the loss suffered by Indian
  consumers.
•  

38
Implications for Welfare (continued)

• Prices increase between 100 to 400.
•  
• Losses to domestic firms pale in comparison 50M
  per year ? May explain why domestic firms have
  been divided regarding TRIPS.
• Moderate gains to foreign patent owners
• Without price regulation 53M per year
• With price regulation 19.6 per year
•  developing a new drug costs 802M on average,
  Mednews (2001).
• What is the fuss about? Global reference pricing?
  
•  

39
Total Welfare Loss
Loss of variety compulsory licensing
Substantial price increase substitutes within
segment important
Consumer Welfare Loss

Firm Profit Loss
Total effect bigger than sum of components
Foreign Profit Increase
Increase in RD unlikely
40
Policy Implications

• Substantial loss of consumer welfare from
  reduction in product varietymore than 50 of
  overall losses under most scenarios
• Suggests possible role for compulsory licensing
• Counterargument If the value of product variety
  derives from coverage of distribution networks
  and associated ease of access, this component of
  consumer welfare loss may be transitory
• with India recognizing patents, MNC subsidiaries
  may invest in expanding distribution networks
• But Incentives to undertake such investments
  will be small as long as the market remains
  small. Price controls will further reduce
  incentives.

41
On Incentives

• Sales of Bayers ciprofloxacin 1.6
  billion in 2000
• Profit of Bayers ciprofloxacin
  640 million in 2000
• Total revenue in the ENTIRE
• anti-bacterials segment in India 610
  million in 2000
• Note The profit calculation assumes as 40
  markup, which is standard in this industry.

42
Summary

• Recent debate has focused on
• - prices
• - RD
• Our research points to another issue ?
  distribution and marketing of EXISTING products
• - over time
• - over space (rural versus urban in
  particular)
• Big Question
• Will patent enforcement change the supply side of
  the market?
• Incentives of multinationals to invest in
  distribution networks and marketing in developing
  country markets?
• Joint Ventures with domestic firms? Licensing?

43
So, what has happened since 2005?

• Evidence is VERY preliminary
• Recent work by Arora, Branstetter and
  Chatterjee(2008)
• Striking Increase in RD intensity of Indian
  pharmaceutical firms
• In particular
• Increase in absolute RD expenditures
• Increase in RD intensity
• Increase in measures of research output
• Increase in stock market valuation of Indian
  firms RD investment.

44
So, what has happened since 2005?

• But
• No evidence that the above developments are
  driven by independent innovations
• No new products
• No evidence of RD collaboration between Indian
  and Western firms (with few exceptions)
• Question Where did the RD expenditures go?
• Answer
• Process and not product innovations
• Sales of generic products abroad Explosion of
  export activity
• Contract manufacturing

45
So, what has happened since 2005?

• Big benefit of TRIPS
• It opened up to Indian firms foreign markets for
  TRIPS-legal imitations the generics market!
• At the same time Oxford Analytica reports
• Complaints that price controls undermine the
  growth strategy of the pharmaceutical industry.
• In 2005 number of new drug products introduced to
  the domestic market fell by 50. Their
  contribution to total sales was just 1.
• Industry confined to re-processing of
  international drugs patented before 1995.
• Because of TRIPS, no new generic drugs.
• Foreign firms are slow to introduce new products
  little interest in its small scale opportunities

46
Conclusion

• Indian firms seem to have benefited from TRIPS,
  but mainly through exports
• Risks to Indian consumers real.
• More research into the distribution of new drugs
  in India and other developing countries
  necessary.
• How soon?
• Do they reach poor rural areas?
• Perhaps the hardest question Welfare
  implications of distribution
• Do we want new drugs to reach uninformed
  consumers?

47

• THANK YOU!