E-drug: World Bank study
---------------------------------------------
WARNING: LONG MESSAGE
I have explored the economic literature on patents and drug prices. Here is
the main list of references (I suppose A. Subramanian is or was at the WB).
I put also a synthesis of this literature. On request, I can send a longer
synthesis in french, or other references.
1 Economic Models with no reference to pharmaceuticals
Deardoff Alan V., Should Patent Protection Be Extended to All Developing
Countries ?, The World Economy, 1990; 13(4): 497-508
Deardoff Alan V., Welfare Effects of Global Patent Protection, Economica,
1992, 59, 35-51
Diwan I., Rodrik D. Patents, appropriate technology and north-South trade. J.
Internat Economics 1990;30:27-47.
Maskus K. E., Konan D.E., Trade-Related Intellectual �Property Rights:
Issues and Exploratory Results, in Deardoff and Stern (eds), Analytical an
Negociating Issues in the Global Trading System, University of Michigan
Press, Ann Arbor, 1994, pp 401-446
Chin Judith C. and Grossman Gene, Intellectual Property Rights and
North-South Trade, . In Jones RW, Krueger AO eds, The political economy of
international trade, Oxford and Cambridge, Mass, Blackwell, 1990, pages
90-107
2 Economic models with reference to pharmaceuticals
Challu Pablo M. The consequences of pharmaceutical product patenting, World
Competition 1991; 15 (n�2) : 65-126
Lanjouw J.O., The introduction of pharmaceutical product patents in India :
�Heartless exploitation of the poor and suffering� ?. Yale University,
Economic Growth Center, Center Discussion Paper N� 775, 54 p 1997
Nogu�s Julio J., Social costs and benefits of introducing patent protection
for pharmaceutical drugs in developing countries, The Developing Economies,
XXX-1 ( march 1993), 24-53
Redwood Heinz, New Horizon in India: The Consequences of Pharmaceutical
Patent Protection, Oldwicks Press, Felixtowe, England, 1994, 134 p
Rozek Richard P. , The consequences of pharmaceutical product patenting: A
critique, World Competition, 1993;16(3), pp91-106Rapp Richard T., Rozek
Richard P. Benefits and costs of intellectual property protection in
developing countries. J. World Trade 1990;24(5):76-102. Schut Frederik T.
and Van Bergeijk Peter A.G., International Price
Discrimination: The Pharmaceutical Industry, World Development, vol 14, N�
9, pp 1141-1150, 1986
Subramanian Arvind, Putting some numbers on the Trips pharmaceuticals
debate, Int. J. Technology Management, Vol 10, Nos 2/3, 1995, pp 252-268
Subramanian Arvind, TRIPs and the Paradigm of the GATT: a Tropical,
Temperate View, The World Economy, 1990; 13(4), pp 509-521
Watal Jayashree, Introducing Product Patents in the Indian Pharmaceutical
Sector - implications for Prices and Welfare, World Competition, (1994) 5-21
Watal Jayashree, Mathai Anu P., Sectorial impact of the Uruguay Round
Agreements on developing countries: Pharmaceutical industry, UNIDO, Global
Forum on Industry, perspectives for 2000 and beyond, New-Delhi, India,16-18
october 1995.
Challu Pablo M., Effects of the monopolistic patenting of medicine in Itally
since 1978, Int. J Technology Management, 19945, Vol. 16 Nos 2/3 : 237-251
3 US & Canada
Congressional Budget Office, How increased competition from generic has
affected prices and returns in the pharmaceutical industry, july 1998,
http://www.cbo.gov/showdoc.cfm?index=655
Lexchin Joel, Pharmaceuticals, Patents, and politics: Canada and Bill C-22,
The International Journal of Health Services, vol 23, n� 1, 1993, pp147-160
4 APhrma study and comments
Chirac Pierre, Kaddar Miloud, Intellectual property protection and
pharmaceutricals, The Lancet, 26th september 1998
Lexchin Joel, Drug patents and prices, The Lancet, 15th August, 1998
Rozek Richard & Berkowitz Ruth, The effect of patent protection on the
prices of pharmaceutical products. Is intellectual property protection
raising the drug bill in developing countries ? NERA, consulting
Economists, 1998.
1. TRIPS Agreement
The TRIPS Agreement (Trade-related Aspects of Intellectual Property Rights)
make pharmaceutical patents mandatory for all countries. This provision has
four possible consequences for access to essential medicines for developing
countries:
- to increase drug prices and to limit financial acces to drugs for patients
with no third party payment scheme;
- to weaken local industry based on generic medicines manufactured through
reverse engeneering;
- to give incentives to foreign direct investment for multinational companies;
- to give incentives to research and development (R&D) in new medicines, in
particular medicines for the treatment of tropical diseases.
All these issues need sound analysis to determine the consequences. Price
issue which is a cornerstone of all other issues and will be examined in detail
here.
2. Industrialists theory
According to the International Federation of Pharmaceutical Manufacturers
Association, there is empirical evidence that patents changes have no
effect on prices. This statement is contrary to common economic knowledge.
3. Economic theory
Economic theory states than prices of patented products are higher: a patent
gives a monopoly to the patent holder, and patented products prices are
higher than non-patent products prices.
4. Computations on prices increases and welfare losses with patent law
enforcement. Using econometric models, Nogu�s (1993), Subramanian (1995),
Watal (1994) and Fink (1999) have computed costs (price increases and/or
consumer surplus losses) for pharmaceuticals in individual countries
(Argentina, India and elsewhere) that could result from new patent laws.
Nogu�s and Subramanian make hypothetical assumptions on the share of the
patented product as a proportion of the total market, on the magnitute of
price elasticity and on the nature of the competition before the new law.
Watal computation relies on precise data on the India market. An expected
weighted average price rise of 52 per cent for the entire group of patented
drugs is calculated. The rise varies from no rise (existing monopolies) to up
to 64 per cent. With a different method applied also to India, Fink gives
price rises of from 8.3 per cent to 225 per cent.
Some authors, applying economic theory with theoretical models, evaluate
costs and benefits of enlarged intellectual property protection (IPP)
rights to
developing countries without specific reference to pharmaceuticals. Chin and
Grossman (1990) have found a conflict of interest between countries of the
North and South. Deardoff (1990, 1992) concludes that it is economically
legitime not to enlarge patent rights to all countries. Diwan & Rodrick
(1991) show that, for goods used in both the North and South, countries of
the South should act as free-riders and not protecti patent rights;
however, for goods preferred by countries of the South, intellectual
property rights should be protected. Helpmann (1993) concludes that
stronger IPP does not benefit countries of the South. For Sherrer (1996),
higher costs do not balance benefits in the case of decreasing returns of
R&D expenditures and decreasing returns of new chemical entities with
higher IPP in developing countries.
Theoretical approaches therefore show that, with patent right enforcement,
price rises in developing countries and welfare losses for the poor who
would not be able to afford drugs or would be forced to give up other
expenses can be expected.
5. Empirical evidence of higher prices for patented drugs.
Many price comparisons have been published. American case studies are the
most statistically reliable (Frank & Salkever, 1977; Caves et al., 1991;
Grabowski & Vernon, 1992; CBO, 1998). According to CBO, the average cost of
a prescription with generic drugs is US$ 11, compared to US$ 37 for the
same prescriptions with brand drugs (with available generic substitutes):
the price ratio is 1:3. This is known as the Generic Paradox competition
does not regularize the price of individual products; this the role of
brand loyalty and market segmentation (price sensitive segment and price
non-sensitive segment). So the impact of patents on prices is strongly
linked to brand name strategies. A patent gives a temporary monopoly to the
patent owner on a new chemical entity; during that period, brand name
loyalty is established by firms through promotion. When the patent expires,
the non price-sensitive segment of the market (with high brand loyalty)
continues to buy the brand name products, regardless of the price of the
generic drugs. For antiinfection drugs, brand loyalty seems very low
(Wiggins & Maness, 1995).
Lu and Comanor (1998) give evidence that new drug prices can be higher than
existing drug prices: important therapeutic drugs are launched by firms
with skimming prices strategies (price is an average 3 times higher than
existing drugs prices); drugs providing little or no therapeutic gain are
launched by firms with penetration price strategies (at the moment of
introduction, prices are not different from existing drugs prices, but
generally increase over the next four years. Perloff & alii (1996) show,
using the example of anti-ulcer drugs, that the introduction of a new drug
allows the price of all drugs for the same indication to be increased
because of the a consummers' selection effect: different property drugs
fits better with different consumers' preferences when a new drug enters
the market.
There is therefore a great amount of evidence that patents push prices up:
brand name competition is generally not efficient for lowering prices, and
the actual ratio of patented drug prices to generic drug prices (up to 1:3)
is
higher than ratio predicted by economic theory (up to 1:1.7).
6. Countries with a new law strengthening patent rights
In a study quoted by the International Federation of Pharmaceutical
Manufacturers Association, Rozek and Berkowitz (1998) analysed the prices
of existing drugs in 4 countries (South Korea, Mexico, Hungary and Taiwan)
18 months before and 18 months after a new patent law. They found no
significant price change: patent laws have no impact on existing drugs
prices because laws are not retroactive. Challu (1995) compared new drug
prices in Italy before and after the 1978 patent law. Using US prices as a
reference, new drug prices after 1978 were 163 per cent higher than new
drug prices before 1978. New patent laws are therefore expected to give
market power to innovative firms to price new drugs higher than they would
without new patent laws.
7. Conclusions
(1) The impact of patents on drug prices is different according to which
price is considered (Lexchin 1998, Chirac & Kaddar, 1998).
(2) There is no effect on price of molecules on the market before a patent
law.
(3) price of molecules marketed after patent laws: higher prices. The
increase is a function of consumers' preference for novelty and sensitivity
to prices. The more the consumer prefers novelty and the more they are
price sensitive, the higher prices will be.
(4) The impact on the average cost of a prescription must be analysed on the
long term and depends on the turn-over: how fast new drugs will take the
place of older ones. Stronger patent holder rights provide higher expected
profits for innovative firms and provide incentives for firms to push up
new drugs sales and in return, drug turn-over will increase.
Jerome Dumoulin
Institut de Recherche Economique sur la Production et le D�veloppement
Universit� Pierre Mend�s-France
BP 47
F 38040 Grenoble Cedex 9
tel : 33-(0)4 76 82 54 50
fax : 33-(0)4 76 82 59 89
jerome.dumoulin@upmf-grenoble.fr
[Thank you very much for this helpful synthesis. BS]
--
Send mail for the `E-Drug' conference to `e-drug@usa.healthnet.org'.
Mail administrative requests to `majordomo@usa.healthnet.org'.
For additional assistance, send mail to: `owner-e-drug@usa.healthnet.org'.