Atanu Dey On India's Development

Indian court orders “compulsory license” of Bayer’s cancer drug

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This opens up an interesting can of worms. But first, here are some excerpts from the Huffington Post article “India Cancer Ruling Opens Door For Cheaper Drugs”:

On Monday, the Indian Patent Office effectively ended Bayer’s monopoly for its Nexavar drug and issued its first-ever compulsory license allowing local generic maker Natco Pharma to make and sell the drug cheaply in India.
. . .
“This could well be the first of many compulsory rulings here,” said Gopakumar G. Nair, head of patent law firm Gopakumar Nair Associates and former president of the Indian Drug Manufacturers’ Association.

“Global pharmaceutical manufacturers are likely to be worried as a result … given that the wording in India’s Patent Act that had been amended from ‘reasonably priced’ to ‘reasonably affordable priced’ has come into play now.”

The new wording is seen as a lower threshold for compulsory licenses, which can be issued under world trade rules by nations that deem major life-saving drugs to be too costly. The licenses allow them to authorise the local manufacture or importation of much cheaper, generic versions.

Global drugmakers see emerging markets such as India as key growth opportunities, but remain concerned over intellectual property protection. Nair said HIV-related medicines were likely to be the most at risk by compulsory licenses in the future.
. . .
A provision of the Indian Patents Act allows for a compulsory license to be awarded after three years of the grant of patent on drugs that are deemed to be too costly.
. . .
“This (Bayer) case might become a trend-setter, wherein generic players can make copies of patented products,” said Siddhant Khandekar, analyst at ICICI Direct.

“While global giants might not like this, generic companies will benefit along with common people,” he said, adding that the cancer treatment market in India was worth up to 30 billion rupees ($600 million).
. . .
Pfizer has questioned the issue of affordability, saying many Indians are well off and can afford Western medicines.

“There is huge wealth in India,” Pfizer CEO Ian Read told Reuters in London on Monday. “There are maybe 100 million people in India who have wealth equivalent to or greater than the average European or American, who don’t pay for innovation. So this is going to have to be a discussion at some point.”

But groups that campaign for cheap access to drugs in poor countries have welcomed the Bayer ruling.

Medecins Sans Frontieres said the ruling means that new medicines in India that are still under patent, including some of the latest treatments for HIV/AIDS, could potentially have generic versions produced for a fraction of the cost.

“It’s a bold move by the government and it’s a good judgment … which will benefit people,” said Dara Patel, secretary general of the Indian Drug Manufacturers’ Association, an industry body of Indian companies.

“Drugs to treat heart-related diseases and HIV are costly,” said Patel. “Compulsory licensing will make them available at one-fourth or one-fifth of the price, which is good.”

Now on to my comments. First, I note that “compulsory license” is allowed under world trade rules. The question is how often should this be exercised and what would the fallout be of this kind of court rulings.

There is no doubt that drugmakers will think twice about peddling their drugs in India. But they do have financial clout and if they want (I am not implying that they do), they can buy influence among the politicians and officers of the court. So they can keep a lid on how many cases of compulsory licenses we will see.

This drug issue is not a huge vote-getter (say unlike job reservations) because the politicians cannot really say that this drug will be only available to the minorities, or to this or that caste. Apparently the only bits that Indian politicians feel interested in is whether this or that voting block will vote for them or not. Price discrimination of drugs is not possible in the domestic market and therefore my guess is that politicians can be easily bought by the pharma companies to toe the line about intellectual property and how preventing them from monopoly pricing will cause social harm.

There is a good discussion going on over at Slashdot (hat tip: @achintyasharma) Here’s something I learned by following a link in one of the comments:

A new study by two York University researchers estimates the U.S. pharmaceutical industry spends almost twice as much on promotion as it does on research and development, contrary to the industry’s claim.

The researchers’ estimate is based on the systematic collection of data directly from the industry and doctors during 2004, which shows the U.S. pharmaceutical industry spent 24.4% of the sales dollar on promotion, versus 13.4% for research and development, as a percentage of US domestic sales of US$235.4 billion. [Source: ScienceDaily.com - Jan 2008.]

If you think about the economics of this sort of behavior by the drug companies, it makes sense. Drug discovery is a really costly process. Then there is a limited time that they get patent protection for. During this time, they have the monopoly on the drug.

Monopolies aim to maximize profits, just like any other firm. But they have one advantage over firms in a competitive market: they can set the price. They set such a price which is far above the marginal costs that maximizes their profit. At this price, the quantity demanded is lower than what it would have been if the firm were to set a lower price. Of course at a lower price they may still make profits but lower than the maximum profit they can make.

But here’s the thing. If the demand were to change, the profit maximizing price (and hence the quantity) will also change. So if they can push the demand up, their profits would increase too. That is, by advertising heavily, they shift demand outwards and thus can sell a greater quantity while increasing the price.

So it makes sense that they spend a lot in advertising if it increases their profits on the margin.

Moving on, Mr Read, the Pfizer CEO says that there is huge wealth in India. No doubt about it. But I doubt his estimate that there are 100 million Indians “who have wealth equivalent to or greater than the average European or American.” Wrong. I will not go into the details but the number is closer to 5 million than 100 million.

Even then, it is not whether there are wealthy people in India. The fact is that at prices at which the company maximizes profits in the rich countries, the quantity demanded in a poor country like India would be very small. The profit maximizing monopoly price would be lower in India by a factor of four or five. The Pfizers of the world can continue to increase their global profits if they could sell their drugs at a lower price in India — that is, if they could “price discriminate.”

Here’s an interesting comment in Slashdot:

Bayer would just avoid India completely, and not release their patented drugs until 10-20 years later

To a large part, this tactic is why most countries grant compulsory licensing in at least some instances — to make it impossible for a company to metaphorically “take its ball and go home”. Most countries besides the US take the attitude, “If the IP owner isn’t interested in selling it here, and won’t allow anybody else to sell it here by granting them a license under reasonable terms, we aren’t going to stand in the way of somebody else independently taking the initiative to do an end run around them, make it themselves and sell it here anyway.” India just happens to be notorious (within the pharmaceutical industry) for doing it openly, loudly, and proudly when lifesaving drugs are priced out of reach for most Indians by rent-seeking drug companies.

India is also somewhat unique in that it doesn’t grant or recognize patents for “method of use” or “molecules”, only manufacturing processes. So when finasteride was repurposed in lower-dose form as Propecia for baldness, it wasn’t eligible for a new patent in India. That’s why Propecia is patented and expensive in the US, but costs next to nothing when purchased from India. Likewise, when Indian companies came up with new ways to manufacture atomoxetine (the ingredient in Strattera), they were able to get their own patents and begin selling it, even though the original patent for Strattera was still in effect and valid in India. In the US, you can combine two old drugs in new doses into a new drug, and get it patented for another 17 years. In India, you’d be laughed at (unless you somehow came up with an innovative new manufacturing process that did something differently than just making the two original drugs by their original processes, mixing them together, and pressing them into tablets containing both).

As I was saying, a fascinating topic if you are interested in the economics of monopolies, patent protection and intellectual property right.

I am not very familiar with the subject — only that much that I need for teaching industrial organization courses at UCB. I found a reference online for a book that looks promising. “Against Intellectual Monopoly” by Michele Boldrin and David K. Levine. The abstract says:

It is common to argue that intellectual property in the form of copyright and patent is necessary for the innovation and creation of ideas and inventions such as machines, drugs, computer software, books, music, literature and movies. In fact intellectual property is a government grant of a costly and dangerous private monopoly over ideas. We show through theory and example that intellectual monopoly is not necessary for innovation and as a practical matter is damaging to growth, prosperity and liberty.

I have not read the book but a quick glance at it says that it will be instructive.

(The book is freely downloadable from the site. This underlines my conviction that you can get a fairly decent education from stuff on the web, provided you have a good guide. In this case, I got the link from a comment on the Slashdot discussion.)

  • Mohun

    Only in Maino’s India.