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(Paper presented to Workshop ID, Cartagena, March 1996)

By: Harvey E. Bale, Jr., Ph.D., Senior Vice President International
Pharmaceutical Research and Manufacturers of America

"Without the sense of security which property gives, the land would still be uncultivated. "
François Quesnay (1694-1774), Maximes Générales (1760)

In this forum on policies affecting development and technology, I highlight the importance of the role of providing strong protection of intellectual property rights. In a study published in 1995 by the World Bank-affiliate -- the International Finance Corporation (IFC) -- it was concluded that "a country's system of intellectual property protection seems to have a substantial effect in relatively high technology industries like chemicals, pharmaceuticals, machinery and electrical equipment on the kinds of technology transferred to that country and the amount of direct investment in that country ... by Japanese and German, as well as U.S., firms."

If we consider this fact in light of the global competitive position of the Americas in relation to that other great region where economic development is accelerating --Asia-- I am afraid we have to be quite concerned. With the exception of India, all major developing countries in Asia have adopted much stronger industrial property protection -- covering patents, trademarks, etc.-- than is the case in many countries of the Americas. The effect on investment and technology has been dramatic. Having been in China recently, I have seen the investment enthusiasm that has led to 12 joint-ventures between American and Chinese firms in the pharmaceutical sector following passage of China's 1992 patent legislation. As the head of China's Patent and Trademark Law Office said last week, "New technology is the most important thing brought in by external investment and patents are a way to protect that technology." Unfortunately, in our own hemisphere, there are still forces fighting rearguard actions to protect their privileged position by preventing early action on patent legislation.

On a global plane, there is very little debate today about whether there should be strong intellectual property protection for pharmaceutical products. Debates of the past about the so-called "monopoly" effects of patents on the market place have been resolved in favor of the recognition that adequate patent, trademark, and trade secret protection for pharmaceutical products is absolutely essential for the development of new pharmaceutical compounds. In other words, without adequate intellectual property protection, we would not see the new miracle drugs for mental depression, heart disease, etc. that have benefited patients in recent years. New pharmaceuticals that result from strong patent protection are saving lives, money and improving the quality of life of patients around-the-world.

A decade ago, Professor Edwin Mansfield of the University of Pennsylvania described in a simple table (Table 1) how pharmaceutical innovation and development were dependent, in absolute terms and relative to other industries, on strong patent protection. This ranking is not very surprising when you consider that the ratio of R&D expenditures of the pharmaceutical/biotechnology industry is far higher than in any other important industrial sector (PhRMA companies spend 20 percent of their revenues on R&D, compared to less than 4 percent for U.S. industry overall). It costs hundreds of millions of dollars in the United States to do R&D for each new marketed drug discovery; and it takes an average of a decade or more to bring each new pharmaceutical compound to the marketplace.

If it has been conceded that patent protection is essential for pharmaceutical products, it has been argued by some that such protection should be: 1) very limited compared to other sectors, perhaps subject to compulsory licensing; and 2) restricted only to advanced industrial countries. These arguments, too, have lost out to the recognition that the term of patent protection (because of regulatory delays) needs to be lengthened beyond the normal standard for other products; that compulsory licensing provisions such as previously existed in Canada, need to be repealed; and that, in fact, developing countries themselves have much to gain in providing pharmaceutical patent protection.

Looking over the past twelve years, in the United States, Europe and Japan the term of patent protection for pharmaceuticals has been uniquely extended to make up for some of the economic benefits lost during the life of a patent in the process of obtaining necessary regulatory approvals (e.g., from the FDA) for marketing pharmaceutical products.

Canada and New Zealand, several years ago, repealed onerous compulsory license measures that eroded the effect of intellectual property protection; and since 1986 developing countries of Asia and the Western Hemisphere have adopted strong intellectual property protection for pharmaceutical products as Table 2 shows. The fact is that, today, there is only a small minority of important developing countries that still do not provide adequate intellectual property protection for pharmaceutical products. A number of those countries unfortunately are in Latin America. But even this is changing. Aside from the fact that the U.S. Government has made strengthened intellectual property protection abroad a major priority in its negotiations with foreign governments, there are other -- even more compelling -- reasons for developing countries in the Western Hemisphere and elsewhere to change their current or past anti-patent policies.

Increasingly, it has been recognized that the non-patentability of pharmaceutical products is a growing economic and health burden on the economies of Latin America -- leaving aside the fact that it sours the trade relationships between Latin America and the United States, and increasingly Europe and Japan. Inadequate intellectual property protection is disguised protectionism for local industry. A 1990 study by the Latin American Economics Foundation FIEL states that: "the non-patentability of pharmaceutical products, that was in its beginning a device designed to safeguard public health, has presently turned into an instrument used to protect local industry." It has also become another basis for the corruption of public officials. Further, in this age of emerging and re-emerging serious infectious diseases, particularly in tropical climates, the lack of intellectual property protection for pharmaceuticals is an example of national and regional disarmament against the invasion and destruction of such diseases. Without patents, where is the incentive for local companies and research institutions to exploit the biomedical promises of Latin America's rain forests? Why must Latin American scientists go to the United States or Europe to win Nobel prizes for the discovery of new pharmaceutical compounds? These are issues and questions which every government in the hemisphere is asking as they review their intellectual property policies.

Let's see what is happening in today's markets in Latin America where patent protection is absent. First, a bit of comparison with conditions of the United States. Here, there are two forms of pharmaceutical price competition that are occurring. During the patent life of products, competition exists on the basis of both price and non-price (i.e., marketing and brand differences) conditions. Even though brand-basis marketing of patents protected pharmaceutical products is important during the period of patent protection, in recent years price competition among patented products has intensified. However, after patent expiry, price competition becomes particularly intense as generics enter the market and erode the market share of the product originator. An example of this phenomenon is shown in Table 3 for Tagamet (cimetidine) which lost its patent protection in 1994. "Unbranded" generic conies are introduced at discounts of 30-60% relative to the brandname product.

On the other hand, when we look at Latin America, where patents for pharmaceuticals are weak or non-existent, the "competition" is product-differentiated between the original products and "branded" pirated copies. There is no generic market as we know it in the United States. The same compound shows up as different brands which are marketed on the basis of strength of sales force, date of introduction, brand loyalty, etc. The existence of pirated copies typically does not bring any significant benefits for consumers. Indeed, as Table 4 shows, a look at the Argentine market shows that, on average, pirated products are priced higher than the brand of the product which the originator invented! Where is the consumer benefit in this situation? In Argentina, pirated copies have "miraculously" made it to the market via government approvals before the inventor/originator can get his product to market. Pirating companies are aggressive in their sales and marketing, deploying huge sales forces and using creative marketing tactics. Thus, the consumer does not benefit from patent piracy; instead, the consumer pays twice. First, the consumer often pays a higher price -- relative to income, prices of the original product, and even prices in the United States -- in countries such as Argentina. Second, the price the consumer pays contains no payment reward for the R&D which created the product in the first place. In contrast to the 15-20% of sales that R&D constitutes as a proportion of the price of an originator's product, the R&D component of the pirated product is zero. Thus, in an important sense, consumer expenditures are "wasted" on pirated products.

I want to note the health impact of the lack of patents and R&D in the markets we are discussing. World Bank statistics tell us that the cost of disease in Latin America in terms of life-years is twice as high as that in the OECD countries (Table 5). This difference is almost entirely due to higher instances of communicable diseases. Allowing for the improvements that are needed for the local infrastructure (e.g., sanitation and distribution of healthcare in Latin America), there are still diseases today and will be in the future which can best be addressed locally by new drugs developed by local, rather than multinational, pharmaceutical companies. Multinational companies have increasingly focused on R&D efforts in the diseases of aging, or geriatric diseases. The absence of patent protection in Latin America therefore leaves a gap in the research into infectious diseases which, with strong patent protection, would bring important benefits to patients in this region.

What can we expect to see with the introduction of patent protection of pharmaceuticals in countries not now benefiting from it? First, to address a fear that will not be realized: i.e., a rise in the cost of drugs. The introduction of patent protection affects no products already on the market. The legal status of products that have been approved and marketed prior to the introduction of patent protection is not affected by the introduction of new legislation. That is, patent protection is not retroactive to existing products on the market. This point alone should lay to rest the false argument that somehow patent protection brings about an increase in pharmaceutical prices.

Second, the period following the introduction of patents will see new dynamic competition among patented products. Such competition will provide consumers with the twin benefits of enjoying new products that bring new solutions to old and debilitating diseases along with prices reflecting such competition. The period of real exclusivity that breakthrough pharmaceutical products have enjoyed has been shrinking, as Table 6 shows. Today, breakthrough new products can experience competition from a similar patented product within a year or so of its introduction.

Third, in the post-patent period, the other major phenomenon which will develop is the evolution of a real generics market where tough price competition following patent expiry outweighs competition based upon marketing and brand differences. In Canada, following the elimination of compulsory licensing, local Canadian-owned generic firms have continued to expand their generic business activities.

The post-patent period will also see increasing investment levels both from local sources and from abroad through new investments and joint ventures. Tables 7 and 8 briefly illustrates what has happened in Italy, Mexico, and Canada in R&D and investment spending over a period of time following the introduction of patent protection. In these three examples, as well as in others for which we have data (e.g., Korea), local investment and R&D have risen substantially. Prior to the introduction of patent protection, activities went toward copying drugs, not investing in new products.

In conclusion, the preponderant weight of arguments today over the introduction of strong intellectual property protection for pharmaceutical patents is in support of such protection. This has been confirmed in negotiations under the North American Free Trade Agreement (NAFTA) and even more recently in the conclusion of the Uruguay Round with the negotiation of the Trade Related Aspects of Intellectual Property Rights (TRIPS). The TRIPS agreement, however, is simultaneously a positive vision of the future and a flawed reflection of the past. It is futuristic in its contribution to the trend toward global protection of pharmaceutical patents, trademarks and trade secrets. Unfortunately, it has one foot stuck in the past because of its permission for "self-elected developing" countries to postpone for up to a decade the implementation of TRIPS provisions. The TRIPs transition provisions allow such high-income countries as Kuwait, Singapore, Korea, etc. and those countries with highly-developed pirate pharmaceutical industries such as Argentina and India an unfortunate grace period to allow them to unreasonably exploit the consumer. But, increasingly, enlightened democratic governments are overcoming local opposition of vested pirate companies and appreciating the value of accelerated introduction of patent protection for pharmaceuticals. To achieve the maximum early benefit of new patent protection, governments should apply such protection to products that will arrive on the market in the near future. For those countries that take such action there will soon be a new era of research, innovation and investment.

Table 1

Importance of Patents to Pharmaceutical Innovation

Industry Percent That Would Not
Have Been Introduced
Percent That Would Not
Have Been Developed
Pharmaceuticals 65 65
Chemicals 30 38
Petroleum 18 25
Machinery 15 17
Fabricated Metal Products 12 12
Primary Metals 8 1
Electrical Equipment 4 11
Instruments 1 1
Office Equipment 0 0
Motor Vehicles 0 0
Rubber 0 0
Textiles 0 0

Source: E. Mansfield, "Patents and Innovation: An Emprirical Study,"
Management Science (February 1986).

Table 2

Recent Key Milestones of Progress in IP Protection
for Pharmaceutical Products

U.S. - PTE 1984* Romania 1992 Poland 1993
Korea 1986 Taiwan 1992 EU - PTE 1993*
Japan - PTE 1987* New Zealand 1992** Philippines 1993
Czech Republic 1990 Russia 1992 Portugal 1993
Slovak Republic 1990 Thailand 1992 Slovenia 1993
Bulgaria 1991 Ukraine 1992 NAFTA 1993
Mexico 1991 Spain 1992 Macedonia 1993
Indonesia 1991 Canada 1987, 1993** Andean Pact 1994
Chile 1991 China 1993 Hungary 1994
Belarus 1991 Yugoslavia 1993 WTO 1995
Latvia 1995

* PTE = Patent Term Extension
** Improvements in Protection from Compulsory Licensing

Table 3
Market Penetration of Generic Cimetidine

Weeks Since Patent Expiration
(Weeks 1/28/94-7/15/94)
0 4 6 8
Tagamet (Brand) 100% 59% 52% 45%
Generic 1 0% 14% 15% 20%
Generic 2 0% 1% 1% 1%
Generic 3 0% 7% 8% 7%
Generic 4 0% 6% 7% 9%
Generic 5 0% 4% 5% 5%
Generic 6 0% 7% 8% 8%
Other 0% 2% 2% 5%

* Percent relative to unit volume at patent expiration (100 percent)
Source: IMS Data

Table 4

Argentina: Relative Prices of Originator
Prescription Drugs vs. Pirated copies

Period National Firms Foreign Firms Price of National
over Foreign
Price control 1990 110.4 89.0 +24.1%
1991 110.9 87.3 +27.0%
Price Freedom 1992 106.7 91.5 +16.7%
1993 103.2 95.9 +7.6%
1994 102.0 97.4 +4.7%
1995* 105.3 93.3 +12.1%

Total Average Prices (relations in percentage with total average price)
Source: IMS
* Last 12 months, ending June '95.

Table 5

Disability Adjusted Life Years (DALYs)
Lost per 1,000 due to diseases

Noncommunicable Communicable Total Life Years
Latin America 125,000 75,000 200,000
US, Japan, Europe 90,000 10,000 100,000
Total Differences 35,000 65,000 100,000

Source: World Bank

Table 6

Time Gaps Between the Introduction of "Innovative"
Drugs and Therapeutically Similar Innovations

Innovative Drug
Year Time Gap Year Follower Drug
Inderal 1968 10 years 1978 Lopressor
Tagamet 1977 6 years 1983 Zantac
Capoten 1980 5 years 1985 Vasotec
Seldane 1985 4 years 1989 Hismanal
AZT 1987 4 years 1991 Videx (ddl)
Mevacor 1987 4 years 1991 Pravachol
Prozac 1988 4 years 1992 Zolofot
Diflucan 1990 2 years 1992 Sporariox
Recombinate 1992 1 year 1992 Kogenate
Invirase 1995 4 mos. 1996 Norvir & Crixivan

Source: TWG analysis

Table 7

Pharmaceutical Investment after the Introduction
of Patent Legislation

Research & Development
Investment in Italy

Year %/R&D/Sales
1973 6.1%
1975 6.2%
1977 6.3%
1979 7.0%
1981 7.5%
1983 8.2%
1985 9.2%
1987 11.0%
1989 12.2%
1991 11.0%
1993 12.1%

U. S. Pharmaceutical Investment in Mexico

Millions US$
Year Training R&D Fixed Total
1990 2 17 23 42
1992 6 27 37 70
1994 8 41 60 109
1995 10 40 69 119

Table 8

Compulsory Licensing Was Restricted Initially in 1987
and Eliminated in 1992

Research & Development
Type of Research

Millions US$
Year Basic Applied Other Total
1991 100 200 50 350
1992 100 225 75 400
1993 100 300 75 475
1994 100 350 100 550

Research & Development-to-Sales Ratios,

Year %/R&D/Sales
1988 6.1%
1989 8.1%
1990 9.1%
1991 9.8%
1992 10.0%
1993 10.8%
1994 11.0%

Source: Patented Medicine Prices Review Board (PMPRB)

For more information, please contact:
Pharmaceutical Research and Manufacturers of America
1100 Fifteenth Street, NW
Washington, DC 20005
Tel: (202) 835-3400