Market Impacts of Patent Reforms in Developing Countries
Intellectual property (IP) protection is a heavily debated issue particularly in the developing world, as many formerly poor countries have experienced rapid economic growth and now represent potentially profitable markets for innovating firms. Partly because of this growing importance, members of the World Trade Organization were required to adopt the Trade Related Intellectual Property Standards (TRIPS) intended to establish uniform IP standards including a product patent system in all fields of technology. Many developing countries such as India, China, and Brazil have recently begun creating these systems (and these policies are currently being considered in many African countries). As a result, little is known about the effects of these policies in the developing world.
Two recent papers published in the American Economic Review (AER) partially fill this gap by investigating the impact of enforcing stringent patent rights on pharmaceutical markets in developing countries. Economic theory suggests that providing firms with monopoly rights via patents today will result in price increases and an inefficiently low number of pharmaceuticals sold. In exchange for this inefficiency, patents are intended to provide the necessary incentives for the development of products in the future. Many activists and policymakers have decried TRIPS, and protestations have represented fears about the outcome of a textbook product patent system, i.e. one in which foreign innovating firms are granted monopoly rights while domestic infringing firms are immediately pushed out of the market for the length of the patent term with significant increases in the prices of essential drugs.
The widespread perception that TRIPS flipped the patent switch from 'off' to 'on' in developing countries obscures the fact that like many international agreements, TRIPS includes room for interpretation and flexibilities. For instance, patent reform involved regulatory measures such as compulsory licensing (i.e. the ability to force patent holders to grant a license to domestic firms under certain conditions), formal price controls, and the right for domestic firms producing newly patented molecules to pay a royalty and continue their commercial activities. Given the threat of onerous regulations, innovating firms also sometimes preemptively modify their behavior. The mere existence of the additional regulatory tools constrains excessive price increases even without their explicit use. Perhaps as evidence of a fear of compulsory licensing, the maker of Sovaldi recently announced that it would partner with generic drug manufacturers and sell its hepatitis C cure for $900 across 90 developing countries. At that time, the US list price for Sovaldi was $84,000. In addition to the regulatory flexibilities in TRIPS, there may simply be differences between the de jure and de facto operation of product patents for pharmaceuticals in developing economies. Given the lack of a clear theoretical prediction, the net effect of the combination of regulatory features of this reform process is ultimately an open empirical question.
In a new paper (Duggan, Garthwaite, Goyal 2016) we address this open question using a newly gathered dataset of product patents matched to a comprehensive set of longitudinal sales data on all single molecule products sold in the Indian market in the years preceding and for several years after the introduction of the new patent system. Our analysis sample includes more than 6,000 products containing approximately 1,000 molecules. We examine the effects of the 2005 implementation of a product patent system in India on pharmaceutical prices, quantities sold, and market structure. Exploiting variation in the timing of patent decisions, we estimate that a molecule receiving a patent experienced an average (modest) price increase of 3-6 percent with larger increases for more recently developed molecules and for those produced by just one firm when the patent system began. Results showed little impact on quantities sold or on the number of pharmaceutical firms operating in the market.
The implementation of product patents did not appear to either cause large increases in pharmaceutical prices or dramatic consolidation of the market as was widely predicted prior to its enactment. The relatively small estimated effects could be seen as both good and bad news. At least in the short-term, it suggests relatively few static inefficiencies resulting from an increase in intellectual property protection. This takes on additional significance when one considers that India is also one of the largest exporters of pharmaceuticals – particularly to the developing world. In 2010, India exported approximately $17.2 billion worth of pharmaceuticals. Many of these exports were critical in supplying certain product segments that treat diseases prevalent in markets of Africa, Asia and Latin America—most notably vaccines and antiretroviral drugs for treating HIV.
However, the lack of a large price effect also suggests that there may only be a limited increase in expected profits for pharmaceutical firms. The lack of large profit increases from patents is important for understanding firm behavior with respect to investments in the development of new products. A paper published in the same issue of the AER (Cockburn, Lanjouw, Schankerman 2016), uses data on launches of 642 new molecules in 76 countries to show that patent rights have an important impact on the diffusion of new innovations as well as on the rate at which new innovations are created. This analysis provides evidence to suggest that the pace of new molecule introduction did not accelerate as a result of India adopting a TRIPS-compliant patent system. This could result from innovative efforts not responding to changes in expected profits. The results strongly suggest that the lack of an innovation response likely stems from at best small changes in expected profits. As a result, the small post-patent price increases that have been estimated should not be thought of as a purely positive outcome.
Aparajita Goyal is a Senior Economist in the Poverty and Equity Global Practice of the World Bank.