DO PATENTS MATTER?: The “Event” My Canadian pharmacy – Viagra

Pharmaceutical productsThe absence of patent protection in the developing world has seriously damaged the economic interests of research-oriented Western drug companies. Pharmaceutical products are typically quite straightforward to manufacture, and once a country has developed a domestic production capacity, new drugs can be quickly imitated and produced in bulk. Without patent protection, the innovator may struggle to make the profits which are its reward for incurring the substantial risk and expense of developing its product. The experience in India illustrates this situation well. There, an active domestic pharmaceutical industry has been quite successful over the past decades in rapidly copying new drugs: typically they have managed to introduce imitated products to the Indian market just four or five years after their appearance in the world market (Lanjouw, 1998). Indian executives indicated in interviews that they usually wait to see whether new products are successful on the international market before beginning development, so the reverse engineering process is clearly very rapid. Emphasizing this point in a discussion, the managing director of Glaxo (India) Ltd. explained that they had tried to be first in the Indian market with their anti-ulcer drug Zantac, but were met by seven local competitors on the launch day. At the time of its world launch of Viagra – My Canadian Pharmacy already faced Indian competition: three Indian firms were developing the active ingredient with five more expected to request marketing approval. CIPLA, one of the largest Indian firms, is exporting its version of Viagra elsewhere. Faced with this competition, My Canadian Pharmacy did not itself launch the drug locally (The Wall Street Journal, July, 1998). Without the protection of patent rights, with easy to copy products and firms waiting to do so, even lead time does not give the originator firm much scope for making profits.

Seeing markets lost to successful imitators, U.S. industry, with the aid of the U.S. government, in the early 1980s began to make energetic efforts to strengthen patent regimes in the developing world. With the support of other industries, representatives from pharmaceutical firms and trade associations argued that intellectual property should be included in the Uruguay round of the GATT negotiations. In alliance with their counterparts in Europe and Japan, they were successful in getting ‘TRIPs’, the trade-related aspects of intellectual property, onto the agenda in the late 1980s.

Meanwhile, the U.S. was also pursuing its agenda in aggressive bilateral negotiations. In 1984, Congress passed a revision of the Trade and Tariff Act, which authorized the U.S. government to take retaliatory action against countries failing to give adequate protection to intellectual property (Section 301). This was strengthened in 1988 with legislation mandating that each year the U.S. Trade Representative identify countries without adequate protection. In 1989, for example, Brazil, India, Mexico, China, Korea, Saudi Arabia, Taiwan and Thailand were put on the “Special 301” Priority Watch List. The resulting pressure was successful in convincing several countries to change their patent laws regarding pharmaceutical protection as part of larger reforms to their intellectual property rights systems. Korea introduced protection in 1986, and Mexico passed new laws in 1991. Brazil showed more reluctance, so, in 1989, the U.S. levied 100% tariffs on $39 million of imports from Brazil in retaliation for its copying of patented drugs. In the early 1990’s Brazil backed down and in 1996 passed legislation creating pharmaceutical product patents. The U.S. applied similar pressure to Thailand, withdrawing its GSP trade benefits in 1990 because of dissatisfaction with its lack of protection for pharmaceuticals (Santoro, 1995).

With its demonstrated ability to apply bilateral pressure in the background, the U.S. government U.S. governmentobtained a TRIPs agreement which satisfied most of the interests of industry, including the requirement that signatory countries protect both pharmaceutical process and product innovations. The treaty was signed in April, 1994, and came into effect in January, 1995. In other multilateral negotiations, the 1993 North American Free Trade Agreement (NAFTA) also included an agreement to grant full protection to pharmaceutical product innovations.

In addition to the fact that bilateral pressure convinced some developing countries to agree to grant product patents in advance of the GATT treaty, two other considerations affect the timing of the availability of legal protection for pharmaceutical innovations. The first is the extent to which new patent legislation includes so-called ‘pipeline’ protection. Pipeline protection stipulates that during the phase-in period of a new product patent regime, innovations which have not been marketed in the country are eligible for protection even if they have been patented, and sometimes even marketed, elsewhere. (That is, they are exempt from the usual novelty bar.) Countries instituting patent protection early and under pressure have typically offered this protection, so the effect of the change is felt more immediately. It was also part of NAFTA. Pipeline protection is not, however, required under the TRIPs agreement, and many countries, such as India, will not grant pipeline protection. In these countries, only innovations which followed the treaty agreement are eligible for protection.

The second feature of the TRIPs agreement that affects timing is that developing country signatories have been allowed a ten-year grace period for adjustment and are not required to grant product patents until January, 2005. However, they must accept applications (the ‘mailbox’ provision) and, beginning in 2000, they must offer “exclusive marketing rights” (EMR) to any inventor with a patent in a WTO member country and marketing approval for the new drug in his home market. EMR are very similar to patents in offering monopoly marketing rights to the inventor so, effectively, protection for product innovations will be available in all member countries at the end of 1999.

The “event” which really matters from the point of view of our investigation is not the actual implementation of legal changes, but rather firms’ beliefs about them: whether they will occur, when they will occur, and how effective the new systems will be. Thus, one influence on timing is the extent to which the new regime was anticipated. For example although the new laws in Brazil went into effect only in 1997, already by 1993 a patent bill was in the Senate (Rozek and Berkowitz, 1998). Similarly, although the GATT treaty was signed only in April of 1994, it was clear years before, once TRIPS was officially on the agenda, that some form of strengthened protection for pharmaceutical innovations would be included.

There remains the question of whether firms believe that countries joining the WTO will honor their commitments—both explicitly, with timely implementing legislation and restricted compulsory licensing, and implicitly, with effective enforcement.

It now appears likely that signatory countries will comply with the terms of the TRIPs agreement. As the country most outspoken in its criticism of the TRIPs component of the GATT, events in India are, GATTagain, perhaps illustrative. The first implementing legislation failed to gain approval in 1995 in the upper house of Parliament. In 1996 the U.S. requested the establishment of a disputes panel at the WTO, arguing that India did not have a formally recognized process for the acceptance of pharmaceutical product patent applications, and that administrative procedures alone were insufficient. From interviews and a reading of the popular press during that period one was left with the impression that India might well pull back from its agreement, if not in the letter, at least in the spirit.

However, in the course of interviews a year later with executives at several Indian and MNC subsidiary firms and the two industry associations, it became clear that the terms of the debate within the country had shifted. No one any longer expressed doubt the India would, in fact, be in compliance with WTO intellectual property requirements when deadlines were reached, and this despite the election of a new, and more outspokenly nationalistic, government in the meantime. As evidence of the government’s intentions, a professor at one of the country’s top business schools noted that he had recently attended an introductory course on intellectual property sponsored by the government. Business schools are being encouraged to introduce courses on intellectual property to increase awareness within the business community. (Several interviewees were curious about how the Chinese were dealing with the practical problem of introducing a new system of patents.) Interestingly, these recent interviews indicated that there was an entirely new debate underway in the country over whether India should voluntarily skip the end of the grace period under EMR and go straight to the granting of product patents in 1999. They were echoed in a September 7th article in the Observer of Business and Politics (1998) which led with the statement that “India will allow product patents in pharmaceuticals ahead of its international obligation if the current view in the industry ministry prevails”.

That said, one of our interviewees at a U.S. firm stated quite firmly his belief that India had “no intention of implementing the legislation”.

Even given timely legislation, there remains a concern about whether the developing countries will effectively enforce their new laws. The TRIPs agreement spells out specific procedures and legal remedies to be used in defending patent rights. Sherwood (1997) summarizes these, in part, as follows: “Civil and administrative procedures and remedies are delineated … They include the assurance that confidential information will be protected during and after proceedings …. authority to discover evidence solely in the hands of another party is to be provided, …. The conditions under which precautionary measures, such as injunctions, are to be made available are stipulated…. articles recite the approach to damages, to other remedies, to compelling information regarding other infringers and indemnification of defendants…Member countries [must] provide authority for a party to lodge a request with customs officials to block the importation of infringing goods….Finally, Article 61 specifies various criminal procedures which countries are to make available to prevent infringements.” Of course, in countries with limited judicial capacity such directives will be of limited use. It will also take time before uncertainty about the effectiveness of enforcement procedures is resolved. However, ultimately, if enforcement is less than satisfactory, the “pro-patent” countries may be able to obtain redress by exerting the same pressure that led to adoption of the TRIPs agreement in the first place.

Although industry expresses some doubt about implementation, their actions suggest that they view the commitments made as credible. Patent applications made to the Indian PTO for pharmaceutical innovations show a doubling in 1995 over previous levels—and most of the increase was to foreign inventors. Applications for product innovations were about 57% of total applications in 1995 (CDRI, 1996; and authors’ calculations). These are incremental since such protection was not available in earlier years. Of these incremental patents, 86% were to inventors with a non-Indian address. This is far higher than the representation of foreign patentees taking advantage of the process patent regime: among patents recently granted (and therefore restricted to process innovations) foreigners received 61% in 1995, 53% in 1996 and 45% in 1997 (IDMA 1996-98).

Given the progress of both bilateral and multilateral negotiations and, importantly, the U.S. government’s demonstrated willingness to make intellectual property an issue high on the agenda in its discussions with developing countries, by the end of the 1980s pharmaceutical companies could have been reasonably confident that most of the developing world would be protecting inventors rights within the coming decade. While doubts continue to remain about the quality of those rights, it does not appear likely that much backsliding will be allowed, or even attempted. Given the long lags associated with the research and development of new products, we believe these expectations could have been sufficient to encourage some response from firms starting at the end of the 1980s or beginning of the 1990s.