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Pharmaceuticals:
The role of biotechnology and patents
By
Jérôme Dumoulin
 
 
 
Keywords:  Drugs (human); Vaccines (human); World Health Organization (WHO); World Trade Organization (WTO); Patent law.
Correct citation: Dumoulin, J. (1998), "Pharmaceuticals: The role of biotechnology and patents." Biotechnology and Development Monitor, No. 35, p. 13-15.
 
The world market for pharmaceuticals shows a clear division: products are developed for industrialized countries promising high profits whereas developing countries are still in need of basic health care. While advancements in biotechnology have a drastic impact on drug development in general, changes in intellectual property protection will especially influence the health care policies of developing countries.

The expenditures on pharmaceutical products give an impression of the level of wealth of countries. In general, all countries dedicate between 0.5 to 1 per cent of their gross national product to drugs. But while 80 per cent of the world population lives in developing countries, they account for only 20 per cent of the world expenditure on drugs.
In many developing countries, the most essential health products against contagious diseases such as diarrhoea and respiratory diseases are often not accessible and affordable for the population. The World Health Organization (WHO) defines essential drugs as substances that satisfy the health care needs of the population of a country. Essential drugs should therefore be available at all times in adequate amounts and in the appropriate dosage forms. The WHO reported that in about one third of the developing countries less than 30 per cent of the population has access to the essential drugs, and in another one third of these countries, access is limited to only 30 to 60 per cent of the population.
At the same time, the treatment of the Human Immunodeficiency Virus (HIV) infection by anti-retrovirals is counted in tens of thousand US$ per annum. It is thus obvious that for these products developing countries are an unattractive market. Countries with an annual gross national product per capita under US$ 1,000 do not have the resources to pay these prices. Moreover, to use the new drugs, sophisticated diagnosis means are needed which are largely unaffordable in developing countries. For instance in the case of HIV treatment, to the very high cost of anti-retrovirals at least the HIV diagnosis and the counting of CD4+ cells must be added (see also Monitor No. 30).
In developing countries priority is given to the procurement of existing essential drugs and not to the purchase of new drugs which rarely concern local diseases. Since 1975, among the 1,219 newly developed drugs that entered the world market, only 11 focused on tropical diseases such as malaria, river blindness or worm infections.

Therapeutic innovation and intellectual property rights
Drugs can be categorized according to their degree of therapeutic innovation and their status of intellectual property protection.
* New Chemical Entities (NCEs) are newly developed drugs, characterized by their therapeutic innovation. An innovation may be substantial when it completely changes a therapeutic field. This is, for instance, the case with vaccines against hepatitis B because so far there is no efficient drug to cure this disease. Companies specializing in NCEs invest heavily in product research. In the USA, pharmaceutical companies’ research budgets may reach over 20 per cent of their revenues. The US Pharmaceutical Manufacturers and Research Association (PhMRA) states a figure of US$ 500 million per NCE. In spite of the use of more rational methods the costs of research and development (R&D) per NCE have soared in 30 years. But the causes of this growth and the real average cost of R&D per NCE are not precisely known. In fact DiMasi, who published the most thorough company financed study on this point found a considerably lower figure of US$ 231 million. Yet the DiMasi study overestimates the companies’ expenditures for R&D per NCE, for instance by including outlays made by public funds such as the US National Institute of Health (NIH).
Such debates on the cost of R&D are not merely academic, in so far as companies use them to legitimate the prices of NCEs which now are commonly 50 per cent higher than production costs. It is therefore an indispensable prerequisite for pharmaceutical industries to protect their products by intellectual property rights such as patents. In developed countries, patent protection generally lasts for a period of 20 years from the date of filing the patent. In reality, this protection period is often shorter, because regulatory approval of a drug can delay its marketing for several years after the patent is granted.
* Me-too drugs are only a variation on existing drugs that are already under patent protection. The therapeutic innovation of these substances is low or zero. They have comparable medical benefits, but they circumvent patents on NCEs and allow the producers to get a share of the market. This is the case, for example, for many new products developed in industrialized countries for the treatment of hypertension.
* Generics are copies of well-known drugs for which patent protection has expired. Companies specializing in generics invest little on research, or only on research in manufacturing procedures. The benefit of generics for consumers essentially lies in the price, which are usually 30 per cent below those for patent protected NCEs. All over the world, the share of the market of generics is growing. For instance, in the USA over 50 per cent of the prescriptions concern generics.

Prices and patents
With the advent of new biotechnologies, methods for developing NCEs have changed rapidly in the last thirty years. Then, from the 1980s onwards, biotechnology also allowed new approaches in the production of drugs; genetically modified micro-organisms were employed to produce desired proteins with complex molecular structures, such as human insulin, which could not be synthesized through classical chemical methods. These changes in creating new drugs coincided with new methods in evaluating them. Mainly through the development of pharmacology the efficiency and security of new drugs can be determined with increased precision. Drug evaluation is often very time-consuming and costly. For recombinant tissue plasminogen activator (rTPA), a drug which is used to dissolve blood clots after acute heart infarction, two studies, each involving over 40 000 patients, were needed to prove its efficiency compared with that of an alternative drug, streptokinase. The heavy costs of these clinical tests bring up the question of who owns their results, once the patent is expired. In fact, the protection period for these data adds to the patent period. US law grants a protection of data for five years after the expiry of the patent before competitors can use it. In Europe this period varies in different countries, and the European Commission aims at a ten year protection rule.
Pharmaceutical manufacturers have always relied on various biological methods, for instance for serum and vaccine production. However, the importance of biotechnological methods for this industry is steadily increasing. An important factor is the knowledge of the genome of both micro-organisms and humans which opens new vistas into the conception of drugs and vaccines. Should this knowledge of the genome be patented, the patent holders would have exclusive rights to its exploitation. As the UK newspaper The Guardian reported in May 1998, the US company Human Genome Science (HGS) has applied to patent one of the bacteria that causes meningitis. The application is one of three filed at the European Patent Office by HGS who are seeking to be the first to own the whole genetic sequence of bacteria. If the application is granted, as seems likely, it will open the door for commercial companies to patent any life form from which profits are expected. It could lead to royalties being paid on every treatment if a new vaccine against the illness is found. The prospect has appalled scientists in the field, who believe discoveries should be shared for the common good and that the scramble for patents for commercial gain will damage research.

Multinational companies and pharmaceutical production in developing countries
In 1996 the first ten multinational companies (MNCs) accounted for approximately 36 per cent of the world pharmaceutical sales of US$ 251 billion (see also table). The position of MNCs in pharmaceutical production greatly differs among various developing countries.
* In countries such as Brazil, Chile, Morocco, Pakistan, the Philippines, South Africa, and in Sub-Saharan Africa, national policies have invited MNCs to manufacture locally part of the drugs as a form of import-substitution policy. The biggest share of the national markets is held by MNCs who produce locally or through licensed local companies. This production is based on imported bulk chemicals. As a consequence, prices for drugs in these countries are often higher than in industrialized countries. The generated profits contribute to the research investment of MNCs, which do not meet the developing countries’ most urgent needs. Pricing strategies by MNCs in these countries seem focused on the wealthier layers of the population, without any systematic price discrimination in favour of the poorer population. Some drug donations or dumpings widely advertised seem to be more cosmetic operations than basic elements in their price strategy. For instance, in March 1998 Glaxo Wellcome (UK) announced that it would sell its anti-HIV drug AZT for 70 per cent below the normal price to pregnant women in developing countries.
* In other countries, such as Argentina, China, Egypt and India, national policy has enabled a locally financed pharmaceutical industry which is almost exclusively engaged in manufacturing generic drugs. In these countries MNCs have a weaker position. For instance in India, MNCs hold only a 20 per cent market share. Some of the national companies have important capacities in R&D aiming at manufacturing processes for already known drugs. These countries have been able to develop a bulk drug industry for antibiotics and some chemical products competitive in quality and price and export them into industrialized or other developing countries.
India is an exception because R&D efforts have also led to the development of NCEs such as vaccines against leprosy and hepatitis B, and anti-cancer drugs. In general, drug prices are very low in these countries since prices rather than innovation are the priority within the national drug policies. India holds a record, with prices for many drugs 10 to 100 times lower than in developed countries.

The world’s top ten pharmaceutical companies
Company 1996 Pharmaceutical sales  
(million US$)
Pharmaceutical sales as  
per cent of total revenues
  Glaxo Wellcome (UK) 
13,026 
100 
  Merck & Co. (USA) 
11,617 
59
  Novartis (Switzerland) 
9,858
34
  Bristol-Myers Squibb (USA) 
8,702
58
  Hoechst Marion Roussel (Germany) 
8,652
26
  Roche (Switzerland) 
8,462
65
  Pfizer (USA) 
8,188
72
  American Home Products (USA) 
7,924
56
  SmithKline Beecham (UK) 
7,431
60
  Johnson & Johnson (USA) 
7,188
33
Source: Scrip’s 1997 Pharmaceutical Company League Tables. RAFI Communique November/December 1997.
 
Health or trade first?
The Uruguay Round negotiations, which concluded in 1994 with the establishment of the World Trade Organization (WTO), again launched a debate on the best means to foster essential drugs procurement. Within this framework, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) settles a minimum standard for national regulations on patents. It compels developing countries to re-write their patent regulations before the year 2000 and the least developed countries to do so before the year 2005. The Agreement sets out that patents must grant protection for at least 20 years after the date of patent application, both for products and processes. The Agreement thus settles the long-standing conflict over pharmaceutical product patents. PhMRA claimed that the US pharmaceutical industry loses US$ 500 million annually only through a lack of patent protection on drugs in India. Although many developing countries began to enforce patent protection for pharmaceutical products in the late 1980s, the majority only recognized process patents in this field. Countries like India, Argentina and those from the Middle East emphasize that this trade agreement will carry severe consequences on their national pharmaceutical industries specialized in manufacturing generics and improving production processes. It is feared that this Agreement will cause an important rise of drug prices which makes them less affordable to their populations.
Other positions were based on case studies in India, arguing that the general level of drug prices will not be heavily affected, because less than 10 per cent of drugs would be under the monopoly of licensed drug manufacturers. Following this argument, all depends on the way these agreements are applied, on the accompanying measures to be taken, as well as on the policies implemented by MNC and local companies.
A careful reading of the TRIPS Agreement shows that it leaves significant space to manoeuvre on different strategic points. National patent laws can serve the purpose of the WTO to spread technologies. At the same time they should protect consumers and not only inventors. For example, member states have the opportunity to exclude diagnostic and therapeutic methods for humans and animals from patenting. States can urge patent holders to license their patents in order to favour competition. For the same purpose the possibility of parallel importation is left open: a country can also import a trademark or patented product from another country where it is legally protected.
Governments may also have broader development concerns. Only a few developing countries are able to develop a R&D activity on drugs enabling them to create NCEs. Patent holders will therefore be in most cases foreign enterprises, and the development of national industries will depend on the willingness of these companies to license their new patented products.
As reflected by examples from India and China, the few developing countries’ pharmaceutical industries which are competitve will not necessarily develop drugs targeted towards developing countries. Instead, they will probably aim at the more profitable world market, as MNCs do.
This shows the importance of a publicly funded research dedicated to meet the most urgent needs in public health. The issue on patents cannot in itself give orientation to health care research policies. Patents are unavoidable as they induce companies to innovate, but their regulations must be balanced by public health imperatives.
Jérôme Dumoulin

Institut de Recherche Economique sur la Production et le Développement, Université Pierre Mendès France BP 47, F-38040 Grenoble Cedex 09, France. Phone (+33) 4 76 82 54 50; Fax (+33) 4 76 82 59 89; E-mail jerome.dumoulin@upmf-grenoble.fr

Sources
K. Bala, O. Lanza and S.R. Kaur (1998), "Retail Drug prices: The Law of the Jungle". HAInews, nr. 100.

R. Ballance, J. Pogany and H. Forstner (1992), The World’s Pharmaceutical Industries. An International Perspective on Innovation, Competition and Policy, prepared for the United Nations Industrial Development Organisation. Cheltenham, UK: Edward Elgar Publishing.

J.A. DiMasi, R.W.Hansen, H.G. Grabowski, et al. (1991), "The cost of Innovation in the Pharmaceutical Industry", Journal of Health Economics 10: 107-1421.

South Centre (1997), The TRIPs Agreement. A Guide for the South; The Uruguay Round Agreement on Trade-Related Intellectual Property Rights. Geneva, Switzerland: South Centre.

US Congress, Office of Technology Assessment (1993), Pharmaceutical R and D: Cost, risks and rewards. OTA-H-522. Washington DC, USA: Government Printing Office.

World Health Organization (1988), The World Drug Situation. Geneva, Switzerland: WHO.



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