The patent debate in the pharmaceutical industry


Author: Samuel Pessôa, Claudio Considera and Mário Ribeiro *

Source: Valor Econômico, 19/09/2007

In the last two decades, national and international institutions dedicated to the protection of intellectual property (IP) have been the subject of intense technical and political discussions. Recently, during the Uruguay Round (1986-94), members of what today is the World Trade Organization (WTO) entered into an international agreement on intellectual property known as “Trips” (Tradre-Related Aspects of Intellectual Property Rights), which set the minimum standards of protection that should be followed by the signatories.

In Brazil, the landmark was Law No. 9.279, of May 1996, which started to regulate the rights and obligations related to industrial property. On May 4 this year, the Brazilian government, for the first time since joining TRIPS, decreed the compulsory licensing of a drug. Most of the public manifestations about this act were supportive, highlighting the supposed cheapening of public treatment, the “social injustice” of charging the right to use life-saving ideas, the “high cost” of patented medicines in Brazil, etc. In this discussion, the lack of an examination of the economic rationality of the patent institute is detected. This article aims to help fill this gap.

It is widely recognized that technological innovation is the only driver of growth in the long run. Without technical change, growth ends. The way to encourage the production of knowledge, and consequently guarantee growth, is the existence of laws that guarantee intellectual property rights. There are industries in which the leadership advantage and secrecy produce sufficient protection of intellectual property (IP). In the pharmaceutical industry, however, institutions that guarantee IP are absolutely essential. It has high research and development (R&D) costs and low imitation costs, constituting a paradigmatic case in which IP institutions are essential.

Unlike what many believe and propagate, the pharmaceutical industry does not present excessive profitability. Its apparent high profitability is a consequence of ignoring the high costs of R&D and the greater risk of this activity, which makes the opportunity cost of capital more expensive. If these factors are considered, the profitability of the industry proves to be equal to the normal long-term profitability of any economic activity. The social return of the R&D and pharmaceutical activity is different from the private return. In this case, due to the public good nature of knowledge, the private return is less than the social return. Numerous studies demonstrate that the social rate of return on R&D for drugs is around 27% per year. This result is surprising, since the real private rate of return on investment in the various sectors is in the range of 7% to 12% per year, well below the social rate of return on investment in R&D. Thus, the empirical evidence is very strong that economies should increase their R&D investments in drugs, since all welfare measures show that the impact of new pharmaceutical products on survival and improving quality of life, as well as about reducing other medical costs, more than offsetting the costs of the medicine.

There is a natural conflict between IP institutions (which create monopolies) and competition law. But only apparently is this a conflict between the (sick) consumer and the laboratory. If that were the case, the defense of competition should take precedence over IP. However, as stated before, the impact on the well-being of investments in R&D in drugs is much greater than its cost, as well as there are clear signs of underinvestment in the sector, so that the conflict that exists is between the patient today and tomorrow's patient. Economic theory suggests that the most efficient way to resolve the conflict between static and dynamic gains is to employ the IP mechanisms associated with direct transfers of public resources to patients who cannot afford to pay for the drugs protected by the patent.

From the point of view of the globalized economy, the Trips agreement, which regulates patents, increases economic efficiency

In turn, from the point of view of the globalized economy, the Trips agreement, which regulates patents internationally, increases economic efficiency, as it creates a coordination mechanism between different countries in order to share R&D costs. Without this, the optimal response of each country in isolation is to reduce its IP guarantees by producing, between countries, consecutive rounds of reduction of patent rights, with bad impacts on stimulating innovation, especially in the pharmaceutical industry. In terms of static efficiency, the Trips agreement is not neutral in terms of the distribution of costs between economies. Countries that produce less technology will pay more to countries that are big producers, especially the USA. Calculations in several studies suggest that these costs can be of the order of 0,25% of GDP for middle-income countries, such as Brazil, Greece and Mexico, or even for rich countries that are not very innovative, such as Canada and Norway. In terms of dynamic efficiency, however, it can be considered that in the pharmaceutical sector it favors countries that produce less technology, since the above value, since it represents only cost, does not consider the effect of Trips on the increase in the speed of production of new products. technologies (which is particularly important in pharmaceuticals) or possible beneficial effects of increasing foreign direct investment.

Considering the Trips agreement from a distributive point of view, it is not possible to know if it is fair. The patentee, being a monopolist, discriminates prices, so that consumers in the poorest countries pay less for the drug unit, but this price reduction may not be enough to allow consumption by society. This, for example, is the case for nations in Sub-Saharan Africa. There is no reason to suppose that this is the case in Brazil, a country with average per capita income, whose cost (0,25% of GDP) can perfectly be borne by society.

Finally, we can ask whether compulsory licensing is a good public policy. Our answer is no. As we have argued, the main function of Trips is to establish a mechanism that coordinates the decisions of different actors. Compulsory licensing represents a decentralized solution: each country individually chooses the optimal level of IP, disregarding the reaction of the others. In a globalized world, with no actor that is clearly much bigger than the others (as was the case in the USA until the 70s), the uncoordinated solution is bad. The sharing of innovation costs between different countries must be addressed by the chancelleries of the different countries.

This text was extracted from the authors' work entitled “The role of the patent institute in the performance of the pharmaceutical industry”, available on the websites of the institutions to which they are affiliated.

* Samuel de Abreu Pessôa is a professor at the Graduate School of Economics at Fundação Getúlio Vargas (EPGE / FGV) and a researcher at the Brazilian Institute of Economics (Ibre / FGV).

* Claudio Monteiro Considera is a professor at the Faculty of Economics of Universidade Federal Fluminense (UFF).

* Mário Ramos Ribeiro is a professor at the Faculty of Economics of the Federal University of Pará (UFPa).