TRIPS II, Asia and the Mercantile Pharmaceutical War: Implications for Innovation and Access: TRIPS II, Asia and the Mercantile Pharmaceutical War: Implications for Innovation and Access Frederick M. Abbott Florida State University Stanford Center for International Development Conference on Economic Challenges in Asia May 31 – June 3, 2006


The TRIPS II Agenda: The TRIPS II Agenda High levels of intellectual property and related regulatory protection Principally championed by the United States, but supported by EU, Japan, Switzerland, Australia with different levels of intensity Achieved through bilateral and regional “free trade” negotiations, and in bilateral WTO accession negotiations “Second-best” alternative to multilateral agreement at WTO Addresses new generation of competitive threats Emerging market industries capable of producing globally competitive high quality products Audio-visual content and pharmaceutical-agricultural chemical principal drivers Focus here on pharmaceutical sector


Problems of Innovation and Access : Problems of Innovation and Access “Access to medicines” issues widely studied and addressed WTO public health debate leading to Doha Declaration, August 30, 2003 waiver and TRIPS Amendment WHO Commission and WHA R&D Resolution Economic focus on market failure resulting principally from disparities in income and wealth Research skewed toward “diseases of the North” Market and regulatory failures lead to concentration on incremental innovation rather than breakthrough Differential pricing allegedly impeded by threat of parallel trade Remedies include developed country subsidization of research and purchase, public-private research partnerships, restrictions on parallel importation (at least cross-regional)


Alternative Context: Mercantile Struggle for Dominance of Pharmaceutical Supply Market: Alternative Context: Mercantile Struggle for Dominance of Pharmaceutical Supply Market Small number of highly capitalized OECD-based enterprises face increasingly strong competition from emerging market, and principally Asian, pharmaceutical enterprises OECD government and industry efforts to constrain emergence of competition leading to highly restrictive regulatory regime with potentially adverse global public welfare impact Consideration of Asian emerging market response


Pharmaceutical Industry Structure: OECD: Pharmaceutical Industry Structure: OECD OECD-based companies are preponderant developers and owners of pharmaceutical technology OECD-based companies dominate OECD internal markets in sales of originator and, to a marginally lesser extent, generic products Revenues from originator markets far outweigh revenues from generics markets OECD dominance in pharmaceutical sector heavily subsidized by OECD governments $28 billion US National Institutes Health budget Medicare Part D program Maintenance of costly regulatory framework New bio-weapon and pandemic vaccine subsidy programs Other OECD governments less supportive than US, but pharmaceutical R&D and purchase heavily subsidized OECD pharmaceutical industry is not a private market economy – it is a heavily subsidized and regulated competitor in the global market


Pharmaceutical Industry Structure: India: Pharmaceutical Industry Structure: India Historically concentrated on supply of generics to developing country markets Increasingly penetrating high-value OECD generics markets Hatch-Waxman patent challenges and 180 marketing exclusivity Purchasing OECD generics suppliers Valuation of major Indian pharma companies rapidly increasing Indian government funding pharmaceutical R&D Growth of clinical trial subindustry Capacity to emerge as successful competitor in global originator market


Pharmaceutical Industry Structure: India: Pharmaceutical Industry Structure: India Indian regulatory structure undergoing transformation based on implementation of TRIPS I requirements Implementation of pharmaceutical product patent protection Nine thousand “mailbox” applications under review Pre-grant opposition proceedings Sui generis prior user’s right allows continued generics production Increased patent office funding Debate on new price control regime OECD Pharma response R&D joint ventures (e.g., Glaxo-Ranbaxy) Acquisitions and greenfield investments so far limited Potential targets include mixed producer drug portfolios Experts expect acquisitions once originator products emerge


Pharmaceutical Industry Structure: China: Pharmaceutical Industry Structure: China Various market advantages Government promotion of technical education Significant production capacity Traditional cultural interest in medicines Large domestic population with growing income and wealth Increasing access to capital markets Local industry increasing export sophistication Relatively non-transparent regulatory and industry structure as compared with India Widely shared perception China to emerge as strong global pharmaceutical industry competitor


Pharmaceutical Industry Structure: Others: Pharmaceutical Industry Structure: Others Indonesia, Malaysia, the Philippines and Thailand house significant generic production capacity South Korea is a leading producer of bulk chemicals, and investing substantially in biotechnology-related R&D and production Singapore investing heavily in biotechnology research, including establishment of Biopolis research complex Bangladesh “least developed” generics export platform China and India remain leading APIs producers


TRIPS II Commitments: TRIPS II Commitments Bilateral and regional trade agreements negotiated by the United States, in force or signed with Jordan, Singapore, Chile, Australia, Morocco, Central America – DR, Bahrain, Oman, Peru, and Colombia, and under negotiation with Thailand, Southern Africa Customs Union (SACU), South Korea and others WTO accession negotiations which are characterized by bilateral demands for concessions on pharmaceutical protection, see, e.g., Cambodia and Russia negotiations


TRIPS II Commitments: TRIPS II Commitments Patents New uses of known compounds (e.g., second medical indications) Plants and animals Patent term extension based on regulatory approval or patent office delay Regulatory review exemption narrowed Grounds for compulsory licensing limited Prohibition of parallel imports Marketing exclusivity Based on foreign submissions and/or approvals Expand scope of covered products beyond new chemical entities Extend term based on new clinical trials Patent-regulatory review linkage Price Controls Right to challenge Australia PBS reimbursement scheduling Negotiations with South Korea


TRIPS II Commitments: TRIPS II Commitments Major shift from private patent holder enforcement of rights to government-imposed market exclusivity regimes Overcomes problem of patent invalidity Complexity overwhelming for developing country regulatory authorities Lead to application of simplified more highly restrictive procedures compared to Hatch-Waxman Avoidance of trade disputes with US Developing country governments recognize elevated pharmaceutical cost of concession to US Ex ante and ex post facto impact assessments confirm Trade-off for improved access to US market in agricultural products, textiles, etc. World Bank, WHO, other development agencies recommend against conceding public health flexibilities


U.S. Policy Objectives : U.S. Policy Objectives Increase US technology rents by foreclosing competition from emerging market pharmaceutical producers US pays significant political price for agreements Antipathy of foreign government officials Public protest Latin American political shift TRIPS MFN extends “benefits” to all WTO Members EU, Japan free ride on political cost Mercantile “winners” are large Pharma companies based in the OECD Mercantile “losers” are generic manufacturers which do not hold patent portfolios or control regulatory data, including from emerging Asian markets


Policy Outcome: Policy Outcome Reinforce dominance of major OECD-based Pharma companies What is rationale for reinforcement? Does the OECD Pharma-centric system function well? 15% revenue directed to R&D High proportion directed to lifestyle drugs – weight loss, cosmetic skin care, etc. Patents predominantly for incremental innovation – sometimes suspect – new forms of same substance, dosages, delivery systems Breakthrough drug pipeline fallow – low number of NCEs Under-investment in diseases of poor High percentage of Pharma expense to advertising and promotion, administration Direct to consumer advertising Promotion to physicians Market incentive for increasing sales irrespective of patient interest E.g., recent high level of prescription sleep medication sales Why reinforce this system through increased technology rents? Best of less than ideal alternatives Mechanism for attracting capital in competitive market Protects against under-investment in R&D


Policy Outcome: Policy Outcome Negative impact Increases cost of medicines, disproportionately affecting less affluent parts of population worldwide Restricts introduction of generic medicines Reduces access to innovative technologies Assumes that technology “leakage” an adverse event Assumes innovation will increase based on limiting drug development to small number of highly capitalized market actors Emergence of Chinese and Indian competitors may be inevitable, but may be delayed for 5, 10 or 15 years Alternative models for promoting pharmaceutical innovation required Separating inventive function from distribution function Oligopolistic market with 5 Asian participants not necessarily an improvement Problem is market structure


Asia’s Response: Asia’s Response Concessions in pharmaceutical sector must be balanced with higher public health expenditure, otherwise done at expense of patient-consumer Adoption of more aggressive regulatory posture Application of competition law Strict review of patent applications and claims for marketing exclusivity Promote challenge in patent-regulatory review linkage Exercise vigilance over prices, including adoption of price oversight mechanisms Increase public funding of R&D to compete with US NIH-based system Restrict level of foreign penetration of pharmaceutical producer market Necessary to maintain competitive market in face of highly subsidized foreign participants Encourage market entry of generic products with, e.g., 180-day market exclusivity periods as per Hatch-Waxman Retain and use TRIPS I flexibilities, e.g., compulsory licensing for domestic and export markets


Conclusion: Conclusion Matter of achieving appropriate balance Asian emerging market economies have self-interest in promoting local R&D and production, and providing affordable medicines to public Caution should be exercised in accepting TRIPS II commitments