Intellectual Property Protection And The Pharmaceutical Industry

INTELLECTUAL PROPERTY PROTECTION AND
THE PHARMACEUTICAL INDUSTRY

For the health of the industry and the people it serves, it is
critical that all nations recognize the validity and importance
of patent protection for the products of this industry.

by Gerald J. Mossinghoff and Thomas Bombelles

The U.S. research-intensive pharmaceutical industry is the most successful and competitive industry in the world and one of the crown jewels of the country's industrial base. Among the principal reasons for its success is an unparalleled commitment to research and development, which in turn yields an impressive array of advanced biomedical therapies.
Intellectual property protection is a cornerstone of the industry's existence. As in the computer software and audio/video recording industries, a major portion of the industry's production costs are incurred in the development stage, rendering unauthorized copying both easy and profitable. The General Agreement on Tariffs and Trade (GATT) Uruguay Round and the North American Free Trade Agreement (NAFTA) have set high standards for intellectual property protection in the pharmaceutical industry and in other industries. Unfortunately, some countries are still delaying implementation of these standards. Such delays harm the industry worldwide as well as individual countries where patent protection would attract investment and stimulate research and development.

Trade Agreements and Intellectual Property

The defining characteristic of the international research-based pharmaceutical industry is its commitment to innovative, but expensive, R&D investment. This R&D would not be possible if the resulting products did not have the limited period of freedom from copying that U.S. and foreign patent laws provide. Rarely has Abraham Lincoln's statement that "the patent system added the fuel of interest to the fire of genius" been more appropriate than in the example of today's American pharmaceutical industry (1).

Unfortunately, the United State's commitment to high standards of intellectual property and patent protection (the principle is enshrined in Article 1, Section 8 of the U.S. Constitution) is not universally emulated. Many foreign countries, especially in the developing world, specifically discriminate against pharmaceuticals in their intellectual property regimes by not providing meaningful patent and trade secret protection. In so doing, they reduce U.S. companies' overseas revenues and decrease the funds that can be devoted to the invention and development of new medicines. The U.S. International Trade Commission (ITC) has estimated that R&D investment is reduced between $720 million and $900 million annually as a result of global patent piracy of pharmaceuticals (2).

The world trading system has recognized the damage caused to the pharmaceutical industry by an earlier lack of consensus among nations. Two recent landmark trade agreements -- the North American Free Trade Agreement (NAFTA) and the intellectual property chapter of the Uruguay Round agreement, called the "Trade-Related Aspects of Intellectual Property Rights" (TRIPs) -- have made clear that all countries must eventually provide full patent protection for all industries, including pharmaceuticals, without discrimination. Regrettably, at the insistence of India and several other countries, the TRIPs agreement contains a 10-year delay for the institution of patent protection for pharmaceuticals and agricultural chemicals. The U.S. pharmaceutical industry, key U.S. government agencies, and European and Japanese researchbased industries are working closely together to seek accelerated implementation of TRIPs in key emerging markets as well as extension of NAFTA's high standards for intellectual property protection throughout the Western Hemisphere.

The R&D commitment

Any discussion of the importance of intellectual property to the international research-based pharmaceutical industry must begin with an overview of the industry's R&D investment. Companies that belong to the Pharmaceutical Research and Manufacturers of America (PhRMA) will spend almost $19 billion for R&D in 1997 (3). By way of comparison, consider the recently completed railroad tunnel under the English Channel, perhaps the largest private-sector civil engineering project ever, took years to complete and cost "only" $15 billion. The industry's R&D investment has roughly doubled every five years since 1970; and in 1997 the industry will invest more than 21% of sales revenue in R&D, more than four times the average for high-technology manufacturing industries (3).

Why do pharmaceutical companies spend so much on R&D? Quite simply, the process of drug invention and development is lengthy, risky, and expensive. An Office of Technology Assessment study estimated that pharmaceutical companies spend an average of $359 million (in 1990 dollars) to bring one new pharmaceutical product through the U.S. Food and Drug Administration (FDA) approval process and into the marketplace (4). The average time from drug discovery to approval by the FDA is 10-12 years; industry hopes that the various FDA reform proposals currently being considered by Congress will speed up the process.

The high-risk nature of the inventive process also raises the expense of pharmaceutical discovery and development. Of 5000 compounds that are synthesized in the laboratory, only 1 is ultimately approved by the FDA.

Although the process is risky, the private sector is still the preeminent source of new pharmaceuticals. Of the 100 most prescribed patented drugs in the United States in 1995, 99% were patented by private industry. A broader measure of all new chemical entities brought to the market between 1981 and 1990 shows equally impressive results -- 92% of all these new drugs were discovered and developed by private industry. Although the U.S. government, principally the National Institutes of Health, also conducts a vigorous basic biomedical research program, only the private sector is capable of turning biomedial research into life-saving new therapies.

U.S. firms developed almost 50% of the important new drugs -- those sold in all major markets around the worldthat were introduced between 1970 and 1992 (5). And in the relatively new field of biotechnology, the United States's lead in biotechnology development is almost insurmountable: More than 100 of the 140 patents granted by the U.S. Patent and Trademark Office last year in biotechnology health care inventions were granted to U.S. inventors.

Patent protection

Without adequate and effective patent protection, the research-based pharmaceutical industry would not exist. Fortunately, the standards for protection of intellectual property in the United States, Europe, and Japan are, for the most part, adequate. In these regions, there is a mechanism for extending pharmaceutical patent terms to compensate in some measure for the years of effective patent life lost during the lengthy regulatory approval process.

Regrettably, however, intellectual property in the pharmaceutical field is not respected worldwide. Beginning in the 1980s, PhRMA and its member companies began a sustained campaign to make the protection of Americal intellectual property a priority in trade policy. As U.S. comparative advantage has shifted away from basic industrial manufacturing to high technology industries, the protection of intellectual property has become a cornerstone of American economic foreign policy.

The pharmaceutical industry is perhaps more dependent on patent protection than any other industry. A 1988 study of 12 industries indicated that 65% of pharmaceutical products would not have been introduced into the marketplace and 60% would not have been developed in the absence of adequate patent protection (6). Because of the pharmaceutical industry's potential effect on the economy and public health, governments of industrialized countries made the protection of intellectual property, including pharmaceutical patents, an international priority. Such efforts resulted first in NAFTA and then in GATT; both include a chapter on intellectual property.

Good news and bad news

After seven years of difficult negotiations, the most comprehensive international trade agreement ever attempted was signed by GATT members in April 1994 in Marrakech, Morocco. Certainly, an international undertaking of such scope required compromises and trade-offs by all parties to reach a final agreement. Nonetheless, for the international pharmaceutical industry, the "Trade-Related Aspects of Intellectual Property Rights" (TRIPs) agreement is a classic "good news, bad news" story.

The good news is that TRIPs formally codifies strong, substantive standards for the protection of all forms of intellectual property. Thus, in time, TRIPs will eliminate the discrimination experienced by the pharmaceutical industry in many developing countries that have specifically excluded pharmaceutical product patents from protection under their intellectual property regimes (see box, The TRIPs agreement ).

The TRIPs agreement

The salient features of the "Trade-Related Aspects of Intellectual Property Rights" (TRIPs) agreement for pharmaceuticals are the following.

• A 20-year patent term (measured from patent filing date)
• No discrimination between locally produced and imported products (i.e., importation satisfies patent working requirements)
• Compulsory licensing of patented technology is strictly limited and cannot be used to target a particular industry (as had been the case in Canada and New Zealand)
• Patent rights must be extended to all fields of technology, without discrimination.

TRIPs also includes a mechanism for settling disputes and a TRIPs Council, which will help interpret the TRIPs provisions for countries in need of assistance.

The bad news about TRIPs is that these laudable standards for the protection of intellectual property will not take effect in several key emerging overseas markets for 10 years or more. Because of entrenched opposition to pharmaceutical patent protection on the part of local pirating industries in countries including Argentina, Egypt, India, and Turkey, a lengthy transition period of up to 10 years was granted to developing countries for the specific purpose of delaying the application of pharmaceutical and agricultural chemical patents (7).

This long-delayed implementation is worsened, however, by the lack of pipeline protection for pharmaceuticals. New compounds or molecules are patented early in the pharmaceutical development process, which means that the patent clock is ticking for years before the product is actually sold and begins to recoup its investment. Therefore, a new molecule patented in 1995, for example, may not be approved as a medicine until 2005. In India, where patent laws may not be amended until 2005, such a product will not benefit from India's new patent law; the product, patented in the United States and elsewhere in 1995, will not qualify for an Indian patent because it will not meet the requirement that inventions be novel. Pipeline protection, then, refers to a mechanism by which inventions that are patented in one country (e.g., the United States) but that are not yet marketed in another (e.g., India) can benefit from legal or administrative protection from unauthorized copying for a limited period of time, usually the remaining patent term in the country of origin.

The combination of a potential 10-year delay in the implementation of TRIPs and the lack of pipeline protection make TRIPs a mixed blessing for the industry. PhRMA and its member companies nonetheless supported Congressional approval of the Uruguay Round on the understanding that the U.S. government will continue its policy of pursuing bilateral improvements to the terms of intellectual property protection with our foreign trading partners.

The NAFTA difference

NAFTA was concluded by the United States, Canada, and Mexico two years before the Uruguay Round. NAFTA's intellectual property provisions (Chapter 17) generally track those of TRIPs, with two notable exceptions: NAFTA had no delayed implementation period and provides pipeline protection (8). As the U.S. government negotiates with other governments in the Western Hemisphere on the extension of NAFTA, NAFTAS's standards (rather than those of TRIPs), will likely be the model on which a hemisphere-wide free-trade area is based.

In fact, such is the stated policy of the United States, as described in the Uruguay Round Agreements Act: "It is the objective of the United States

• to accelerate the implementation of the Agreement of Trade-Related Aspects of Intellectual Property Rights . . .
• to seek enactment and effective implementation by foreign countries to protect and enforce intellectual property rights that supplement and strengthen the standards of the Agreement on Trade-Related Aspects of Intellectual Property Rights and the North American Free Trade Agreement in particular . . ." (9).

Other benefits and costs

The benefits of ongoing research that leads to new pharmaceuticals in the United States are obvious, as is the need to protect the investment with appropriate patent protection. But what about the costs and benefits to the economies, industries, and patients in the developing countries that will be the most affected by TRIPS and, potentially, NAFTA? All forms of intellectual property protection, including that for pharmaceutical patents, enhance the conditions for investment in the affected industry, both inward and foreign; improve the quality of goods circulating in the market; and stimulate indigenous innovation, creating better jobs and opportunities for local inventors.

When China improved its patent law in 1992 and provided, among other things, pharmaceutical product patent protection that included pipeline protection, Li Yue, Deputy Chief of the Patent Division, explained the rationale for the change: "In order to promote the development of science and technology and economic restructuring in China, and to adopt to the needs of carrying out reform within the country and opening up to the outside world . . . China has established its own patent system . . . making it even more favorable to encouraging inventions and creations."

The link among the transfer of technology, foreign direct investment, and the strength or weakness of a country's intellectual property regime was clearly identified in a study by the International Finance Corporation, an arm of the World Bank: "We find that the strength or weakness of a country's system of intellectual property protection seems to have a substantial effect, particularly in high-technology industries, on the kinds of technology transferred by U.S. firms to that country. Also, this factor seems to influence the composition and extent of U.S. direct investment there . . ." (10). The study also found that the type and quality of investment were perhaps as important as the amount of investment. Whereas most companies may undertake basic investments abroad, such as establishing sales and distribution outlets or new factories, intellectual property protection in foreign countries is considered a must if R&D investment or any subsequent investment in distribution and factories is to occur (see the box, The Indian example).

Intellectual property in other countries

Unlike India, many other countries have realized that pharmaceutical patent protection is both good health policy and good economics. A brief review of a few countries' experiences proves the point.

Korea. The benefits of adopting pharmaceutical patent protection in the late 1980s were noted in a 1994 study by the Organization for Economic Cooperation and Development (OECD), which pointed to substantially increased R&D investment, especially by privately owned, indigenous companies. Local pharmaceutical firms in Korea gained strength after patent protection was improved. By 1990, their share of the total Korean pharmaceutical market had risen to 89.2%, up from the 87.3% share that they had held in 1986 (before introducing improved patent protection).

Mexico. Since the adoption of a powerful patent law in 1991, R&D investment within Mexico by the research-based pharmaceutical industry has almost tripled compared with pre-1991 levels. Mansfield's World Bank study noted a significant shift in the views of U.S. firms, which in 1991 had been unwilling to transfer their newest and most effective technology -- even to wholly owned subsidiaries in Mexicobut by 1994 were willing to consider seriously such technology transfers (10).

Japan. The Japanese pharmaceutical industry is highly competitive on a global scale. However, the industry's development was retarded by a delay in introducing product patent protection for pharmaceuticals until 1976. Until then, local industry had concentrated and invested its resources on detour and imitative processes that were, in many cases, economically inferior to existing processes. The technology trade balance of Japan's pharmaceutical industry, which had been in deficit, rapidly improved with the introduction of product patent protection for chemicals in 1976. In the mid-1970s, Japan paid foreigners for their drug technology three times what it earned in royalties from abroad. Since 1986, however, the Japanese pharmaceutical industry has become a net exporter of such technology and the quantitative market leader in developing new, although not necessarily the most innovative, molecular entities.

Italy. The unprecedented growth of the pharmaceutical market, industry, and research activities in Italy followed the government's 1978 decision to adopt full product patent protection for pharmaceuticals. Between 1978 and 1993, employment in the Italian pharmaceutical industry rose by 1.1% while employment in the chemical industry overall dropped significantly.

Despite the predictions of the patent pirates, the introduction of patent protection did not lead to the demise of the Italian pharmaceutical industry. On the contrary, between 1975 and 1993 the market share of locally owned companies was maintained at 36%. Patent protection also unleashed a wave of innovation among Italian pharmaceutical companies; between 1986 and 1991, the number of European patent applications by Italian pharmaceutical companies more than tripled totals of the previous five years. The local pharmaceutical industry in Italy has advanced so much that a small Italian pharmaceutical company recently licensed its breakthrough patented pharmaceutical product to a large U.S. company.

The Indian example The work done by Mansfield is borne out in real-world experience, not only in pharmaceuticals but also in other industries (11). Although India is one of the worst infringers of pharmaceutical patent rights, the Indian government has acted to improve the terms of protection for another type of intellectual property -- copyrights -- with stunning results for the development of an indigenous computer software industry. Bangalore is now known as India's "Silicon plateau." India's software industry had been developing slowly since the 1980s; lack of adequate copyright protection retarded its development, even though thousands of qualified computer engineers graduated from Indian universities annually. Partly as a result of changes to the copyright law in 1994, there are now 114 indigenous Indian software companies and many multinationals (e.g., IBM and Digital Equipment Corp.) in the Bangalore area alone (11). Of course, many other factors -- government policy encouraging foreign investment, skilled labor pool, and so on -- are responsible for the growth of the software industry, but the point is that none of those factors could be exploited to its maximum advantage were it not for a foundation of intellectual property (in this case, copyright) protection. Unfortunately, India's policy toward pharmaceutical patents is not so enlightened; the results are predictable. Several years ago, many international pharmaceutical companies had direct investments and/or research centers in India. Bristol-Myers Squibb, Roche, Merck, Ciba, and Searle have all left the Indian market. The effects are also visible on the public health side. A recent market survey by Pfizer Inc. indicated that of 434 pharmaceuticals patented in the United Kingdom, only 45 are available in India. Thus, Indians do not have access to 389 of the best medical therapies available (12).

Patent protection and prices

Perhaps the most entrenched myth about pharmaceutical patents is that they lead to higher drug prices. That is simply not true. It should be understood that changes to a country's patent law of the type sought by PhRMA are prospective in nature; only products that are not yet on the market in that country will be protected by patents. Only 22 new drugs were approved by FDA last year, and most countries have thousands of drugs registered by the health authorities. Therefore, we clearly are discussing a situation that will affect a very small proportion of the market.

Furthermore, it is important to understand that, whereas patents give the inventor of a specific molecule the exclusive right to market that product for a limited time, there are dozens of competitive products in virtually all therapeutic categories. This competition both keeps prices down and provides a market-driven stimulus that results in a stream of newer, more advanced medicines. In the United States, for example, at least 40 anti-hypertensive drugs have been approved during the past 30 years, thus giving physicians a wide range of options so that pharmaceutical therapy can be tailored to individual patient needs. The Italian example also shows that the institution of pharmaceutical patents does not lead to price increases. In the 10 years after Italy instituted its pharmaceutical patent protection, retail and wholesale prices rose much less than did prices in general and less than the price index for health-related goods and services (13).

The United States has one of the strongest, if not the strongest, patent and intellectual property protection systems in the world. This system, combined with a lack of price control, stimulates fierce competition among products competing in the same therapeutic class. Together with the structural changes occurring in our health care system, these features of our system contributed to the smallest Producer Price Index increase in 1996 for pharmaceuticals in the past 20 years. Clearly, many factors other than patents affect price levels and price increases.

Many people, particularly in less developed countries, are concerned about the putative price effects of patents on the poor. The World Health Organization (WHO) has compiled a list of "essential drugs," defined as drugs that can treat a majority of the health conditions affecting the population in a given country. Of the approximately 270 drugs on this list, only 5 or so are patented. The others are available from hundreds of manufacturers worldwide at low prices.

The people benefit

The American pharmaceutical industry is one of the few high-tech manufacturing industries in the United States with a consistently positive trade balance, even in trade with Japan. Moreover, there are sound public health reasons for protecting pharmaceutical intellectual property in developing countries. Few have expressed this view as eloquently, and with as much personal investment, as Paulo Tarso Flecha de Lima, Brazil's ambassador to the United States. In 1995, the ambassador suffered a stroke, for which he underwent two operations in Washington, DC. After the second operation, he developed a serious infection. As Ambassador Tarso related in an interview with a Brazilian newspaper, "A new generation of antibiotics -- not available in Brazil because of lack of an adequate patent law -- saved me. If I was not favorable to a patent law before, I am now. In my judgment, that [patent] law is important (1) for the Brazilian economy, (2) for Brazilian researchers and scientists, (3) for Brazilian agriculture, and (4) to save Brazilian lives" (14).

If we substituted the names of all the other countries that do not protect pharmaceutical patents for that of Brazil in Ambassador Tarso's comment, we have the PhRMA view.

In postscript: The Brazilian Congress passed a new patent law that provides full patent protection for pharmaceuticals, including pipeline protection, in April 1996.

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References

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(1) Lincoln, A. "Discoveries and Inventions"; speech to the Springfield, IL, Library Association, Morris Library, Southern Illinois University-Carbondale, Winter 1859.

(2) U.S. International Trade Commission. Potential Impact on the U.S. Economy and Selected Industries of the North American Free Trade Agreement; U.S. International Trade Commission: Washington DC, January 1993; U.S. ITC Publication 2596, Chapter 9, p. 3.

(3) Pharmaceutical Research and Manufacturers of America. "1997 PhRMA Annual Survey"; Pharmaceutical Research and Manufacturers of America; Washington, DC, 1997.

(4) U.S. Congress, Office of Technology Assessment. Pharmaceutical R&D: Costs, Risks and Rewards; U.S. Government Printing Office; Washington, DC, February 1993; OTA-H-522.

(5) Congressional Budget Office. How Healthcare Reform Affects Pharmaceutical Research and Development; Congress of the United States; Washington, DC, June 1994.

(6) Mansfield, E. In Intellectual Property Rights and Capital Formation in the Next Decade; Walker, C.E.; Bloomfield, M.A., Eds.; University Press of America; New York, 1988; p. 14.

(7) World Trade Organization. "Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations"; World Trade Organization: Geneva, Switzerland, April 1994; Article 65.

(8) World Trade Organization. "North American Free Trade Agreement Between the Government of the United States of America, the Government of Canada, and the Government of the United Mexican States"; World Trade Organization: Geneva, Switzerland, 1992; Chapter 17, Article 1704(4).

(9) Public Law 103-465, Title III, Section 315.

(10) Mansfield, E. "Intellectual Property Protection, Foreign Direct Investment, and Technology Transfer"; International Finance Corporation, World Bank: Washington, DC, 1994; Discussion Paper 19.

(11) In Financial Times, 5 Oct. 1995.

(12) Neimeth, R. Presented to The Economist Roundtable, New Delhi, India, April 1994.

(13) Jori, G. Patents and Trademarks News. October 1988, p. 7.

(14) In Gazeta Mercantil, 12 Oct 1995. p. A-T.

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Copyright 1996 by the Columbia Journal of World Business. Original article published under the title The Importance of Intellectual Property Protection to the American Research-Intensive Pharmaceutical Industry, Columbia Journal of World Business, Spring 1996, Volume XXXI, Number 1, page 38-48. Reprinted with permission. Also reprinted in Chemtech, May 1997, under the title Intellectual Property Protection and the Pharmaceutical Industry, page 46-50.

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