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TWN Info Service on WTO and Trade Issues (Sept16/01)
5 September 2016
Third World Network

The unfulfilled promises of innovation and expansion of IPRs
Published in SUNS #8306 dated 2 September 2016

Geneva, 1 Sep (Kanaga Raja) - The incorporation of intellectual property (IP) into trade agreements has not brought about the promised benefits, and the premise that the same standards of protection are suitable for countries with different levels of development and that innovation will be boosted through such agreements does not match the reality.

This is one of the key conclusions highlighted by Dr Carlos M. Correa in a South Centre Research Paper (No.70) titled "Innovation and the Global Expansion of Intellectual Property Rights: Unfulfilled Promises."

Another main point in the paper is that the TRIPS Agreement has failed to increase innovation and generate benefits equitably distributed among all members of the World Trade Organisation (WTO).

According to Dr Correa, the same can be said with regard to the free trade agreements (FTAs) promoted by the US and the European Union that entail a further expansion of intellectual property protection ("TRIPS-plus standards"), such as: extended term of patent protection (in the case of US FTAs); data exclusivity for pharmaceuticals and agrochemicals; linkage between drug registration and patent protection (in the case of US FTAs); and strengthened enforcement measures.

The South Centre research paper noted that the effects of high standards of protection - as those mandated under the TRIPS Agreement and further extended under FTAs - have been critically examined in the developed countries themselves: "[i]ntellectual property is ... a social contrivance purportedly designed to increase welfare, by supposedly enhancing innovation (though... it may actually have exactly the opposite effect)".

[See Giovanni Dosi and Joseph E. Stiglitz , 'The Role of Intellectual Property Rights in the Development Process, with Some Lessons from Developed Countries: An Introduction', in Mario Cimoli, Giov Ann I Dosi, Keith E. Maskus, Ruth L. Okediji, Jerome H. Reichman, Joseph E. Stiglitz, Intellectual Property Rights. Legal and Economic Challenges for Development, Oxford University Press, 2014, p. 3-4.]

If intellectual property does not work in developed countries as generally described by their proponents, the situation can only be worse in developing countries with weak science and technological infrastructures, scarcity of risk capital and unsophisticated production profiles, said Dr Correa.

"These countries are currently paying the price of a system which primarily serves as a platform to extract rents (in the form of royalty payments and high prices) and which does little to promote local innovation and economic development."

According to the South Centre paper, the scenario for innovation in the pharmaceutical sector clearly illustrates that the conception underpinning the TRIPS Agreement was flawed from a global perspective.

"The rate of innovation has not increased, rather, it has declined and while developing countries struggle with high prices for medicines, R&D necessary to address their particular health needs continues to be marginalised," it said.

Providing some background, the paper notes that international intellectual property law developed since the end of the 19th century as an independent normative area. Three international conventions were adopted at the end of that century, two of which became the very foundation of an international system on industrial property and copyright law. Thereafter, it took a long time to develop additional international rules on the subject, as it was only in 1952 that a new convention on copyright was established.

The internationalization of intellectual property gained momentum in the 1960s and 1970s when various negotiations led to the conclusion of new treaties in this field. The governance of the emerging set of international conventions on intellectual property was ensured through specialized bodies established by the same conventions.

The system of rules created by these international instruments operated in isolation from the multilateral trade system established by the General Agreement on Tariffs and Trade (GATT) in 1947. The creation of a linkage between the two systems was the result of an initiative of a group of US-based industries that sought to establish a framework for intellectual property protection of broad geographic coverage and capable of ensuring not only the recognition of rights, but also their effective enforcement.

According to the paper, the opposition of developing countries to establish a comprehensive agreement on intellectual property in the context of GATT led them to refuse the developed countries' interpretation of the ambiguous mandate approved at the GATT Ministerial Conference in Punta del Este (Uruguay) in 1986, and to avoid engaging into negotiations on the subject until 1989.

The change in their position is attributable to many factors, but the primary one is likely to have been the developed countries' confessed strategy to link concessions in the areas of agriculture and textiles - the main targets for developing country negotiators - in the Uruguay Round to the acceptance of a new set of binding international rules on multiple aspects of intellectual property that would reflect the patterns of protection generally available in developed countries, said Dr Correa.

"Of course, the proponents of such rules articulated a discourse around the advantages that new disciplines on intellectual property would bring about to all participants in the multilateral trading system, including developing countries. Increased innovation, growing flows of foreign direct investment and technology transfer to these countries, and better prospects for economic growth were central components in this rhetoric."

While a number of econometric studies have been conducted correlating intellectual property (or the 'strength' thereof) with these and other variables, none of them conclusively shows that the claimed benefits have actually emerged from the implementation of high intellectual property standards, the paper underlined.

For instance, a literature review concluded, in relation to patents, that "the sheer size and growth of the recent literature might lead one to assume that patents are an extremely important instrument of economic development and growth, which therefore attract a great deal of interest from researchers and policy makers. But this seems at odds with the weak evidence that patents serve as an incentive for innovation and the fact that relatively few firms find them an important means of securing returns to innovation".

One clear outcome of the increased levels of intellectual property protection seems to be the enormous increase in US receipts for the use of intellectual property abroad, which doubled between 1994 and 2014.

THE TRIPS AGREEMENT

The South Centre paper has pointed out that one of the key arguments underpinning the grant of intellectual property rights and, in fact, the claimed benefits of implementing the standards of the TRIPS Agreement, is the positive role that such rights would play in promoting innovation.

"The global map of research and development (R&D), however, does not show a general improvement of R&D capabilities in developing countries in the last twenty years, with a few exceptions, notably in the case of China."

Although the participation in global R&D may have improved after 2010, the US, China, Japan and Europe together still account for about 78 per cent of the $1.6 trillion total investment in R&D.

R&D investment has increased in India, Brazil and China in the last twenty years, but other developing countries, especially in Africa, undertake low levels of R&D and there are no indications that there will be significant changes in the short term.

The extent to which the increase in R&D investment in those three countries is related to or caused by the introduction of TRIPS-compatible rules on intellectual property is at least questionable. Significantly, none of these countries has entered into free trade or other agreements imposing TRIPS-plus standards. Hence, they would not qualify as granting "stronger" intellectual property rights protection, one of the variables considered in some studies to assess the impact of such rights.

"How much of the increment in R&D that has taken place in the last two decades may be attributed to intellectual property protection? It is not easy to respond to this question. However, if leading economists from the USA are right, it cannot be simply argued that innovation only or mainly occurs because such a protection is conferred," said Dr Correa.

Moser, for instance, concluded a historical analysis indicating that '[o]verall, the weight of the existing historical evidence suggests that patent policies, which grant strong intellectual property rights to early generations of inventors, may discourage innovation.' [See Petra Moser, 'Patents and Innovation: Evidence from Economic History', Journal of Economic Perspectives, volume 27, number 1, Winter 2013, Pages 23-44.]

Other scholars have gone as far as suggesting the abolition of patents: "[I]n general, public policy should aim to decrease patent monopolies gradually but surely, and the ultimate goal should be the abolition of patents. After six decades of further study since Machlup's testimony in 1958 failed to find evidence that patents promote the common good, it is surely time to reassess his conclusion that it would be irresponsible to abolish the patent system". [See 'The Case Against Patents', Michele Boldrin and David K. Levine, Journal of Economic Perspectives, vol. 27, no. 1, Winter 2013, Pages 3-22.]

The inappropriateness of a "one-size-fits-all" approach in the area of intellectual property has been highlighted in various reports and in abundant academic work, noted Dr Correa.

Dosi and Stiglitz, for instance, have warned about the negative consequences of pretending that a system of intellectual property adapted to a developed country could work in the same way in a developing country: "As badly designed as the American IPR regime is for the United States, it is even worse suited for developing countries. But even if the American IPR regime were ideal for the United States, that does not mean that it would be ideal for others... In particular, the IPR regimes of the advanced developed countries are likely to be inappropriate for many developing countries, and this is likely to be especially so in areas like health and agriculture... Indeed, one-size-fits-all, policy prescriptions are rarely a good idea in any field, but this is one area where they may work particularly badly... There are, for instance, large distributional consequences of different IPR regimes, and developing countries may not have the resources to easily offset those effects." [See Giovanni Dosi and Joseph E. Stiglitz , 2014]

In summary, said Dr Correa, "while the proponents of the TRIPS Agreement operated on the premise that minimum standards of protection would be equally beneficial for countries with diverse levels of socio-economic and technological development, the dominant view flowing from academic and other analyses seems to strongly reject that premise."

This is particularly the case for pharmaceuticals, he added.

THE PHARMACEUTICAL INDUSTRY

According to the South Centre paper, the case of the pharmaceutical industry illustrates well the disconnect between innovation and the geographically broader and more extensive protection of intellectual property introduced by the TRIPS Agreement.

It is generally accepted that patents are not among the important means to appropriate returns to innovation in most sectors, with the notable exception of pharmaceuticals.

The pharmaceutical industry played a major role in the development of the US strategy leading to the adoption of the TRIPS Agreement; this Agreement may never have existed in the absence of the effective lobbying made by that industry.

"The implementation of global rules ensuring the patenting of pharmaceutical products - which was denied in more than 50 countries at the beginning of the Uruguay Round - and the protection of test data - for which there were no international rules before the TRIPS Agreement - was presented by that industry as an indispensable platform to sustain and increase investment in the development of new drugs."

The paper however pointed out that a study by Scherer published in 2004 predicted that the increase in the development of new drugs that would result from the implementation of the TRIPS rules in developing countries would be minimal, and that "global welfare is maximised by letting low-income nations free-ride on the patented inventions of first-world nations". [See F. M. Scherer, A note on global welfare in pharmaceutical patenting, Working Paper No. 03-11, Federal Reserve Bank of Philadelphia, available at https://www.philadelphiafed.org/research-and-data/publications/working-pa pers/2 003/wp03-11.pdf, p. 10.]

In fact, said Dr Correa, the post-TRIPS Agreement period has been characterized by a continuous decline in pharmaceutical innovation, as measured by the number of new drugs approved for marketing. The average number of new drugs developed after 2000 (when the TRIPS Agreement became enforceable in developing countries) was almost half of the average in the five previous years.

"The extension to developing countries and the strengthening of patents and test data protection for pharmaceuticals have done nothing to prevent the plummeting efficiency of the pharmaceutical industry in developing new drugs."

Thus, the "number of new drugs approved per billion US dollars spent on R&D has halved roughly every 9 years since 1950, falling around 80-fold in inflation-adjusted terms".

In addition, the extension of product patent and test data protection has not helped developing countries - the primary target of the whole TRIPS exercise - to address the diseases prevalent in those countries (often referred to as 'neglected diseases'), since the lack of interest and, consequently, low investment in R&D by the pharmaceutical industry continues to be an outstanding feature of its business model.

A report by the WHO Commission on Intellectual Property, Innovation and Public Health (CIPIH) of April 2006 already noted that "[t]here is no evidence that the implementation of the TRIPS Agreement in developing countries will significantly boost R&D in pharmaceuticals on TYPE II and particularly Type III diseases. Insufficient market incentives are the decisive factor".

A more recent report confirmed that: "patents alone do not drive sufficient investment to counter diseases that predominantly affect poor people, because they do not offer a sufficiently profitable market; as a result, some diseases - or rather, some populations - are neglected".

While in 1975-1999, only 1.1 per cent of new therapeutic products had been developed for neglected diseases, between 1 January 2000 and 31 December 2011 only four new chemical entities were approved for neglected diseases (three for malaria and one for diarrhoeal disease), accounting for 1 per cent of the 336 new chemical entities approved during this period.

According to the paper, the effects of an expanded protection of intellectual property have been particularly tangible in the case of treatments for HIV/AIDS. Prices of HIV treatments vary greatly between middle-income countries (MICs) depending, inter alia, on the patent landscape, while the price of drugs for third-line treatments remains a major challenge as they are likely to be patented in key countries with manufacturing capacity.

In addition to the low number of new drugs developed after the TRIPS Agreement entered into force, innovation in pharmaceuticals presents other shortcomings. The great majority of the new drugs are 'me-toos', that is, drugs that do not perform better than previously existing treatments, but which are generally more expensive.

For example, a specialized journal noticed that "a 'new generation' of anti-psychotics was systematically prescribed by doctors, yet these drugs proved to be no more effective than the prior generation and were 10 times more expensive".

More generally, it has been found that by the 1980s drugs were less than four times better than placebo; by the 1990s, twice as good, and by the 2000s just 36 per cent better than a placebo.

Intellectual property is deemed to be necessary to drive private investment in drug research, which is believed to constitute the primary source of new treatments, said Dr Correa. The evidence suggests, however, that a large part of the new medicines with a genuine therapeutic impact emerge from public, not private, R&D laboratories: "...innovation depends on bold entrepreneurship. But the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state."

A common argument for the justification for the minimum standards imposed by the TRIPS Agreement has been that it would effectively lead to more innovation in pharmaceuticals in developing countries, especially in those with a significant scientific and technological capacity such as India.

An analysis for pharmaceutical patents in 85 countries from 1978 to 1999 found that "national patent protection did not stimulate domestic innovation activities, except at higher development levels, and that above a certain level of patent protection, innovation activities are actually reduced".

Dr Correa noted that a recent study on the TRIPS Agreement's impact on the pharmaceutical industry in India concluded that TRIPS may have accelerated R&D related to improvement of existing medicines, but "in the absence of TRIPS, such activities would still have been undertaken. With larger domestic operations, Indian companies...would have had access to larger resources and would have been better placed to undertake such research".

The TRIPS Agreement requires a minimum protection for patents of twenty years counting from the date of filing.

"This is an arbitrary term, as there is no evidence suggesting that this is the optimum duration, particularly if applied to inventions of very different nature (both major or radical as well as incremental or minor) and the development of which require completely different levels of skill and investment," Dr Correa added.

The TRIPS Agreement, in summary, has done nothing to stop the decline in the innovation of the pharmaceutical industry in developed countries, or to induce R&D on new drugs in developing countries. Despite this, in many of these countries there has been a massive proliferation of patents in this area, based on "evergreening" strategies, that is, the practice of filing for patents, such as on derivatives, crystal forms, formulations or new uses of existing medicines, in order to block the market entry of generic producers.

ALTERNATIVE MODELS

According to the paper, high prices of pharmaceuticals, based on the exercise of patent rights, severely affects developing countries where the States' purchasing capacity is low and medicines often need to be paid by the patients themselves, if they can afford them at all.

But high pharmaceutical prices are also shocking patients and creating financial problems to social security systems in developed countries. For instance, 11 of the new drugs approved for cancer in 2012 cost at least $100,000 a year in the USA, where a twelve-week treatment with a patented drug for hepatitis C costs US$84,000.

The declining productivity in pharmaceutical innovation and the unaffordable costs of the patented outcomes of R&D have prompted analyses and proposals for new models of innovation in this field.

Thus, Dr Correa noted, a Consultative Expert Working Group on Research and Development: Financing and Coordination established by the World Health Assembly of the World Health Organization in 2010, produced a set of recommendations in view of the failure of the present incentive systems, in particular, intellectual property, to generate enough R&D in either the public or private sector in order to meet the health needs of developing countries.

Based on the evaluation of close to 100 proposals for mechanisms to promote better financing and coordination of research, the report concluded that an open approach to R&D should be promoted, with the results of R&D being treated as public goods not subject to the exclusive rights conferred by patents.

It recommended new forms of shared financing, direct subventions, prizes and patent pools (to increase access to health products), including, in particular, a legally binding convention on R&D, said the paper.

[The full paper including references can be found at: https://www.southcentre.int/research-paper-70-august-2016/]

 


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