Drugs and their Protection

A cyber-friend wrote to me asking what was “the rationale behind giving monopoly rights to big-global-drug-companies in India (by the way of patent protection).” He said that this was “leading to prohibitively expensive life saving cancer drugs (Rituximab at 1.3 lakhs/dose is actually daylight robbery and murder) … India is an insignificantly small (revenue % wise) part of global drug market … the unrealistic pricing shows that drug firms are not even bothered about us. India would be much better off if it produces (at fair prices) some of the life saving drugs and tries to save/elongate lives of some of its 5 lakh people who die of cancer every year.”

The argument for patent protection is fairly simple and reasonable. It says that absent protection accorded by the patent, firms will not invest in the research and development required to produce the drugs in the first place. Because of the legally imposed ban against copying a patented drug, the discoverer of the drug has ex ante assurance that the cost of the discovery will be recovered. Once the drug is discovered, there may be an incentive to renege on the promise to provide the firm with patent protection. But then firms will appropriately adjust their expectations and refuse to incur the cost of drug discovery.

There is a trade-off in this situation but then there are very few, if any, situations in life that do not involve a trade-off. By disallowing the copying of a life-saving drug, there is a welfare loss incurred. That loss has to be considered in relation to the welfare cost of the drug not being discovered at all. In an ideal world – what I call a “first best world” – a firm could produce stuff costlessly and people would take whatever they needed without having to economize. Our world unfortunately is a “second best world” where there is no such thing as a free lunch.

Patent protection is a specific example of a more general notion called “intellectual property rights,” or IPR. Just like you have property rights over physical property – you paid for that car and it is yours – so also you have rights over non-material property such as the recipe for biriyani that your family has used for generations (which is a trade secret that you don’t disclose to anyone) or the poem you wrote (which is given copyright protection.)

Why should India honor patents that protect multi-national drug firms that sell life-saving drugs at prohibitively expensive prices? That is part of the trade-off that a country faces. By trading with the rest of the world, India gains. But it has to agree to abide by international trading rules which include the protection of intellectual property rights. India too has an interest in supporting IPR since India has IP itself. I suppose if one has no property, it is easy for one to disregard the whole notion of property rights.

Coming back to drug patents. The protection is for a limited time, generally around 17 years. The idea is that the monopoly power it provides is sufficient for the discovery costs to be recovered. It is to be expected that firms could cheat by making trivial changes to an existing drug which is about to go off patent and then apply for additional protection. Those sort of matters are dealt with at the courts and the outcome depends on a political bargaining process. Oftentimes the pharmaceutical firms have high-paid lobbyists and successfully buy their way into additional protection. The system, in other words, is far from perfect. But then given human imperfection, it is unreasonable to expect any human scheme to be perfect.

Are there alternatives to the patent protection in the drug business? Some have been proposed. One way would be for the government to buy the drug discovered by paying the discovering firm a fair price, and then to release the drug into the public domain for any firm to produce and sell competitively. This has the obvious advantage that once the drug is discovered, the public will have access to the drug at prices that reflect the actual cost of producing the drug and does not include the cost of discovering the drug or the markup above cost that any monopolist would include.

On the other hand, there are two problems. First, the government will have to fund the buying of the drug formula from the firm which discovered it. That purchase has to be funded from tax revenues. Taxes always introduce welfare losses and these welfare losses have to be considered in relation to the welfare losses associated with the firm’s monopoly supply of the drug. The second problem is how one arrives at a fair price at which the government will buy the drug. Let us suppose that the idea is to pay for the actual cost of drug discovery plus a reasonable amount to compensate the firm for the risk it took to discover the drug. The firm will have an incentive to inflate its costs. Furthermore, the firm can withhold selling the drug at a reasonable price and charge a monopoly price to the government itself. There lie major complications.

All the above was in the context of a single economy. What happens when you foreign firms? The story complicated. What if the consumers in the home country are poorer than the consumers of the foreign country (and the firm is a foreign firm)? Then it is possible for the foreign firm to “price discriminate” – sell the drug at a lower price in the poor country and at a higher price at home.

One can argue that this is possible and indeed welfare improving. Generic versions of branded drugs do precisely that.

I am sure that I have merely scratched the surface of this matter. Hope it somewhat answers the questions that my friend raised.

10 thoughts on “Drugs and their Protection

  1. Atanu

    Thats an excellent analysis. I want to add one more thing. If there was no patent protection, the drug company would no incentive in taking the risks and producing the drugs in the first place and the people would suffer more from Cancer if there were no drugs, then if there are expensive ones to cure. One thing the govt can do (and I am sure it is doing) is to invest heavily in R&D inside the govt funded labs and the incentive there should be academic prizes (rather than cash that comes from Patents), that way it can solve some of the patenting issues that goes with expensive drugs.

    My 2 cents.



  2. Atanu,

    A very nice, cogent analysis as always. But yes, you have scratched the surface of this issue.

    Drug firms generally apply for a patent at the IND (Investigative New Drug) application stage, when they seek permission to conduct clinical
    trials. Once they are done with clinical development, they apply for marketing authorisation called NDA (New Drug Application). Typically, it takes about 7-8 years from the time IND is applied, for the drug to hit the market. So, the exclusivity rights are enjoyed only
    for about 5 years (with 12 years being the standard patent protection timeline).

    Since only one out of 10 drugs that hit the market is likely to be a blockbuster, and approximately $1 billion is spent in bringing each drug to market, there is a lot at stake.

    The moment exclusivity ends, generic drugs enter the market at rates 1/8 or even less than the parent drug.

    In UK, and many EU countries, these generic drugs are encouraged because of the obvious cost benefits. In most of these countries, there is a strong welfare system in place, and often, the National
    Health Service is the biggest customer for all the drugs. So, the drug companies have to sell at subsidised rates to these organizations, if they have to access the market. Even then, the moment generic drugs
    appear in the market, the Govt.s prefer to buy them.

    The situation in India is different. The Indian generic drug makers do not want exclusivity rights to be renewed for ‘incremental innovation, where as the MNCs and some Indian companies that have tasted success recently (Reddys, Nicholas Piramal etc.) want incremental innovation
    to be rewarded. There was a committee headed by Mashelkar to look into the issue, but the report has been criticized by both domestic and foreign companies. But the report seems to be siding more with the foreign companies, and one of the accusations against the committee
    has been that instead of doing independent study, they copy-pasted findings from a study conducted by a UK think tank (funded by some global drug majors!).

    In the US and even in EU, ANDAs (Accelerated NDAs) are allowed after
    5-6 years, where by generic drug makers can show that they have developed a different molecule or the same molecule by a different process, and they are allowed to market the drug if they can show
    bio-equivalence (same effect as the proprietary drug) and also comparably better impact on the disease condition. In addition, US and EU have Orphan Drug law, which allows for funding firms that work
    towards discovering drugs that affect very few people. Orphan drugs also get preference in regulatory clearance. We badly need such laws and processes in India. The one reason Malaria has returned in a more resilient form, is the lack of research into anti-Malarial drugs.

    We also need to understand that a lot of research is done collaboratively these days and Universities in US and EU play a key role in drug discovery as well, not to mention all the bio tech start-ups.

    So, a possible solution to your friend’s question w.r.t India:

    1.A very clear Patent Protection regime that allows drug firms to recover their costs and at the same time, ensures that drugs are not over charged.
    2.The regime should also use the best practices implemented in EU and
    in some cases in US, to allow generic drugs in the market after a few
    years, if they can show better results in patient outcomes.
    3.Funds to be made available for research on India-specific (tropical) orphan diseases like Malaria.
    4.Implementing strict ethical controls on the conduct of clinical trials in India, and ensuring that drug firms need to test their drugs on Indian patients before seeking marketing approval for India. The
    patients should continue to get the drug free of cost from the drug firm, even after it gets released into the market.
    5.Where the cost of buying drugs is prohibitive, negotiating with the
    drug firm about reducing the cost. Drug firms do it all the time reducing price) if the Health Care system allows the drug to reach all needy patients. It is a volume game.

    The problem: The bureaucrats who make the policy do not know or delve into the issue with the right perspective. They get wined and dined by representatives of the drug companies, not by the citizens who get
    impacted. And the MPs know and care even less.

    Well, I think I have scratched only a bit more. This is a very contentious and complex topic.


  3. Thanks for putting out the post…
    You are right – two countries make things very complicated. ..
    specially for a poor country like ours

    I have many lines of thought running to come up with convincing arguments against patent protection for life saving drugs… These thoughts will take a little time to crystallize.. cause I am not a PhD in eco…:-)
    I will post them on my blog when the arguments get more solid

    Here are some of my broad approaches –

    Free markets are the most efficient (is this true from an economists perspective???). I mean shouldn’t these guys be selling medicines to any dying man as long as the man can cough up more than their marginal costs. In reality these guys are not even trying price discrimination to reach the whole of the market. (the airlines can do it.. the software guys can do it… why can’t the pharma guys). On top of that the demand is totally inelastic (for obvious reasons – life is typically more precious than any alternative), given a free hand pharma firms can ask any crazy price, and they are doing that.

    I get it that in the case of heavy investment in capital,infrastructure or R&D the free markets breakdown (as you said people would have no incentive to invest in R&D).
    So the governments distort the market and gives patent rights. But look ..even for natural monopolies governments have regulators…. Why not for the artificially created ones?

    Question – Is patent the best way of distorting the market to provide public good ? ( if R&D costs are high .. shouldn’t the incentive be proportional to the R&D cost involved …where is the pressure to do R&D efficiently? ..like moving it to low cost centers in India).

    What is the point in getting these drugs invented by patent protection when most of our population can’t afford to use them?

    A 20 year limit is arbitrary, it does not take into account the cost of R&D, efficiency in R&D, . Companies can spend wasteful amount on marketing and then recoup it from customer because of government given monopoly.etc etc

    Second broad argument… Do not look at the moral stand of paying the inventor for his efforts. Its not a fair world. India should be driven by its own selfish interest. We on a whole are not a nation of inventors…but net consumer of inventions… We should subtly oppose any move to give too much value to the inventors… (like patent protections).. if you let the opposite side bend the rules to their advantage.. the opposite side would rob you naked.

    We can conveniently change this stance if/when we become a net producer of inventions

    (besides many inventors/creators don’t invent for money’s sake.. take linus trovalt of Linux … i am sure the penicillin guy discovered penicillin for reasons other than becoming an millionaire …besides most invention are serendipitous… “oh look these X-rays are exposing photographic films.how strange”… Take the case of great painters… as a rule their painting become expensive long after they die .. where is the monetary incentive to create beautiful paintings?)

    Third line – Defence does not need patent protections .. In fact most countries don’t mind stealing technology from wherever they can .. cryogenic engines.. nuke technology…sophisticated gyroscopes …anything… There is no reason why healthcare should have less priority than defense (moreover, one gets very few chances of using ones fancy weapons .. but ample chance to realize health care benefits )

    Fourth line – Promoting trade is good.. but to what extent?… I am a good businessman… I can give you anything from my house if you quote a good enough price… but even i don’t sell my mother, sisters and children… Life saving drugs are these mothers,sisters and children of society .. they should not be used for promoting trade . …. I am sure the world would not stop trading with us if we deny patent protection to life saving drugs …

    the list of possible arguments can go on an on… just like this comment has gone on and on..

    But let me end with a comment, that i got on one of my blog posts, from a microbiologist pal of mine. (after hiding company name as it doesn’t matter)

    “Dont feel sorry for CompanyX. You are right about the huge amount of R&D that leads to the product. But private companies come into the picture much later, when they smell a viable product. The very basic R&D is still funded by the public sector. You may have a better idea of how much profit they are making.I know this- if I have a bacterium, I can extract 10,000 units of a particular enzyme with a cost of ten dollars. CompanyX produce the same enzyme large scale(cost per unit is less), and sell it at 50 dollars per hundred units( of course with quality assurance!).You do the math.”


  4. Very interesting comment from Kumar

    He has got some very valid points
    Especially the one about regulatory capture/ regulatory failure. (wine and dine and then agree to everything wink wink)

    My info is that brand name drugs get 20 year protection (that about 1/3 of a lifetime, probably enough for the drug to be stale by the time the generic hits the market)

    Now about local variants . Rituximab , the drug i am cribbing about has got a local competitor. Dr Reddy’s has come up with a bio-generic or bio-similar (terminology differ between Europe and US) that is priced at exactly half of Roche’s price. Most probably the pricing is still psychological pricing (junta still getting robbed of money and life) and actual costs might be much less (what invention??.. this is copy.. so the costs might have been more legal costs than research costs)

    I also have a point about India specific and relevant drugs ( I mean i have nothing against drugs for erectile dysfunction… but get a perspective man .. we are talking life and death). Drugs for lifestyle diseases may make monetary sense for big farma but may not take care of chikenguniya and dengu in India. The western R&D preferences may not align with our needs… so we need Indian public money in India specific research (which thankfully is cheaper if done in India .. and also much better than many wasteful utilizations of our taxpayer money …. which incidentally is paid by rich and poor at the same rate (as we have many indirect taxes – e.g sales tax is paid by the both poor and the rich though it might make a bigger percentage of the poor man’s earnings )


  5. The argument for broad IP rights and reciprocal trade benefits is sensible.

    However, there are a few caveats when it comes to prescription drugs.

    Most drugs produced by pharma are licensed from universities – compounds discovered by publicly funded research. Therefore, it is not unreasonable for the public to assume some guarantee of access to these discoveries. Now how to define “access” is another matter.

    Also, the $500 million – $1 billion figure provided as the cost of bringing a new drug to the market is a myth.
    We are part of a research group bringing a new drug to the market, and the cost for the pharma company which licensed it to bring the medicine to market will be ~$40 million, though this is on the lower end of the spectrum. We worked with the company to ensure equitable access provisions for certain populations as the drug has the potential for a large impact in developing countries.

    We believe: Our labs, our drugs, our responsibility. and there’s an entire movement dedicated to promoting socially responsible licensing.


  6. What I don’t understand is the attack on so called “Big Pharma” as if there is this one evil person who is behind all this and roars in laughter every time a poor person dies of some terrible disease.

    You all do know that these industries are made up of Scientists, Janitors, IT People, Managers, Stock holders et al at this companies who need to get paid to feed their families and make their investment in education worthwhile, right? If these people are not paid well, simple economics tells me less students will go into these fields or if Stock holders don’t deem the company be a good investment they won’t invest in the company.

    Sometimes people get too carried away emotionally don’t really see that everyday people make up big corporations, there is no mythical Big Business that is trying to keep the poor and weak down.


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