IPR and medicines, Part 4

I posted my article on IPR which was published by BusinessWorld in October 24, 2007, to some of my discussion yahoogroups. Here is a long discourse.
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OCTOBER 26, 2007

Comments to the IPR article

Four friends commented on my earlier article on IPR.

(1) From Ted:

Then why the hell are drugs from India only 20% of the price of the same drug pushed by the MNCs here in the philippines, at about the same efficacy? I agree that duties from imports and other taxes should be reduced, especially for medical products. But equally important, government should promote innovation and protect the patents of Filipinos who are creative innovators.

(2) From Alan:

You can’t blame the absence or weak IPR on the presence of counterfeit products. When there is artificial pricing due to expensive medicines and DVD, it creates a demand for cheap products, fake or otherwise. If the drug manufacturers don’t want fake medicines, they should not make their products very expensive. I would rather see government intervening to protect IPR and making quality drugs affordable to the general public, than government intervening to protect IPR alone.

(3) From Robby:

Intellectual property is the textbook example of a public good. Once something is invented, the knowhow that comes from the innovation is non-rival (my use of it does not diminish other people's ability to use the new information) and non-exclusionary (impossible to stop other people from using it).... If you want IPR or any form of private property protection, someone has to set up a regulatory institution and PAY for the costs of running that institution. So, if you cut all tariffs and taxes, how are you going to pay for all of these costs?

(4) From Randy:

Patent represents monopoly. Long patent means long monopoly. Hence, the patent should be cut short whenever possible. And discovery of new medicines results in enormous profits. The innovators of new medicines – those pharmaceutical companies – make enormous profits at the expense of public health. Hence, their profits should be regulated, if not cut.
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Below are my reply to those comments:

(1) For Ted:

Drug prices in the Philippines are generally higher compared to their counterpart prices in India and Pakista due to a few reasons First, drugs are NOT taxed in India and Pakistan, whereas in the Philippines, we have import duties, value-added tax, other taxes. Second, there is more competition in India, with 8,000+ pharma companies, both local and multinationals. In the Philippines, there are probably less than 40. Third, economies of scale: India has 1.1 billion people or 12x that of the Philippines’ 88 million. Pakistan's population is nearly 2x that of the Philippines.

”Price abuse” is definitely a possibility if the economy is not competitive and if there is no level playing field. If a country allows only a few, say a dozen, innovator companies to operate -- due to dozens upon dozens of regulations and restrictions -- and there are hundreds of copyers, then that country will be at the mercy of the few innovators. You are right that local innovators should be encouraged, but the state is not doing that. If the government can give a small entrepreneur who only wants to put up a small vulcanizing shop or small food shop, a dozen requirements (from barangay clearance to location permit to sanitation permit to fire dept permit all the way up to mayor's permit), how much more with a local company wanting to manufacture new drugs?

At the moment, many people and policy-makers hate the multinational innovators because "they make enormous profits", so they want to socialize their invention to the copyers. If the degree of socialization of invention will reach a certain high point, even local businessmen may not bother become innovators themselves, and multiantional innovators may degenerate to become plain copyers themselves, stop innovating new medicines, and move instead to innovate new perfumes, new cosmetics, new shampoo, new bath soap, new skin whiteners, new fat burners, and so on. Pulling out from the country is one option, but they may not do that if they can make money innovating and selling new cosmetics products, but never new and more effective medicines.

So it depends on the incentives and disincentives you give. If there are lots of disincentives to become innovators, then people will just become copyers of innovations elsewhere, importers and traders of innovations elsewhere. What to do with specific diseases that afflict certain areas of the Philippines, new diseases that have morphed and evolved from previous diseases? Ahh, with no one innovating on these new diseases, people will scramble to import or copy somewhere else. Or just watch people get sick and die helplessly.

(2) To Alan:

"High prices” is mainly a result of supply not keeping up with demand. Many weak and sick people wanting new and more effective medicines, and too few innovator companies who produce and supply more effective medicines. So copyers (like generics manufacturers) and manufacturers of fake or counterfeit drugs surface, artificially expanding the supply of medicines, making some of them cheap and affordable.

But expanding the supply of counterfeit medicines, even if they are dirt cheap, is not our goal, right? It is expanding the supply of effective medicines, even if they are initially expensive. Something like instead of a medicine that can remove your viral infection (and the pain) in 1 or 2 week/s, why not go for a medicine that can do the same job in just 1 or 2 days? So one obvious solution is to expand the number of innovator companies, whether local or multinational, and let them compete with each other in giving us more effective medicines. It is competition, not over-regulation and high taxation (as done by many governments) that can bring down the price of anything.

(3) To Robby:

It is not correct to say that invention and IPR is a public good, non-rival, non-exclusive use. Invention is a private good. To illustrate: Some bright guys have the talent and initial resources to invent a device that can bring down fuel consumption of vehicles by xx percent. Then all the other guys around say that it is a "public good", they too should be entitled to use that invention at little or no cost for them because those inventions are non-rival, non-exclusive use anyway. What is the incentive/s for those bright guys to proceed with the invention? Who will pay for their time, effort, expenses, all those risks (remember, there is always a risk of failure for any invention)?

Or other bright guys have the brains, the network of financiers, access to laboratory facilities, etc., they can develop a rice variety that can pack up enough vitamins and boost immunity against malaria, against TB, against respiratory diseases. It can take them 20 to 30 years to develop and commercialize that rice variety. After all those years, all the other guys around will say that such rice variety is a "public good" because it involves public health, public nutrition, public safety, so that they should enjoy such rice variety at little or no cost for them. Why then would those bright guys proceed with such expensive and risky invention if they will not be compensated, even financially for their hard work?

I also did not propose to cut "all tariffs and taxes", so that nothing may be left to pay for all those government regulatory costs. I wrote,

"If a government wants to bring down the price of medicines, rice, clothing, fertilizers, farm tractors, or any commodity essential to life and economic growth, the first thing would be to drastically cut, if not abolish, the import duties and direct taxes that hit the poor hardest."

In this country, there are dozens upon dozens of different kinds of taxes. Income tax, travel tax, excise tax, import tax, value added tax, amusement tax, documentary stamp tax, vehicle registration tax, real property tax, percentage tax, common carriers tax, franchise tax, etc.

Then there are dozens upon dozens of different kinds of government fees: driver's license fee, terminal fee, business permit fee, location clearance fee, sanitation permit fee, electrical permit fee, NBI clearance fee, police clearance fee, passport fee, quarrying fee, environmental clearance certificate fee, taxi meter calibration fee, jeepneys and buses new fare matrix fee, etc. etc.

Then there are dozens upon dozens of different goverment charges and penalties: expired driver's license charge, interest charges on delayed payment of real property tax, etc. etc.

In my paper, I never mentioned to cut or abolish ALL the above taxes and fees. I only proposed to drastically cut if not abolish the import tax and direct taxes on those things that government says it wants the price to go down.

(4) To Randy:

To say that “patent means monopoly” is only partly correct. An IPR or patent of an innovation for a specific number of years, is considered a “legal monopoly” for that invention, say for a device that can reduce a vehicle’s fuel consumption, or a medicine that can reduce hypertension or cure leukemia. But this is not equivalent to an “economic monopoly” where one corporate entity, whether private or state-owned, monopolizes the production and marketing of all vehicle parts and devices, or all medicines.

A legal monopoly through IPR and patent for a particular medicine cannot be considered a full monopoly to cure a particular disease. Consider this hypothetical case:

To reduce hypertension, these pharmaceutical companies have discovered and patented medicines, subsequently marketed them, with different raw materials: Pharma A uses extracts from mango fruits. Pharma B uses extracts from mangosteen fruits. Pharma C uses extracts from pineapples. Pharma D uses extracts from bananas. Pharma E uses extracts from corn. Pharma F uses extracts from a particular rice variety. Pharma G uses extracts from a particular wheat variety. Pharma H uses extracts from apples…. Pharma AB uses extracts from basil leaves. Pharma AC uses extracts from maple tree leaves… Pharma ZA uses extracts from dog urine. Pharma ZB uses extracts from cow liver…

Where now is the medicine monopoly here? None. Can all of them to be taken as collective monopolists? No. This is against the formal definition of a monopoly being the “single, lone producer”.

Innovators who discover new products (cell phones, cars, tvs, medicines, etc.) do not automatically make enormous profits. Toyota launches several car models every year around the world. Toyota does not automatically makes money from each model, some do not "click" with buyers, but Toyota still makes billions of dollars of profit because its other models are selling briskly. The same for pharma companies, their biggest drugs do earn “enormous profits” but others do not. Meeting strict regulations by governments also involves “enormous costs”: per industry estimate, of the 10,000 new chemical entities that are granted patent approval (by government food and drugs regulatory boards) and enter phase 1 clinical trials, only 1 emerges as a likely candidate to reach the market. And only 3 in 10 of those are actually profitable.

If the economy is competitive and the playing field is fair and level, people who enter high-cost, high-risk research and innovation, should be rewarded with high returns if they come up with novel and successful products and services. The same way that people who risk nothing and do nothing should also be rewarded nothing. But medicines, they say, is different compared to say, inventions in new car manufacturing and accessories, or inventions in more powerful cell phones and televisions, or inventions in skin whitening and hair shining, because medicines involve public health. Hence, investors and innovators in the former can be left to reap enormous profits but investors and innovators in medicines that can cure previously incurable diseases by many people should be regulated. This is double talk, if not double standard and regulation based on envy.