Breaking the Fence: Can Patent Rights Deter Biomedical Innovation in ‘Technology Followers’?

Abstract

The impact of patent protection on biomedical innovation has been a controversial issue. Although a ‘medical anti-commons’ has been predicted as a result of a proliferation of patents on upstream technologies, evidence to test these concerns is only now emerging. However, most industrial surveys that shed light on this issue are mainly from developed countries, making it very difficult to predict the impact of patenting on biomedical innovation in developing and least developed countries. This paper develops a framework of analysis for the impact of patent rights on biomedical innovation in ‘technology follower’ developing countries. Based on the framework developed in the paper, empirical data collected in an industry-level survey of the Indian pharmaceutical industry between November 2004 and January 2005 is used to analyze the impact of patent rights as recognized under the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement) on biomedical innovation in technology followers.

Acknowledgements

The data used for the empirical analysis in this paper was collected during a firm level survey of the Indian pharmaceutical industry conducted by the author for the Commission on Intellectual Property Rights, Innovation and Public Health (CIPIH) of the WHO. The author is grateful for comments received at the IKD Workshop on ‘Bridging the gulf between policies for innovation, productivity and industrial growth and policies to reduce poverty’, Institute of Common Wealth Studies, London, 18–20 November 2005 and the III Globelics Conference, Kovalam, 4–7 October 2006. The author is also thankful to Professor Banji Oyeyinka, UNU-MERIT, Professor Carlos Correa, University of Buenos Aires, Professor Pierre Mohnen, UNU-MERIT, Rajneesh Narula, University of Reading and three anonymous referees for comments on an earlier draft of this paper. Research assistance by Vladimir Raymond and editorial help by Eveline in de Braek and Erika Moran is acknowledged.

Notes

1. See W. M. Cohen, R. R. Nelson & J. P. Walsh, Protecting their intellectual assets: appropriability conditions and why US manufacturing firms patent or not, NBER Working Paper 7552, 2000; and A. Arundel, The relative effectiveness of patents and secrecy for appropriation, Research Policy, 30, 2001, pp. 611–624.

2. See E. Mansfield, Patents and innovation: an empirical study, Management Science, 37(2), 1986, pp. 173–217, and W. M. Cohen, A. Goto, A. Nagata, R. R. Nelson & J. P. Walsh, R&D spillovers, patents and the incentives to innovate in Japan and the United States, Research Policy, 31, 2002, pp. 1349–1367. The propensity of firms to patent differs across industries. A comparative survey that assessed the importance of patents in different industries showed that patents were most important for the development and introduction of products in two industries—the pharmaceutical and chemical industries—where they accounted for over 30% of development activities (E. Mansfield, Academic research and industrial innovation: an update of empirical findings, Research Policy, 26(7–8), 1998, pp. 773–776).

3. According to the OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practice (Paris, OECD, 2002, p. 22), there has been a rapid rise in patent grants in biotechnology. In the time period 1990–2000, the number of patents granted in biotechnology rose by 15% a year at the USPTO, and by 10.5% at the EPO, compared with a 5% increase in overall patents.

4. See M. A. Heller & R. S. Eisenberg, Can patents deter innovation? The anticommons in biomedical research, Science, 280, 1998, pp. 698–701; and M. A. Heller, The tragedy of the anticommons: property in the transition from Marx to markets, Harvard Law Review, 111, 1998, pp. 621–688. An ‘anti-commons’ is the opposite situation to a commons, where ‘… multiple owners are each endowed with the right to exclude others from using a scarce resource, and no one has an effective privilege of use’ (Heller, ibid., p. 622).

5. Heller & Eisenberg, op. cit., Ref. 4; Heller, op. cit., Ref. 4; R. Eisenberg, ‘Bargaining over the transfer of proprietary research tools: is this market failing or emerging, in: R. C. Dreyfuss, D. L. Zimmerman & H. First (Eds) Expanding the Boundaries of IP: Innovation Policy for the Knowledge Society (Oxford, Oxford University Press, 2001).

6. S. Scotchmer, Standing on the shoulder of giants: cumulative research and the patent law, Journal of Economic Perspectives, 5(1), 1991, pp. 29–41. J. R. Green & S. Scotchmer, On the division of profit in sequential innovation, RAND Journal of Economics, 26(1), 1995, pp. 20–33.

7. ‘research tools’. See definition on p. 678 of this paper.

8. World Health Organization, Genetics, Genomics and the Patenting of DNA (Geneva, Human Genetics Programme, Chronic and Health Promotion, WHO, 2005), p. 37.

9. See Heller, op. cit., Ref. 4.

10. Economic catch-up is a process by which countries that are followers in technological terms, are learning through the acquisition of technological capabilities to catch up with the leaders (see M. Abramowitz, Catching up, forging ahead and falling behind, Journal of Economic History, 46(2), 1986, pp. 385–406; and A. H. Amsden, Asia's Next Giant: South Korea and Late Industrialization (New York, Oxford University Press, 1989).

11. The intellectual origins of the term ‘technology followers’ can be attributed to Akamatsu's original flying geese hypothesis (K. Akamatsu, A theory of unbalanced growth in the world economy, Weltwirtschaftliches Archiv, 86(3), 1961, p. 25. For discussions and applications, see A. H. Amsden, The Rise of ‘the Rest’: Challenges to the West from Late-Industrialising Economies (Oxford, Oxford University Press, 2001); and N. Forbes & D. Wield, Managing R&D in technology-followers, Research Policy, 29(9), 2000, pp. 1095–1109.

12. R. R. Nelson & N. Rosenberg, Technical innovation and national systems, in: R. R. Nelson (Ed.), National Innovation Systems, A Comparative Analysis (New York and Oxford, Oxford University Press, 1993).

13. S. V. Ramani, Who is interested in biotech? R&D strategies, knowledge base and market sales of Indian biopharmaceutical firms, Research Policy, 31, 2002, pp. 381–398.

14. WHO, op. cit., Ref. 8, p. 39.

15. K. J. Arrow, Economic Welfare and the Allocation of Resources for Invention in Essays on the Theory of Risk Bearing (Amsterdam, North Holland, 1969).

16. See among others W. D. Nordhaus, An economic theory of technological change, American Economic Review, 59(2), 1969, pp. 18–28; and F. M. Scherer, Nordhaus's theory of optimal patent life: a geometric reinterpretation, American Economic Review, 62, 1972, pp. 422–427.

17. A caveat in the case of patent length is that longer life of a patent does not always translate into higher expected rents, since expected rents is also determined by how long it takes for a more superior technology to find its way into the market (S. Scotchmer & J. R. Green, Novelty and disclosure in patent law, RAND Journal of Economics, 21(1), 1990, pp. 131–146.

18. Cf. N. T. Gallini & M. Trebilcock, Intellectual property rights and competition policy: a framework for analysis of economic and legal issues, in: R. Anderson & N. T. Gallini (Eds) Competition Policy and Intellectual Property Rights in the Knowledge Based Economy (Calgary, University of Calgary Press, 1998).

19. L. J. Glasgow, Stretching the limits of intellectual property rights: has the pharmaceutical industry gone too far?, IDEA The Journal of Law and Technology, 41(2), 2001, pp. 227–258. Gallini & Trebilcock, op. cit., Ref. 18, p. 20 note in this context that mainly due to this, economic models on this topic view patent scope and competition policy as perfect substitutes for one another.

20. Gallini & Trebilcock, op. cit., Ref. 8.

21. J. H. Barton, The impact of contemporary patent law on plant biotechnology research, DAFFE/CLP Competition Policy and Intellectual Property Rights, OECD, 18(458), 1998, pp. 305–321; S. Kanwar & R. E. Evenson, Does intellectual property protection spur technological change?, Center Discussion Paper 831, Economic Growth Center, Yale University, New Haven, CT, 2001); B. Dumont & P. Holmes, The scope of intellectual property rights and their interface with competition law and policy: divergent paths to the same goal?, Economics of Innovation and New Technology, 11(2), 2002, pp. 149–162.

22. Cohen et al., op. cit., Ref. 2.

23. Ibid., p. 1358

24. OECD, Patents and Innovation: Trends and Policy Changes (Paris, OECD, 2004).

25. N. Thumm, Motives for patenting biotechnological inventions; an empirical investigation in Switzerland, International Journal of Technology, Policy and Management, 4(3), 2004, pp. 275–285.

26. Ibid.

27. Heller, op. cit., Ref. 4; Heller & Eisenberg, op. cit., Ref. 4.

28. Eisenberg, op. cit., Ref. 5, p. 226. See also in this context A. K. Rai, Regulating scientific research: intellectual property rights and the norms of science, Northwestern University Law Review, 94(1), 1999, pp. 77–152; and A. D. So, A. K. Rai & R. M. Cook-Deegan, Intellectual property rights and technology transfer: enabling access for developing countries, Presentation at the CIPIH WorkShop and Open Forum, 30–31 May, World Health Organization, Geneva, 2005.

29. Eisenberg, op. cit., Ref. 5, p. 227, notes that in the 1990s, despite heavy investment by the US government, private research expenditure in biomedical sciences was much more than public funded research.

30. Ibid., p. 230.

31. Ibid. and OECD, op. cit., Ref. 3. Eisenberg summarizes these as the main issues that were significant during the investigation of the Working Group on Research Tools, National Institute of Health, USA, 1998, which investigated difficulties encountered by researchers in obtaining access to proprietary research tools in biomedical research.

32. See for example R. Merges, Intellectual property rights and bargaining breakdown: the case of blocking patents, Tennessee Law Review, 62(1), 1994, pp. 74–106.

33. See also in this context O. Granstrand, The Economics and Management of Intellectual Property (Cheltenham, Edward Elgar, 2000).

34. Cohen et al., op. cit., Ref. 1.

35. OECD, op. cit., Ref. 3.

36. Royalty stacking refers to a situation where each earlier innovator grants access to his/her product in return for a royalty on the new innovation. The greater number of earlier patents that need to be licensed to proceed with innovation, the larger the number of royalty agreements that get ‘stacked’ on to the yet-to-be-discovered product.

37. See for example the case of the digital video compression standard MPEG 2, where patent pools have been successful in solving problems of patent thickets and ‘stacking’ licenses, or the case of ‘golden rice’ in agricultural biotechnology.

38. J. P. Walsh, A. Arora & W. M. Cohen, The patenting of research tools and biomedical innovation, in: W. M. Cohen & S. A. Merrill (Eds) Patents in the Knowledge-Based Economy (Washington, DC: National Academy Press, 2003), pp. 285–340. The sample is a mix of universities and firms. Seventy interviews were conducted with IP attorneys, business managers and scientists from 10 pharmaceutical firms, 15 biotechnology firms as well as university researchers and technology transfer officers from six universities and finally, patent lawyers, government and trade association personnel.

39. J. Straus, in collaboration with H. Holzapfel &. M. Lindenmeir, Genetic Inventions and Patent Law: An Empirical Survey of Selected German R&D Institutions (Munich, VMD Verlag Medien Design, 2004). Among the 25, there were four large pharmaceutical companies, nine small and medium-sized specialized biotechnology companies, seven public research institutes and five genetic research testing centres.

40. OECD, op. cit., Ref. 3, p. 51.

41. See UNIDO, Capability building for catching-up, historical, empirical and policy dimensions, Industrial Development Report 2005, UNIDO, Vienna, 2005, pp. 1–178.

42. J. Mokyr, Long-term economic growth and the history of technology, in: P. Aghion and S. Durlauf (Eds) Handbook of Economic Growth, volume 1B (USA, Elsevier, 2003).

43. R. R. Nelson, Capitalism as an engine of progress, Research Policy, 19, 1990, pp. 61–87; and. D. Foray, Knowledge distribution and the institutional infrastructure: the role of intellectual property rights, in: H. Albach & S. Rosenkranz (Eds) Intellectual Property Rights and Global Competition: Towards a New Synthesis (Berlin, WZB, 1995), pp. 77–118.

44. WHO, op. cit., Ref. 8.

45. Commission in Intellectual Property Rights (CIPR), Integrating intellectual property rights and development policy, Report of the Commission on Intellectual Property Rights, London, 2002.

46. WHO, op. cit., Ref. 8, p. 42.

47. O. D. Hart, Firms, Contracts and Financial Structure (Oxford, Clarendon Press, 1995).

48. Legal uncertainty can refer to any or all of the following three possibilities: (a) lack of laws and institutions to suitably enforce corporate and intellectual property transactions, or (b) laws that exist to govern corporate and intellectual property transactions, but they do not clearly prescribe rights, obligations and remedies; or (c) unstable political or legal situation in the country, as a result of which a ‘new’ legal situation may emerge at any time after concluding the contract.

49. Walsh et al., op. cit., Ref. 38.

50. Cohen et al., op. cit., Ref. 2.

51. Granstrand, op. cit., Ref. 33.

52. Cohen et al. op. cit., Ref. 2, found in a comparison of R&D labs in the manufacturing sectors between Japan and USA that appropriability conditions depend on cross-national differences in policy and institutional environments. Hence, patents played a larger role in diffusion of information across rivals in the Japanese industry than in the USA and this was found to be due to their respective patent systems.

53. Walsh et al., op. cit., Ref. 38, pp. 322–323.

54. C. Morel, D. Broun, A. Dangi, C. Elias, C. Gardner, R. K. Gupta, J. Haycock, T. Heher, P. Hotez, H. Kettler, A. Krattiger, F. Kreutz, K. Lee, R. A. Mashelkar, R. Mahoney, H. Min, S. Matlin, M. Mzimba, J. Oehler, R. Ridley, P. Senanayake, P. Singer & M. Yun, Health innovation in developing countries to address diseases of the poor, Innovation Strategy Today, 1, 2005, pp. 1–15; R. A. Mashelkar, Nation building through science & technology: a developing world perspective, Innovation Strategy Today, 1, 2005, pp. 16–32. These authors define the term ‘innovative developing countries’ as developing countries that have demonstrated a significant promise in carrying out activities in health innovation.

55. IBEF (India Brand Equity Foundation) & Ernst and Young, Pharmaceuticals (Haryana, India, IBEF, 2004), p. 8.

56. Ibid., p. 8.

57. Confederation of Indian Industry (CII), Report on the pharmaceutical sector in India, Presented to International Trade Centre, Geneva, New Delhi, 1999; IBEF & Ernst and Young, op. cit., Ref. 55; and C. Grace, The Effect of Changing Intellectual Property on Pharmaceutical Industry Prospects in India and China: Considerations for Access to Medicines (London, DFID Health Systems Resource Centre, 2004).

58. See ‘Salient Fratures of the Patents (Amendment) Act, 2002 and the Patent Rules, 2003’, downloadable from: www.patentoffice.nic.in/ipr/patent/salient_f.htm (accessed 14 March 2005).

59. See P. Gehl-Sampath, Economic aspects of access to medicines after 2005: product patent protection and emerging firm strategies in the Indian industry, A Study for the World Health Organization Commission on Intellectual Property, Innovation and Health (CIPH), 2005; P. Gehl-Sampath, Indian pharma within global reach?, UNU-MERIT Working Paper 2006-031, 2006. Also see R. Sridharan, Indian pharma's mid-life crisis, Business Today, 27 February 2005.

60. Expert Committee. A comprehensive examination of drug regulatory issues, including the problem of spurious drugs, Ministry of Health and Family Welfare, Government of India, 2003. On the whole, the 6000 odd firms in the sector can be broken up into 100 firms belonging to group 1, 200 firms belonging to group 2 and 5700 firms to group 3 when one takes both formulations and active pharmaceutical ingredient work into account. Gehl-Sampath, 2005, op. cit., Ref. 59, p. 27.

61. For an analysis of the different ‘innovation modes’ in the three groups of these firms, see Gehl-Sampath, 2006, op. cit., Ref. 59, and P. Gehl-Sampath, India's product patent protection regime: less or more of “pills for the poor”’, The Journal of World Intellectual Property, 9(6), 2006, pp. 694–726.

62. See Gehl-Sampath, 2005, op. cit., Ref. 59, and Gehl-Sampath, 2006, op. cit., Ref. 59.

63. This is the reason why a firm like Matrix Laboratories, which rose quickly from being a group 2 to a group 1 firm by 2006, was acquired by another company despite its success.

64. Such firms have also shown that they are capable of fighting sophisticated patent disputes in the EU and the USA (see Gehl-Sampath, 2006, op. cit., Ref. 59, and C. Grace, Update on China and India and access to medicines, Briefing Paper, DFID/HRSC: London, November 2005, for examples).

65. Gehl-Sampath, 2006, op. cit., Ref. 59.

66. Because several developing countries have only recently complied with the TRIPS Agreement (and several LDCs are yet to comply as a result of the extension granted to them under the Doha Agreement on the TRIPS Declaration and Public Health until 2016), data that compares a pre-TRIPS scenario to a post TRIPS is a very useful tool for analysis.

67. The samples considered in the US and German surveys are mixed and relatively small, with respondents from both the private and public sector. Furthermore, both surveys are descriptive; descriptive surveys usually need to be corroborated by firm-level evidence. At the same time, several of the results obtained from the Indian survey and presented in this paper are very similar to the Swiss survey of the biotechnology industry, which was also a firm level investigation.

68. Cohen et al., op. cit., Ref. 2, p. 1357; Granstrand, op. cit., Ref. 33.

69. Cohen et al., op. cit., Ref. 1.