How can developing countries get access to patented pharmaceuticals and other products at reasonable prices if they are required under World Trade Organization (WTO) rules to offer patent protection at a level that is commensurate with that which exists in developed countries?
New research by Eric Bond and Kamal Saggi, published in the May 2018 issue of the Economic Journal, analyses the effects of the WTO”s trade-related intellectual property rights (TRIPS) agreement on negotiations between developing countries and patent-holders.
The TRIPS agreement requires all WTO members to provide a minimum level of protection for all major types of intellectual property such as patents, copyrights and trademarks. Prior to the ratification of TRIPS in 1995, many developing countries did not provide patent protection and allowed local producers to imitate patented products.
To ensure that developing countries can get access to patented products, TRIPS allows compulsory licensing to produce a patented product if the patent-holder fails to supply its market within a reasonable period of time. In the event of compulsory licensing, TRIPS also requires that adequate compensation be provided to the patent-holder.
To date, most compulsory licensing has involved patented pharmaceuticals and it has served as an important channel for ensuring access to patented drugs in developing countries.
The researchers argue that the key trade-off facing developing countries in choosing whether or not to provide patent protection is between providing local consumers high-priced patented products and cheaper imitated goods that can often be of lower quality.
They show that prior to the TRIPS agreement, it was in the interest of developing countries to provide patent protection only if the quality of imitated products was fairly low and the local market was sufficiently small so that patent-holders would not enter without patent protection.
For countries with relatively large domestic markets, however, patent protection was unnecessary because patent-holders would have been willing to enter despite facing competition from imitators.
The analysis shows that the level of patent protection prior to TRIPS was below the socially optimal level because developing countries ignored the effect of their decision on the profits of patent-holders.
The absence of patent protection prior to TRIPS made compulsory licensing an unnecessary instrument for developing countries, because imitators could produce patented foreign products without requiring a licence. In fact, the analysis shows that when developing countries were free to allow local imitation, the option of using compulsory licensing could actually make all parties worse off by reducing their incentives to offer patent protection.
The key underlying insight is that developing countries are better off under imitation relative to compulsory licensing and therefore have an incentive to pre-empt the possibility of a patent-holder resorting to compulsory licensing by not recognising the patent. After all, the issuance of a compulsory licence is premised on the legal recognition of the underlying patent.
The TRIPS requirement that developing countries provide patent protection made developing countries worse off and patent-holders better off, because it raised prices of patented products by preventing imitators from providing competition for patent-holders.
The authors show that the extent to which the loss to developing countries is mitigated by the ability to issue a compulsory licence depends on the characteristics of the country”s market:
• For countries with markets sufficiently profitable that a patent-holder would have entered without a patent, TRIPS primarily benefitted patent-holders by eliminating competition from imitators.
• On the other hand, for cases where the market would not be served without the compulsory licence, both parties could benefit: the developing country receives access to the product via a compulsory licence; and the patent-holder receives some royalties for its product as required by TRIPS.
The authors also consider the case in which the government of the developing country negotiates a price ceiling for which the patented product is to be sold in its market. The effect of the compulsory licence in this case depends on the relative bargaining power of the two parties during negotiations over the price ceiling:
• If the patent-holder has all the bargaining power, then the government is able to use the threat of a compulsory licence to lower the price of the patented product.
• If the country has all the bargaining power, the royalty payment required by TRIPS benefits the patent-holder by providing a minimum level of compensation that it must receive for entering the market.
Thus, the ability to issue a compulsory licence primarily benefits the party whose bargaining position during price negotiations is relatively weaker.
Eric Bond and Kamal Saggi are at Vanderbilt University.
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