Patent-Antitrust Interface in the Pharmaceutical Industry from a Developing Country Perspective Thomas Cheng University of Hong Kong IP and Innovation Conference Moscow, April 22, 2014

Patent-Antitrust Interface in General  A balance between generating innovation incentives and minimizing consumer welfare loss  Louis Kaplow’s ratio test: Patentee reward/monopoly loss  Assumption is that patentee reward is needed to attract innovations.  Is that true?  What is the theoretical perspective and empirical evidence on that?

Theoretical Perspective on the Need for Patentee Reward to Generate Innovation Incentives  Does the pharmaceutical industry require patentee reward to generate innovation incentives?  Appropriability conditions in an industry:  Profitability of invention  Imitation:  Profit potential of imitation  Number of potential imitators  Imitation costs  Ease of imitation  Codifiability of technology—tacit knowledge involved?  Complexity of technology  Amount of investments required to undertake the imitation  Imitation lag/first mover advantage  Augmented by brand loyalty.

Theoretical Perspective on the Need for Patentee Reward to Generate Innovation Incentives  Does the pharmaceutical industry require patentee reward to generate innovation incentives?  Low appropriability conditions in the pharmaceutical industry:  Usually high profitability of invention  Imitation:  Profit potential of imitation  Number of potential imitators  Imitation costs  Easy to imitate  Relatively codifiable technology/less tacit knowledge involved  Complexity of technology  Usually no special investments required to undertake the imitation  Imitation lag/first mover advantage

Empirical Evidence on the Need for Patentee Reward to Generate Innovation Incentives  Taylor & Silberston (1973):  Data from 27 firms  64% of pharmaceutical R&D dependent on patent protection (compared to 17%of chemical R&D, 5% of mechanical engineering R&D).  Mansfield et al. (1981):  For two-thirds of the pharmaceutical products the ratio of imitation costs to innovation costs was less than 0.8.  For two-thirds of the pharmaceutical products the ratio of imitation time to innovation time was less than 0.7.

Empirical Evidence on the Need for Patentee Reward to Generate Innovation Incentives  Mansfield et al. (1986):  For over 30% of pharmaceutical R&D patent protection was deemed to be important (compared to 10% to 20% for petroleum, machinery, and fabricated metal products).  Levin et al. (1987):  Patent protection found to be the most important means of appropriation in the pharmaceutical industry (the only industry)

Do Developing Countries Have the Innovative Capacity to take advantage of the innovation incentives?  Keith Maskus (2000):  Pharmaceutical R&D not expected to rise in Lebanon, South Korea, and Argentina after the introduction of patents for drugs.  “Few, if any, firms in developing countries are likely to find it attractive to engage in fundamental R&D in competition with the major international research-based pharmaceutical companies, which have expertise in research and marketing and benefit from significant economies of scale.”  Julio Nogues (1990):  Pharmaceutical R&D not expected to rise in Argentina after the introduction of patents for drugs.  “[T]he development of new chemical entities is outside the reach of local companies in any developing countries, since there are no firms in such countries big enough to finance the high costs of pharmaceutical R&D.”

Do Developing Countries Have the Innovative Capacity to take advantage of the innovation incentives?  Scherer & Weisburst (1995):  Italy introduced patents for pharmaceuticals in Prior to that, Italy had a vibrant generic sector.  After the introduction of pharmaceutical patents:  No significant increase in pharmaceutical R&D expenditures relative to world trends.  No significant increase in the number of new drug entities introduced by Italian firms.  A sharp deterioration of the Italian balance of trade in drugs. Export sales plummeted.  Domestic drug manufacturers were gradually taken over by multinational firms.  Generic production capacity moved to India.