THE MARKET IMPACTS OF PRODUCT PATENTS IN DEVELOPING COUNTRIES: EVIDENCE FROM INDIA

Transcription

1 THE MARKET IMPACTS OF PRODUCT PATENTS IN DEVELOPING COUNTRIES: EVIDENCE FROM INDIA Mark Duggan Stanford University and NBER Craig Garthwaite Kellogg School of Management Northwestern University and NBER Aparajita Goyal The World Bank

2 Intellectual property in the developing world Highly contentious issue Perhaps most debated sector is pharmaceuticals Low marginal costs and life-or-death in many cases Tradeoff of static and dynamic efficiency Access to treatments today versus Incentive to develop new treatments for tomorrow Nordhaus, 1969 and many others As the value of emerging markets grows so does the importance of governments IPP policy

3 Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) As of 1995, all World Trade Organization (WTO) members were required to adopt TRIPS Among other things, TRIPS required product patent systems for pharmaceuticals Those without existing systems were given 10 years to implement these changes India began to phase in starting in 2005

4 Previous literature on TRIPS Existing literature on effects on price and consumer welfare are primarily prospective in nature Chaudhuri, Goldberg, and Jia (2006) estimate what would occur if domestic firms exit the Indian market Predict % price increases with strong patent system Other estimates have focused on development of new products and found negligible impact Using cross-country data, Kyle and McGahan (2012) find little effect on development of products for neglected diseases This could result from either a lack of profitable opportunities or small actual effects from TRIPS Little micro evidence on actual impact of TRIPS on market structure, prices and quantities in developing world

5 Our setting: Indian Pharmaceutical Market Prior to the TRIPS reform, India s patent law was governed by the Patent Act of 1970 Created a process patent system for pharmaceuticals Effectively allowed legal production of products containing molecules patented in other countries Resulted in robust domestic manufacturing sector Indian domestic manufacturers serves as the drugstore for much of the developing world CIPLA sells ARV treatments in Africa for approximately $1 day Doctors without Borders estimates that 80 percent of the ARV treatments they distribute come from India

6 Our setting: Indian Pharmaceutical Market Given its existing patent law, the Indian market structure was far different from U.S. and other industrialized countries Large number of firms sell and manufacture products containing molecules patented in other countries Would a textbook patent system be implemented? Flexibilities such as compulsory licensing, price controls Threat of regulatory tools could alter patent impacts U.S. per-capita on RX ~ $1,000 versus India ~ $10

7 Predictions of patent effects in India varied Abbot et al, 2005: it is likely that prices of essential drugs will go up significantly once patents are granted. (The Hindu) Dugger, 2001: Indian companies will probably be able to go on making and selling copycat drugs even after (NYT) Chatterjee, The new law will make it far more difficult for poor people across the developing world to access vital drugs. (The Lancet)

8 Lipikind Lipicor Liponorm Lipofix

9 IMS Pharmaceutical Sales Data Sample of approximately 5,100 Indian stockists that covers between 80 and 85 percent of the pharmaceutical market Manufacturer-product-level data for each quarter on the quantity sold and average price paid Data for single molecule products from Comparable data used to estimate effects of U.S. policy changes such as Medicare Part D (e.g. Duggan and Scott Morton, 2010)

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12 Distribution of Molecules in the Indian Market by Number of Manufactures, 2006 and 2011 Number of Manufacturers Percent of Molecules Panel A: 2006 Panel B: 2011 Percent of Sales Percent of Weighted Molecules Molecules Percent of Sales Weighted Molecules % 2.4% 30.1% 2.3% % 1.9% 13.2% 2.0% % 2.7% 9.9% 2.6% 4 7.4% 3.3% 7.4% 3.0% % 10.8% 14.7% 8.1% % 17.0% 12.8% 17.9% % 10.7% 5.2% 13.9% 40% molecules made by more than 5 firms % 6.2% 2.5% 9.8% % 12.1% 1.1% 7.1% 90% of sales weighted molecules made by more than 5 firms % 17.4% 1.7% 15.4% % 6.4% 0.7% 9.7% % 9.3% 0.6% 8.2%

13 Distribution of Firm Molecule Concentration by Molecule Sales Level Panel A: 2006 Panel B: 2011 # of Average firms # of Average firms Molecule sales molecules per molecule molecules per molecule <$100k $100-$249k $250-$499k Number of firms is increasing in sales volume $500k-$999k $1.00mill-$2.49mill $2.50mill-$4.99mill $5.00mill-$9.99mill $10million-plus

14 2005 Indian Patent Reform B/c of TRIPS, India implemented product patents in 2005 From , firms could apply for patents which would be held in a mailbox facility Over that period, 9,000 applications were submitted 7,500 patents were from foreign countries Section 3(d) of Indian patent law intended to only reward new innovation Products patented before 1995 had more stringent requirements Great uncertainty about which products were eligible Recent fight over Glivec the most public example of this point

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18 Indian Patent Data Acquired through partnership with Origiin IP solutions Intellectual property search firm with experience determining the existing patent status in Indian system Exhaustive keyword search of Indian Patent Database Important limitation is that these data are at the molecule and not the product level Not enough information in patent application to reliably merge with product or manufacturer in the IMS data However, our sales data are single molecule products

19 Staggered introduction of patents in next several years 1000 Unpatented Molecule Sales 800 Sales (millions) Patented Molecule Sales 0 01jan jul jan jul jan2013 Year-Quarter

20 Indian market was ripe for large effects from an ideal product patent system Large number of firms making highly profitable products containing the same molecules Intellectual property for these molecules was owned by single firms outside of India Policy-induced price increases could lead to surge in innovation for products that differentially benefit India

21 But that is not what we see. 0-1 Log Price jan jul jan jul jan2013 Year-Quarter

22 [m]ost economists believe that TRIPs represents a sharp shift from the status quo. But maybe not so fast there is a widespread perception that TRIPs flipped the patent switch from off to on in developing countries Like many international agreements, TRIPs includes room for interpretation and, in pharmaceuticals, flexibilities. - Bhaven Sampat (2010)

23 TRIPS flexibilities Great concern about static DWL and higher prices TRIPS provides governments with some tools to mitigate these effects Formal price controls Compulsory licensing Grandfather clause In practice, little use of formal price controls Nexavar compulsory licensing moved price from approximately $5,600 to $180 per month. Even without the formal use of price controls, they can affect firm behavior (Glazer and McMillan, 2002).

24 Empirical Strategy Exploit longitudinal sales data paired with newly gathered molecule level patent data Analysis is at the molecule-year-quarter level Y mt = α m + δ t + λ * t * I{EverPatent} m + β * I(HasPatent) mt + ε mt α m are molecule level fixed effects and δ t are year*quarter fixed effects λ allows patented molecules to follow a different trend I{HasSinglePatent} is an indicator variable for quarters in which a molecule has a patent We also explore if/how pre-trends differ and if/how the magnitude of the effect after patent introduction evolves

25 Key Assumptions Granting of patent unrelated to other factors differentially affecting patented molecules relative to other molecules Examine pre-trends to test the validity of this assumption Estimate additional specifications including only molecules that receive a single molecule patent at some point in study period Assume that firms and customers do not know the exact timing of a patent decision Uncertainty over timing and over whether patent will be granted

26 Effect of Indian Patent Reform on Log Prices HasSinglePatent * QuarterTrend (0.002) [0.500] HasSinglePatent (0.013) [0.033] (0.013) [0.194] Number Molecules 29,845 10,295 Number Observations 1, Mean Dep. Var

27 Examining pre-trends in pricing Our identification assumes that the timing of patent grants was unknown to firms. We test this assumption by examining trends in pricing before and after a patent grant in an event study format. If patents cause the price increase, the pattern of coefficients should be flat before the patent and increasing after

28 Event study estimates for log prices

29 Importance of molecule vintage Indian patent reform treated molecules differently based on their vintage Molecules patented elsewhere before 1995 were not eligible for patents unless they were: Part of a new product A significant increase in therapeutic efficacy Despite this, many patents granted for pre-1995 molecules However, these patents likely will not withstand legal challenges Therefore patents for these older molecules will likely have less of an effect This may attenuate our main price estimates

30 Effect of Indian Patent Reform on Log Prices HasSinglePatent * QuarterTrend (0.002) [0.5] (0.002) [0.455] HasSinglePatent (0.013) [0.033] (0.013) [0.194] 0.01 (0.024) [0.685] (0.012) [0.246] HasSinglePatent * Post (0.036) [0.418] (0.022) [0.031] Number Molecules 29,845 10,295 29,845 10,295 Number Observations 1, , Mean Dep. Var

31 Price event study estimates by vintage Molecules First Sold After Molecules First Sold Before

32 Strength of Patent Small estimates could be driven by patent data containing numerous weak patents even for post-1995 molecules Use data on products patented in the U.S. and applying for patent in India (Sampat, Shadlin and Amin, 2012) We have data on products that receive patents, are denied patents, and have pending patent applications Create two samples with comparison groups composed of pending patents and denied patents Much smaller # of observations

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34 Do Effects Vary by # of Substitutes? Existence of close substitutes could attenuate price effects Two types of substitutes for a molecule-firm combination Treatments in the same therapeutic subclass (~ 300 in our data) Products that contain the same molecule Little difference for treatments with few therapeutic substitutes Compare 0-2 versus 3+ though similar by other measures Larger estimated increase for products produced by just 1 firm May have priced low initially to deter entry (Milgrom and Roberts, 1982) Estimates suggest at 20 percent price increase

35 Distribution of Substitutes, First Quarter 2005 Percentage of Other Firms Selling Molecule Number of Therapeutic Substitutes

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38 Importance of single firm molecules Single firm molecules make up a small fraction of total sales 30% of molecules but ~ 3% of sales Small effect on the average price paid for pharmaceuticals in India May be our best estimate of future effects of Indian patent system New innovations will not have generic competitors when they enter Even in this sample we can rule out effects larger than 38% In U.S. brand versions typically 3+ times more expensive than generic

39 Results suggest patents led to modest price increases ~3 percent increase for average molecule ~6 percent in sample with stronger patents Larger effects for more recent products Largest effects for treatments produced by just 1 firm in 2005 Dramatically lower effects than predicted by many Did it affect market structure and/or concentration of sales? If firms exited and/or entry slowed this could lead to more concentration Little change in average market structure More than 60% of sales-weighted molecules made by 20% firms in both years

40 Effects on market concentration We do not have data linking patents to specific firms in the retail sales data But if changes we observed are caused by patents, there should be a shift in sales concentration We measure concentration using both the # of firms and the molecule level HHI

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42 Event study estimates on sales concentration

43 Concentration event study estimates by vintage Molecules First Sold Before Molecules First Sold After

44 Summary of Concentration Results Significant pre-trend in # of firms among those with a patent But no such trend for HHI - mainly fringe entrants Little change in # of firms producing Baseline average of 15.2 in the ever patented sample Statistically significant increase in HHI But just 2 percent of average baseline HHI Estimate of.014 consider change from 9 to 8 equally sized firms

45 Do (modestly) higher prices affect the quantity sold? Demand curve for pharmaceutical products is presumably downward sloping Magnitude of this elasticity is unclear Increased prices need not result in decreased quantity Firms could undertake activities to shift demand curve (i.e. advertising) Large declines possible even with modest price changes because of important retail distribution networks

46 Effect of Indian Patent Reform on Log Daily Doses HasSinglePatent * QuarterTrend (0.005) [0.064] HasSinglePatent (0.036) [0.129] (0.035) [0.334] Number Molecules 29,853 10,295 Number Observations 1, Mean Dep. Var

47 Event study estimates for log quantity

48 Effect of Indian Patent Reform on Log Quantity of Daily Doses HasSinglePatent * QuarterTrend (0.005) [0.064] (0.0044) [0.044] HasSinglePatent (0.036) [0.129] (0.035) [0.334] (0.07) [0.909] (0.034) [0.858] HasSinglePatent * Post (0.112) [0.332] (0.062) [0.439] Number Molecules 29,853 10,295 29,853 10,295 Number Observations 1, , Mean Dep. Var

49 Quantity event study estimates by vintage Molecules First Sold After Molecules First Sold Before

50 Results for U.S. Patent Sample Patents in this smaller sample granted only to U.S. firms Effective patents may shift production to foreign firms with limited distribution networks May cause a non-price related decline in quantity sold Examine changes in quantity sold Estimates suggest relatively large effects

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52 Discussion and Welfare Effects Static effects of TRIPS-induced patent reform modest Limited impact on today s consumers or on domestic firms The two primary concerns of policy makers at the time May help to explain small effect of TRIPS on new drug introductions (Kyle and McGahan, 2012) The key benefit pointed to by proponents of TRIPS Future work could explore effects on India s exports Actually larger in $ terms than domestic sales