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Solving an Innovator’s Dilemma

Thursday, May 20, 2010

Innovative licensing agreements between Western and Indian drug companies are leading to sustainable profits and increased access to quality medicines.

Over the past decade, the developing world has become the battleground in the global debate about drug patent protection and access to essential medicines. And the debate continues at this week's World Health Assembly in Geneva. Part of the solution, which will unfortunately not likely be discussed at the WHA, is innovative licensing agreements between Western and Indian drug companies.

Until recently there had been much heat and little light in the fights between the governments of India, Thailand, and Brazil, which had threatened innovator companies to lower drug prices or face losing patent protection, and innovator companies, which steadfastly defended their patent rights. The epicenter of the patent and drug access debate is India. The caricature is simple: for health activists, India is the medicine chest to the world’s poor, whereas to Western industry it is often a cheating competitor in the global market.

Since 2005, India has protected most patented medicines and seen a greater than doubling of Western and domestic investment in the pharma business as a result. But certain arbitrary decisions by India’s Intellectual Property Office (IPO) are limiting further investment. In the past two years, IPO has denied patents, which have been granted in every developed economy in the world, on important cancer medicines made by Swiss drug companies Roche and Novartis. Novartis’s cancer drug Glivec was even denied a patent by IPO on the grounds that the drug is expensive—even though drug prices should have nothing to do with granting a patent.

The epicenter of the patent and drug access debate is India. The caricature is simple: for health activists, India is the medicine chest to the world’s poor, whereas to Western industry it is often a cheating competitor in the global market.

But the most bizarre decision IPO made is over Gilead’s drug Viread, known generically as tenofovir disoproxil fumarate (TDF). TDF is arguably the best HIV drug in the world and has become the standard of care in combination with other drugs. Yet, despite a track record showing that TDF is 50 times more effective than any other formulation of the compound, IPO denied the patent, and told Gilead that the drug was not innovative enough.

Nonetheless, Gilead, a pharmaceutical company based in Foster City, California, continued in its efforts to make money as well as increase access to medicines. Even without an Indian patent, it negotiated with 13 Indian companies to make its anti-HIV drug, TDF. This way, Gilead retains its innovator patent rights in rich countries, but helps Indian companies make TDF to sell in the poorest countries. Today, Gilead’s most successful Indian partner is Matrix Laboratories. In 2009, Matrix sold more TDF than Gilead, producing treatments for more than 420,000 patients in the developing world. Matrix’s production costs are about half those of Gilead, allowing the company to make a profit at a far lower price—around $8 per month per patient versus Gilead’s $17.

One may wonder why Matrix paid $2.2 million in royalties to Gilead since the company has no patent protection in India. The reality is that Indian producers of generic drugs continuously struggle to maintain consistent high-quality production standards, which are vital to win large pharmaceutical contracts for the developing world from donors like the U.S. government, the Global Fund for AIDS, Tuberculosis, and Malaria, and the World Bank. Because of Gilead’s technology transfer, Matrix was able to achieve a tentative U.S. Food and Drug Administration approval for TDF within five months—a remarkably short time.

It would be naïve to think that Gilead has found the panacea for pharmaceutical disputes between the United States and India, but its approach is working better than anything else.

By comparison, the Indian firm Cipla, which didn’t sign a deal with Gilead, had to wait 21 months to get approval from the FDA for its version of TDF. Cipla’s product is more expensive than Matrix’s, which had the benefit of efficiency gains made by Gilead. Matrix will benefit from any new product development made by Gilead, so it happily continues to pay the 5 percent royalty on sales. It also monitors the market for poor-quality versions of TDF, valuable vigilance not provided by other generic manufacturers.

It would be naïve to think that Gilead has found the panacea for pharmaceutical disputes between the United States and India, but its approach is working better than anything else at the moment. The advantages are clear for non-confrontational Indian businesses: working with innovators leads to sustainable profits and increased access to quality medicines for poorer clients. Indeed, Hetero Drugs, another Indian generic manufacturer, has started to make TDF under license from Gilead, and two other firms, Ranbaxy and Aurobindo, may soon start commercial production.

Other Western companies are beginning to follow Gilead’s lead, and one hopes the trend accelerates. But arbitrary patent decisions in India don’t help the kind of innovation pioneered by Gilead. After all, making new innovative drugs is not enough; we also need new ways of licensing those products for private benefit and the public good.

Roger Bate is the Legatum Fellow in Global Prosperity at the American Enterprise Institute. Gilead is a corporate supporter of AEI. Bate is the co-author of a paper on India’s drug quality: “A Safe Medicine’s Chest for the World,” which is being published by the International Policy Network and the Legatum Institute on May 18, 2010.

FURTHER READING: Bate recently discussed DDT in “The Excellent Powder,” examined “Investing in India: Art of the Impossible?” and revealed “India’s Counterfeit Claims on Counterfeit Drugs.” He has explained how “India’s Fake Drugs Are a Real Problem,” “Lessons from a Syrian Drug Bust,” and causes and solutions to “Fake Drugs.”

Image by Rob Green/Bergman Group.

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