BackGlivec and the question of innovation
Incremental improvements of existing products to secure patents are a menace to innovation
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The landmark judgement of the Supreme Court striking down the application of Novartis AG for the grant of patent on an anti-cancer medicine, Glivec, has been hailed as an important step in putting the interests of consumers ahead of the profits of the big pharmaceutical firms. The ruling will allow generic firms to market their version of the medicine at a price 15 times lower than that charged by Novartis.
The key message the judges conveyed through their ruling is that minor modifications of proprietary products does not qualify for the grant of patent rights. By doing so they endorsed the provisions of section 3(d) of the Indian Patents Act that was explicitly introduced to prevent a patent being granted on a product that was a mere discovery of a new form of a known substance not resulting in the enhancement of the known efficacy of the substance.
The motivation of the lawmakers behind introducing section 3(d) was two-fold. The first being that patent holders should not be allowed to extend rights over existing proprietary products by claiming minor improvements. The lawmakers were keen to ensure early entry of generic firms in the production of products whose patents had expired. This is something, which, as evidence from several countries has shown, resulted in a steep reduction in the price level of the patent-expired products.
The second motivation was to strengthen the basis for innovation in critical areas such as pharmaceuticals. Granting patents for minor improvements of existing products would discourage those engaged in the development of genuinely innovative products. After all, the global community agreed to increase incentives for innovation by enhancing the rights of the patent holder, including by extension in the term of patent rights to 20 years. This was, in part, due to the assertion by pharmaceutical conglomerates that development of new molecules was an expensive venture, requiring more than $1 billion of investment. The apex court ruling should, therefore be seen as a step in the right direction to motivate new innovators.
This is not the sole instance when public authorities have spoken their mind regarding the tendencies shown by these firms to indulge in activities that undermine consumer interests. The Federal Trade Commission (FTC), the agency responsible for safeguarding consumer interests in the US by preventing anti-competitive business practices in the marketplace, has been engaged in a battle with the pharmaceutical firms that buy-off generic producers to delay introduction of a generic version of a patented drug.
In its most recent annual assessment of the patent disputes between firms owning patents and generic manufacturers, FTC has reported 140 final resolutions of disputes. Of these 40 settlements may involve pay-for-delay payments as they contain both compensation to the generic manufacturer and a restriction on the generic manufacturer’s ability to market its product. The number of pay-for-delay recorded in the latest assessment was the highest since the organization started monitoring such deals in 2003.
According to FTC, these settlements involved 31 different patented pharmaceutical products with combined annual sales of approximately $8.3 billion in the US. In nearly half of these potential pay-for-delay agreements, compensation took the form of a brand manufacturer’s promise not to market its own generic version of the product in competition with the generic manufacturer’s product for some period of time. Such deals are valuable to generic firms, as they significantly reduce the level of competition new generic entrants face and thus allow generic firms to secure greater market shares and extract higher prices from consumers. FTC estimates show that by delaying the entry of cheaper generics, pay-for-delay deals cost American consumers almost $3.5 billion annually. Besides, they would add to the federal deficit by making the publicly funded health programmes more expensive. The Congressional Budget Office estimates that public debt will decrease by almost $5 billion over the next decade if steps were taken to restrict the pay-for-delay deals.
Proprietary firms have often defended their behaviour arguing that the cost of bringing a new pharmaceutical product in the market is prohibitive and they needed mechanisms such as pay-for-delay deals to recoup their investment. In other words, these firms insist that the consumers should continue to pay high prices for the products they develop, even when there are possibilities of producing affordable generics.
This raises a fundamental question about the model for pharmaceutical research adopted by big pharmaceutical firms. Firms that are developing life saving medicines argue they can continue to make their contribution only when they are allowed to charge extraordinarily high prices for their products. When product prices pegged at such high levels, an overwhelmingly large proportion of the consumers, particularly in the developing world, are denied access to these “break-through" cures. Patents are thus causing moral hazard on two counts: one, a public policy instrument designed to ensure that inventors get the incentives to produce useful products for the citizens have now become a mechanism to promote private profits rather than public welfare. Two, evidence is wearing thin that in their present form patent monopolies are promoting innovation.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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