Nobel laureate in Economics, Professor Joseph Stiglitz of Columbia University (USA) strongly argues against US pressure on India’s intellectual property regime. Below is an interview with him and his colleagues Dean Baker and Arjun Jayadev by Rema Nagarajan published in the Times of India on 1 March 2015, which Southnews reproduces with appreciation to the Times of India.

You have often written that patent monopolies are economically inefficient. Why?

Monopolies arising from patent protection are economically inefficient in the same way that any other monopoly is, they lead to higher prices than would be seen in a competitive market. We tolerate this inefficiency in order to encourage private actors who might otherwise be unwilling to undertake the effort and expense to innovate. But we limit this period of monopoly so that the knowledge associated with innovation is publicly available for future innovators to use. Public policy is always trying to balance the need to provide a return to innovation and access to knowledge. We tolerate a known inefficiency in the short term to (hopefully) generate a system that is more innovative in the long run.

You have also said patents stifle innovation. How do they do that?

If patent rights are too strong and maintained for too long, they prevent access to knowledge, the most important input into the innovation process. In the US, the 20 year limit on patents, rules of disclosure, and the Hatch Waxman Act in the case of generics represented an attempt to forge a balance so that patents could be added to public knowledge while compensating innovators for innovation. There is growing recognition that the balance has been too far tilted towards patent protection in general (not just in medicine). The growing problem of patent trolls is an example of this. Firms have to maintain a buffer to protect themselves against lawsuits by patent owners who may never have intended to produce a product at all and who discovered a very small part of complex products.

For a developing country like India with a limited public health budget, what is the optimal approach to intellectual property? Would US-style intellectual property protection support India’s public health goals and needs?

India will have to decide on its intellectual property stance in other industries, but with respect to public health, it seems obvious that it is not in its interest to pursue stronger patent laws. India has already increased patent protection on medicines relative to a few decades ago by acceding to the TRIPS agreement. Greater intellectual property protection for medicines would, we fear, limit access to life-saving drugs and seriously undermine the very capable indigenous generics industry that has been critical for people’s well-being in India and other developing countries.

The government would face impossible choices: spending more money to provide the drugs that people need for their survival, taking away money that could be used for education or other developmental objectives, or letting people die.

Has the US patent system hurt the people of the US? How?

There are several examples of the ways in which tilting the balance towards greater patent protection has been detrimental to ordinary people in the US. A prominent example is of Utah firm Myriad Genetics that isolated and patented two human genes that can contain mutations that predispose women to breast cancer. Information about whether you carry the gene is critical for early detection and prevention. The patent also allowed it the right to prevent others from testing for these genes. Although the test can be done very cheaply, women were unable to do so at an affordable price because of the patent. They even prevented Yale University from administering a test that was more effective than their own test. Some would surely die because of this lack of information or others be severely financially penalized to simply find out whether something they actually ‘own’ (their own genes) are present in their body because it is the property of a corporation. There is a growing sense that in many areas America’s unbalanced intellectual property regime is even impeding innovation, for instance, as a result of “hold-ups”, patent trolls that use the patent system to extract large payments under the threat of litigation from the real innovators. Courts, including the US Supreme Court, have been trying to reassert greater balance into the intellectual property regime, but unfortunately, the USTR typically takes a one-sided view.

What would be the impact of adopting data exclusivity in India as the US is demanding?

Data exclusivity is in many ways a stronger form of monopoly protection than patents. During the process of approval of generics, drug regulators rely on prior clinical data showing that a drug is safe and effective. Data exclusivity prohibits such reliance for a certain period of time. This means that a generic producer seeking approval during the period of exclusivity (which could be from 5  to 12 years if the U.S. government gets its way) would have to perform its own clinical trials. This would be expensive and unethical since a new clinical trial would mean giving patients a placebo when a safe and effective drug is available. For this reason, data exclusivity can be a more effective obstacle to competition than patents, since it is often possible to innovate around a patent.  The effect will be higher prices. Data exclusivity can effectively extend monopoly protection for patented drugs and create a monopoly for an off-patent drug. High prices also give drug companies more incentive to misrepresent the safety and effectiveness of their drugs. While pharmaceutical companies may claim that high profits give them greater incentive to research new drugs, it is unlikely that such R&D would be directed at the public health needs of developing countries and any hypothetical gains will likely be dwarfed by the additional costs of delayed generic competition and unhealthy marketing practices stemming from the perverse incentives created.

A recent announcement by Joseph DiMasi put drug development costs at USD 2,558 million. How are these estimates arrived at in the absence of public access to the accounts of pharma companies? What is your opinion of such estimates?

There are many difficulties with the DiMasi cost estimates. First, it is important to note that his cost estimates are only for a small minority of new drug approvals. The vast majority of new approvals are combinations of known compounds. A substantial share of new compounds relies on at least some publicly funded research.

Second, his data for preclinical cost are based on proprietary data from major pharmaceutical companies. This should at least be a basis for caution, since these companies clearly have an interest in showing a high cost. Third, over 45% of his $2.6 billion figure is based on implicit interest costs as he imputes an 11% real return. This figure is certainly on the high side. Few investments provide an 11% real return in the world today. We know this since large companies can readily borrow long-term at 2-3% real interest rates. If they expected returns of 11%, we would be seeing a huge investment boom.  Finally, DiMasi’s analysis, and his prior work, implies that the cost of developing new drugs has been rising at an 8.5% real rate over the last decade. This does not speak well for the current method of financing drug research. Overall, much of the cost of drug development is typically attributed to testing. But we know that the way testing is done in the US is very inefficient—and is in fact part of the drug marketing program. Not only is the system inefficient, the drug companies have distorted incentives—to show that their drugs are safer and more effective than they really are.

How feasible is it for any US president in general or Obama in particular to stand up to the pharmaceutical lobby in the US?

The pharmaceutical industry is a powerful political force in the US. However, there are, in principle, powerful actors that could go against them. In a context where health spending (both public and private) is running up against constraints, other health care providers such as hospitals doctors, insurers, may view it as being in their interest to reduce the cost of drugs. In addition patients obviously have an interest in paying less for their drugs. Of course many people do not realize how much the drugs actually cost since they don’t see the full amount paid by the government or their insurers. Interestingly, already over 80% of all drug sales in the US are generics.

Whose interest does the office of the US trade representative (USTR) serve when it pressurizes India through its Special 301 report to push for stronger intellectual property rights?

Clearly, the direct beneficiaries are the US pharmaceutical industry. It can be argued that by increasing industry profits there will be more incentive to innovate, but this chain of causation is weak at best. It is also worth noting that from the standpoint of U.S. workers, higher drug prices may be seen as a negative, since they may crowd out other U.S. exports. The logic is that, other things being equal, the more India pays the U.S. for drugs, the higher will be the dollar relative to the rupee. This will make other U.S. products relatively more expensive for people in India, meaning they will buy less non-drug exports from the United States. Interestingly, though the USTR has often talked about jobs, the link between its position on these issues and jobs is at best weak. The drugs that are covered may actually be produced outside the US—and even the research can be conducted outside the US. This is about profits of Big Pharma—not jobs, innovation, or health.

What are the dangers in developing countries like India signing bilateral trade agreements with developed countries or joining mega-FTAs like the Trans-Pacific Partnership Agreement?

The biggest problem is a lack of transparency. These deals are negotiated largely behind closed doors. They will then be brought out for national parliaments to approve on an all or nothing basis. It is possible that there will be many economically beneficial parts of these agreements (although that cannot be taken for granted), but there will certainly be many items that will be disadvantageous.

The interest groups who stand to benefit from the positive parts of the agreement can be expected to lobby intensely for the deal’s acceptance. If those who stand to lose from the agreement are a diffused group, for example patients who can expect to pay more for drugs, they will find it difficult to organize effectively. In this way, India and other developing countries may find themselves signing on to agreements that produce more losers than winners.

The worst provisions in these FTAs are those related to intellectual property and “investment protection,” which pose a risk for regulations intended to protect health, the environment, workers, and consumers.

What will be the implications for India and the developing world if India buckles under the pressure of the US to change its current IP regime? Historically does higher intellectual property protection benefit domestic companies in developing countries?

There is no evidence that higher intellectual property protection benefits domestic companies in developing countries or results in more investment, innovation, or job creation. We are particularly concerned in the medium term that this will have a really detrimental impact on the availability of low-cost medicine in India and across the world. It is highly unlikely, in our estimation, that increased levels of intellectual property protection for pharmaceuticals are going to incentivize the generics industry to develop new molecules itself. More likely, such a policy will squeeze new lines of products, making new medicines less affordable and making the generics industry less profitable in the medium term.

Joseph Stiglitz is Nobel laureate in Economics and Professor of Economics at Columbia University.

Dean Baker is co-director of Centre for Economic and Policy Research in Washington, DC.

Arjun Jayadev is Associate Professor of Economics at University of Massachusetts, Boston and Faculty at Azim Premji University, Bangalore.

Source: SOUTHNEWS, No. 86, 15 April 2015

South Centre: www.southcentre.int.