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India, Intellectual Property, and Innovation
Our conversation about Martin Shkreli and Indian pharmaceuticals reminded me that I’ve been having a mental debate with myself for a while. Where better to air my confusion than Ricochet?
As I argued, the case for importing generic medications from India is open-and-shut. I strongly suspect our failure to permit this is more owed to pharma-company rent-seeking and protectionism than to concern for public safety. American consumers are discerning enough to make their own decisions about whether they trust drugs from overseas. If we allowed them to come into the country, rigorous and trustworthy private mechanisms for inspecting overseas drug manufacturing facilities would quickly emerge, just as they have for awarding Michelin stars to restaurants around the world.
But I’m confused about the ideal regulatory regime for medication under patent, and indeed, for intellectual property generally. It’s a challenging problem if you think markets allocate scarce resources more efficiently than central planners do. The legitimate fight between the US and Indian pharma — “legitimate,” in the sense of, “I’m not sure who’s right” — is a case in point.
The US and India argue about the length of time a drug should be under patent. I can’t imagine an answer to this question that’s not arbitrary; nor can I imagine an effective private arbiter. Unless I’m missing something obvious, it seems to me that yes, we need the government to make and enforce this decision in some arbitrary (but consistent and predictable) way — and not just domestically, but globally.
That’s a lot of government.
Geeta Anand of the Wall Street Journal explains the problem this way:
The latest skirmish in the Indian government’s long-running battle with the global pharmaceutical industry came last week, when officials withdrew patent protection for an emphysema drug marketed by Germany’s Boehringer Ingelheim GmbH.
India’s refusal to recognize patents on some of Western drug makers’ most profitable medicines has been the cause of considerable rancor between New Delhi and governments in the U.S. and Europe, who say India is failing to adhere to global intellectual-property rules.
There can be no denying being tough on patents could cost India substantially in foreign investment—and that means lost jobs and growth. The country’s pharmaceutical sector was expected to grow to at least $48.8 billion in sales by 2020 from $11 billion in 2012, according to PricewaterhouseCoopers. Novartis AG, the Swiss company, has said it would reconsider launching new drugs in India after losing a court battle in 2013 to get a patent approved. Pfizer Inc. said at the time it was, “concerned about the environment for innovation and investment in India.”
Rigorously and globally enforced patent, copyright, and IP laws are obviously essential to innovation. If there’s no promise of unusual remuneration for inventing something new, people will have vastly less motivation to invent new things. If other people or companies can immediately copy and sell the idea or the product you invent, there’s little incentive to invest in research and development, little incentive to be creative, and little incentive to hire or cultivate inventive people. So I can think of no alternative to patent and copyright laws. But owning a patent gives you a monopoly on supply. And monopolies are not in the best interests of consumers.
Nowhere does the tension between creating incentives to innovate and protecting the interests of consumers seem more obviously in conflict than in pharmaceutical research and development. Pharmaceutical companies, obviously, want to gain and extend patent protections, and of course we want to them to have those protections. It costs a lot of money to create and test a new drug, and no one would do it if it were impossible to make a profit from it. In fact, we want to create very strong incentives for these companies to profit by discovering new drugs, particularly ones that cure diseases from which we now routinely die, or ones from which we’d begin to die again if the drugs we have cease to work. Think about new antibiotics, for example: The possibility that the ones we have will cease to work is real. So certainly, we want pharma companies to have very strong financial incentives to make new ones.
The hard question, for me, is how long any given drug company should enjoy a patent, and here, I can think of no way for markets to function absent a large amount of basically arbitrary government intervention. As the Journal notes,
India’s refusal to recognize patents on some of Western drug makers’ most profitable medicines has been the cause of considerable rancor between New Delhi and governments in the U.S. and Europe, who say India is failing to adhere to global intellectual-property rules. …
Indian law is strict in limiting what can and cannot be patented – and, local activists argue, justifiably so. Foreign pharmaceutical companies and their political allies may not like that, but it is hard to argue – morally, at least — against India’s approach.
It’s not clear to me that it’s a hard moral argument to make. The moral argument for a US-style patent regimen is the one I’ve made above: If we make drug discovery too unprofitable, pharmaceutical companies will cease to do it. But clearly, we don’t want companies to have monopolies forever. That would prevent consumers from enjoying the benefits of competition among producers.
So what, exactly, is an optimal patent regimen? One that gives us the best balance between providing pharmaceutical companies with an incentive to innovate and ensuring they also have incentives to copy each other’s innovations and compete on price? Is there such a thing as a non-arbitrary answer?
India’s law sets a higher bar for protection than in some other countries, limiting the ability of companies to get patents for new versions of drugs whose active ingredients were previously known unless they can show significant therapeutic benefit. U.S. and European patent laws more readily grant patents to updated versions regardless of whether they offer major improvements in efficacy over the original compounds. …
In 2006, India’s patent office refused to give Novartis AG a patent for Glivec, an extremely effective drug for a rare cancer. The patent office argued that the drug’s active ingredient was already known before the development of Glivec, and that it wasn’t significantly more effective than the earlier version. …
In 2012, India’s Intellectual Property Appellate Board revoked a Roche Holding AG patent for a hepatitis C drug saying technology involved in the drug’s invention was “obvious” and could be replicated easily. …
As Anand reports, the complaint among pharma companies in the US is usually the reverse:
[the US] patent office granted monopoly protection too easily for innovations that didn’t represent major advances over existing medicines or known science, a practice known as “evergreening.”
Longer-acting versions of old medicines were given patents, allowing their manufacturers to market them as better than the older versions, whose patents had expired—and whose prices were cheap. The collective effect of a low bar for patents drives up healthcare costs and insurance premiums for patients.
Anand concludes that India’s right:
To be sure, India’s patent office and courts can be arbitrary at times—and their individual decisions may not always be above reproach.
But taken together, India’s efforts to set a high standard for patents on life-saving medicines whose costs are often beyond reach of the majority of the population should be applauded and defended against attacks from the West.
In both India and the US, I suspect that the regulatory environment will to some degree reflect regulatory capture: Both countries have huge incentives to protect their own industries from foreign competition. But assume an entirely corruption-free regulatory environment and decisions that are truly made in the best interests of the public.
To whom should pharmaceutical patents be awarded, how long should they last, and why?
Can these rules be generalized to other forms of intellectual property?
Published in Domestic Policy, Economics, General, Healthcare
They’ve got a huge incentive not to cut corners. A brand that acquires a reputation for doing this is poisoned (so to speak) for years. And we’re not the biggest market for any of these drugs: India’s already manufacturing them, literally, for about three billion people. Adding the US market of 300-plus million is not going to make them suddenly start cutting corners to supply us.
He has an occasional feature about dangerous chemicals called “Things I won’t work with” that is hilarious (this one is an all-time favourite). He also writes on quality control in the scientific literature and on patents and IP, to circle back to the topic at hand.
The problem with buying illegal medical drugs is that it’s very hard to know what you’re buying. Back when I studied this in ’05, there was a pretty substantial market for cheap drugs from Mexico, Viagra in particular. And quite a lot of the trade was actually in Viagra, or whatever. Some of it was in inferior alternatives designed to look (and sometimes to taste and crumble) as if it was Viagra. And some was entirely unrelated to Viagra, but designed to look/ taste/ feel like Viagra on consumption; some of the time the ingredients to do that were pretty toxic.
Until legitimate businesses start to feel comfortable smuggling, importing your drugs illegally will always be a sensible life choice for a minority of patients only.
Sure. But given the limits of my insurance plan — catastrophic care only — my plan, if I need any kind of non-emergency surgery, is medical tourism. I’d feel very comfortable flying to Bangalore for a knee replacement or cataract surgery or any of the many afflictions I cheerlessly anticipate with age. I can see no reason why I shouldn’t be free to do that, and can see no reason why I shouldn’t be free to import my medical treatment, too, if I’m willing to assume the risk.
Still, you can’t deny that your time was made easier because of the French regulatory state. You didn’t worry because the state didn’t say “buyer beware” and expect you to make sure the hospital was properly sourcing its drugs.
Now, that said, “The French do it” has never held much sway with me as an argument. Europe conducts their affairs in so many appalling ways it’s almost too difficult to count.
As for the FDA reform you seek I reiterate my point that Pharma is not nearly the biggest problem here. Until you can break the grip of the Trial Lawyers Association on the Democratic Party you will never have any meaningful change.
Why shouldn’t pioneer drug companies seek protection from foreign generics if the courts shield the generic manufacturers while exposing the original patent holders?
The cost of manufacture most pharmaceuticals is a tiny fraction of the price. Importation of drugs from elsewhere will help to lower the price of drugs in the West, but not as much as one might imagine given the prices for drugs in India. The problem is that drug prices are driven by demand and availability of substitutes, not cost of development and manufacturing. The problem is not the FDA it is pharmaceutical benefits.
Hear Hear.
“The French do it” is far more likely to influence me to do something else.
Sure. I agree that medical tourism is likely to grow for major non-emergency surgery among the underinsured. Each of those qualifiers is pretty significant, though, and I don’t see the market getting too big; flying after surgery is rough and the cost for equivalent quality care, including equipment and experienced doctors on hand in case anything goes wrong, is still pretty high.
Still, I was trying to answer your question about why the black market in drugs isn’t larger. In terms of why the law isn’t reformed to allow people to evade intellectual property rights, I’m sure that you can see the arguments, even if you disagree with them.
The best arguments I’ve read came from David Friedman’s “Law’s Order” chapter 11: Clouds and Barbed Wire, the Economics of Intellectual Property.
In particular, Friedman helped me see why patents and copyrights would be different – namely that patents carve out a large chunk of “IP space” with fuzzy boundaries, while copyrights carve out a much smaller chunk with much clearer boundaries, and that therefore long-lasting patents are much more vulnerable to rent-seeking than a copyright of the same duration.
But thanks, Stu, for the reference to “the Unknown Ideal”. I look forward to reading (or possibly re-reading) it.
Or the Germans either, if the name ‘Thalidomide‘ means anything to you.
It was only last month that a drug test on a painkiller was halted because one otherwise healthy test volunteer suddenly became brain dead (and subsequently was allowed to die) and a half-dozen others became sick and are still being treated for complications.
That was in France, where the drug test was easier to get approved than in the U.S.A.
I don’t know anything about the other cases from India, but that 2012 case in which India revoked Roche’s patent for their new Hepatitis C drug was a case of simple theft by the Indian court.
If this is just an example of “evergreening,” then foreign courts are under no constraint to honor it. If the new formulation isn’t significantly more effective than the old one, then use the old one.
That’s more problematic. If it was all that obvious, you must feel pretty stupid for not having come up with it on your own. Lots of patented things can be “replicated easily.” That’s why there are patents. If you can’t claim “prior art,” then “obvious” rings a little hollow.
No, but it certainly wasn’t the state’s imprimatur that made us decide this hospital was trustworthy: It was the survival rates of patients who had undergone this procedure at that hospital, which had been evaluated by independent specialists who had nothing to do with the state. We did indeed put our trust in private assessments of the surgeon, the team, the institution and their record of success; the anesthesiologist in turn put his trust in the drugs he administered, presumably for rational reasons and in full knowledge of where they were made and how, knowing his reputation was at stake.
It was reasonable for us to conclude their success rate is as high as it is because they take great care with many of the complex things that you have to get exactly right in a surgery like that — drug dosage and quality being only one of them. I didn’t put a private investigator on the tail of the surgeon to make sure he’d really done this procedure before, either; and I didn’t follow them to the operating room to see if they’d scrubbed properly.
I think it’s very reasonable to conclude that hospitals with above average rates of survival in Procedure X are procuring their drugs from a reliable supplier. As I said, I’d gladly have surgery in one of India’s good private hospitals, and I’m sure every drug I’d be given would be Indian-made — and not purchased from Bengal Bob, but from a first-rate pharmaceutical manufacturer.
Yep, that was a huge story and a huge scandal here. I believe this was literally unprecedented in France — or at least, the word I kept seeing was “unprecedented,” that may not be literal. “So long that no one can remember the last time” is more likely; I can’t really imagine that nothing like this has happened since Asterix the Gaul.
I don’t think it’s generally easier to get permission to test here, though. As I understand it the regulatory hurdles in Europe are even more onerous than the US. There’s been speculation that France made an error in 2012 when it passed a law to streamline the rules for medical research and make France less unattractive to researchers who want to do trials, but it’s just that — speculation. It looks to me as if Biotrial just broke the law: All six participants seem to have been given BIA 10-2474 simultaneously; I believe that legally, they should have administered one test dose to one subject first. I’m pretty sure it’s being treated as a criminal matter, and I presume that’s why we don’t know what happened, exactly: French prosecutors tend not to leak, so reporters usually don’t get the details until charges are filed. It’s being reported in the English-language news as “authorities are not being transparent,” but I’d guess it’s less a matter of that than “Prosecutors are not allowed to discuss the details of a case until they formally bring charges.”
Was it? I’m not very familiar with the details of the case, but as I understand it, to conform with TRIPS, India passed a new patent law in 2005 recognizing patents on specific pharmaceuticals. Before it had only protected manufacturing processes. The language of the new law — again, I’m only very superficially familiar with this — allowed patents to be opposed on the grounds that the product wasn’t a new innovation. I’m looking for the actual ruling, because I’d like to see the exact justification they used — you don’t have a link to it, do you?
While looking for it, I came across this article, which is very revealing. It’s about the Indian courts’ refusal to grant a patent for Glivec, which set off five-alarm fires in the US:
So the way this works is just openly reported in the Indian press: India wants a regulatory environment in which it’s harder to get patents, because that favors its generic-drug manufacturers and its consumers, who are numerous but poor. The US wants one in which it’s easier to get patents, because our consumers are fewer but wealthy. Seems they made this decision and basically said, “Your move.” They openly report the concern: In the US, Big Pharma is able to retaliate by lobbying for punitive trade barriers. Now, you might say, “Great. That’s exactly what we should impose on them to create a level playing field,” and I might even agree, but I don’t want to told, “Indian drugs aren’t safe,” when the truth is that we’re in a trade war with India.
And here’s why I’m not sure at all that we’d ultimately win such a trade war. A trade war is only winnable if you a) have more power in the relationship and b) can quickly coerce the opponent. If this goes on, well, this is Ricochet, you know why trade benefits everyone. We end up punishing American consumers who need low-cost, life-saving drugs, and India punishes consumers who need new and innovative drugs. Everyone dies, in other words, literally. Lose-lose.
The assumption in this article, and probably among US pharma companies, is that we can force India to adopt our rules. But my guess is that in the long run, or even the short one, India will have the power to set the global standard on pharma patent law. The size of their market and the size of their pharma industry will compel us to change our patent law, not vice-versa, and no way should we assume that we’ll continue to be more innovative than India — they’ve got a huge advantage in population; and usually their most talented researchers do graduate and postgraduate work in the US — after which, we don’t allow them to stay. Thanks to our self-destructive immigration laws, we deliberately send all that intellectual capital back to India. We used to benefit enormously from Indian brain drain, but now this has reversed: Our brains are draining to the Pacific. So if their strategy is to become a phama giant so powerful that it can set international patent standards, I’d say it’s a reasonable bet.
Was it? I’m not very familiar with the details of the case, but as I understand it, to conform with TRIPS, India passed a new patent law in 2005 recognizing patents on specific pharmaceuticals. Before it had only protected manufacturing processes. The language of the new law — again, I’m only very superficially familiar with this — allowed patents to be opposed on the grounds that the product wasn’t an innovation; they say this wasn’t. I’m looking for the actual ruling, because I’d like to see the exact justification they used — you don’t have a link to it, do you? I don’t understand the chemistry of it well enough to form my own judgment, but I’m interested in the legal language.
Interestingly, while looking for it, I came across this article, which is very revealing. It’s about the Indian courts’ refusal to grant a patent for Glivec, which set off five-alarm fires in the US, and it was published in the business section of India’s NDTV online:
So the way this works is pretty much just openly reported in the Indian press: India wants a regulatory environment in which it’s harder to get patents, because that favors its generic-drug manufacturers and its consumers, who are numerous but poor. The US wants one in which it’s easier to get patents, because that favors our more innovative industry and our consumers, who are few but wealthy.
Seems India made this decision and basically said, “Your move.” NDTV openly reports the concern: In the US, Big Pharma is able to retaliate by lobbying for punitive trade barriers.
Now, you might say, “Great. That’s exactly what we should do on them to create a level playing field,” and I might even agree, but I don’t want to told, “Indian drugs aren’t safe,” when the truth is that we’re in a trade war with India. And I suspect that is what we’re often told — if not by the government itself, than by various pharma companies’ PR arms — when the truth is that we’re in a trade war.
And here’s why I’m not sure we’ll ultimately win that trade war. A trade war is only winnable if you a) have more power in the relationship and b) can quickly coerce the opponent. If this goes on too long, well — this is Ricochet, you know why trade benefits everyone. We end up punishing American consumers who need low-cost, life-saving drugs, and India punishes consumers who need new and innovative drugs. Everyone dies, in other words. Literally. Lose-lose.
Peter Pitts may or may not believe what he’s saying — that in the short or the long run, we can force India to adopt our rules. But my guess is that this isn’t true. In the long run, or even the short one, India probably does have the power to set the global standard on pharma patent law. The global market for inexpensive drugs is so big, and their pharma industry is so competitive, that they may well be able to compel us to change our patent law.
No way should we assume that we’ll continue to be more innovative than India — they’ve got a huge advantage in population, which is increasingly educated and moving into the middle class. Usually their most talented researchers do graduate and postgraduate work in the US — after which, we don’t allow them to stay. (Thanks to our self-destructive immigration laws, we deliberately send all that intellectual capital back to India. We used to benefit enormously from Indian brain drain, but now this has reversed: Our brains are draining to the Pacific.)
So if their strategy is to become a pharma giant so powerful that it can set international patent standards, I’d say it’s a reasonable bet.
What do you think?
I can’t imagine any fully rational justification for the government to have more power to regulate drugs than it does food. (Drugs that aren’t mind-altering or addictive, that is; that’s a different category of argument predicated on a different set of assumptions.)
It’s not at all hypothetical to ask, “What should we do if we know a whole category of low-cost food is harmful to health?” We do know full well that cola and other sugary foods, in large doses, are harmful to health. Obesity-associated mortality in the US is a vastly bigger public health problem than lack of access to Daraprim. If the state has a legitimate interest in regulating the safety of the drugs we take, or even a positive obligation, why doesn’t it have the same interest in regulating food?
It seems to me the assumption we use is that a food product is safe so long as it doesn’t cause immediate poisoning. But that’s not especially rational; slow poisoning is still poisoning.
Yet we all instinctively recoil at the idea of banning soft drinks, and even the soft coercion of limiting the dose you’re permitted to sell and buy to a smaller size, as Bloomberg tried to do. Perfectly rational to do that on public health grounds, but we don’t think the state has a legitimate interest in doing that, and certainly we don’t think it has an obligation.
A lot of this is just habit of mind — it’s not rational, it’s just what we’re used to doing.
Agreed. Though I can empathize somewhat with our instincts:
Our senses are evolved to give us many cues about what’s in the food we eat, and whether it poses an immediate threat. Not so with pills. And even though our senses are adapted to an ancestral environment where empty calories were scarce enough for our instincts to respond to junk food as if it were a nutritious (hence delicious) treat, we can tell when food tastes decadent or “junky”. When it comes to food, not medicine, we can still trust our eyes, nose, and tastebuds to a great extent, and that gives us instinctive reassurance.
Also, unless prospective food is spoiled or poisonous (in which case it hopefully tastes disgusting), we usually have to eat a lot of it to be harmed by it (most people don’t have food allergies). It’s not so strange that our instincts fear one pill whose ingredients we’re unsure of more than they fear a doughnut. It takes a lot of trust to swallow something in the absence of the sensory cues we usually have for food.
My understanding is that it is often true that Indian drugs aren’t as safe as western drugs; it’s not just lower manufacturing standards and more widespread corruption, but it’s also about transportation conditions. That wouldn’t be enough to warrant exclusion by itself, but it is a rational factor in examining the trade offs.
Well, in the short term, sure. Everyone always loses from trade wars in the short term. If the result is that India abides by civilized norms and medical research is supported, though, then the long term result would be positive for both sides, with more Indian and American lives being saved in the future.
India is big, but the margins on Indian drug sales are small, and the Indian economy isn’t particularly large (at 3% of global GDP, it’s part way between Italy and France).
The Indian Middle Class and the US Middle Class are not the same thing. India turns out many, many, more software engineers than America does. Leading software engineers, the ones who do innovative stuff, are overwhelmingly American and, to a lesser extent, European. It’s not racism that means that Bangalore and Chennai produce not only lower grade stuff than America, but also lower grade stuff than China. Indian rote education is doing well for it, and it seems likely to me that it will ultimately overtake China, but it’s not going to become better than the US at the stuff the US does well at in the foreseeable future.
Look at the best students and you’ll find some reassurance. Ivy League schools have numbers like 7.9% of their students or 10.8%, 0r 13% being foreigners. India produces around 12% of America’s international students. Also, if you go to one of the best schools, you probably can stay in the US, and you’re pretty likely to do so. I agree with you that we should improve the stats there, but they’re not disastrous and they’re certainly not indicating that a majority of those students will be Indian any time soon. When the first ethnic minorities enter a white neighborhood, it’s common to hear about the neighborhood being “swamped”, but that’s still pretty much where we are with Indian innovative pharmacists.