Health, Patents and Innovation: The Pharmaceutical Industry in Latin America
By Santiago Remón; Reviewer, Franco M. López, Fundacion BASES
We have long understood health as a basic human need. The pharmaceutical industry, that business sector dedicated to the manufacture, preparation and marketing of medicinal chemicals for the treatment and prevention of diseases, has played a very important role in health care for some centuries now. There is virtually no doubt about the enormous benefits that the pharmaceutical industry has brought to the human race throughout history in terms of health. This is particularly due to research and development in the industry, which allows new treatments for new or existing pathologies to be found. These benefits that we have seen in the last centuries are not only a thing of the distant past, recent studies indicate the enormous gains we have had in recent years in the life expectancy and quality of life of people suffering from certain diseases, which also translates into an enormous economic gain for the entire population.
Just as an example we can see several studies that show the effectiveness that the new drugs had in the last decades: a review paper (3) that looked at more than 30 studies concluded that when a new drug is introduced into the market to replace one that has been on the market for 15 years, there is a considerable drop in healthcare spending due to reduced hospitalizations, as well as finding greater efficiency and huge savings in treatments for specific diseases such as cancer and cardiovascular disease, and in vaccines. Another report published by the American Cancer Society in January 20204 states that between 2016 and 2017 the cancer mortality rate in the United States fell by 2.2%, which is considered by specialists in that country to be “the greatest decrease in cancer mortality in a single year on record”; this same work indicates that since 1991 this indicator has fallen by an incredible 29%.
This represents not only the obvious gain in terms of human capital, but also a very high gain in economic and productive terms, but losing lives is as much a tragedy for families as it is for a country. Thanks to innovation in the pharmaceutical industry, the potential number of years of life lost is decreasing. (5)
This level of innovation in the industry is made possible by the enormous costs incurred by companies in the area of Research and Development (R&D). If we consider the expenditure of the first 50 most important companies in the world, we find annual investments of approximately 116.9 billion US dollars. On a global level, total investment in R&D amounts to 16.4% of total sales (6), it is important to note that this type of investment involves a high degree of uncertainty because the results, which nobody assures will be positive, will be perceived many years later, since the development and approval of a new drug takes more than a decade.
Once a new active ingredient is identified, in order to turn it into a new pharmaceutical product, several stages must be completed, including pre-clinical, clinical and formulation studies, with the aim of testing the drug’s safety and efficacy. The entire process can require an investment of around 2.5 billion dollars and take between 10 and 15 years from the start of research to market launch. (7)
It is also important to highlight the impact that the industry has on the economy of countries, producing a high added value and generating a large number of highly qualified jobs. In a study carried out in Spain, it was estimated that for every job directly generated by the pharmaceutical industry, another 4 jobs were created in the rest of the national economy. According to these estimates, only 20% of the total employment generated by the pharmaceutical sector in the Iberian country represented direct employment, while indirect and induced employment represented 48% and 33%, respectively.
A patent is a right granted by the government to an inventor. This right allows the patent holder to prevent third parties from making use of the patented technology. Only the patent holder can make use of the patented technology or authorize third parties to use it on his terms. Patents have a deadline, after which anyone who wishes to do so may use the patented technology without the inventor’s consent, i.e. it becomes public property.
The very notion of the patent system is a relatively new fact, particularly in Latin America the legislation corresponding to property rights was poor or non-existent during the 20th century and even more so with regard to the pharmaceutical industry. In 1994, the Marrakesh Agreement during the Uruguay Round created the World Trade Organization, where its member countries ratified a series of agreements, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which linked public health to intellectual property rights by extending protection to all fields of technology. (8) This agreement, which since 29 July 2016 has 164 member country accessions, laid the foundations for countries to then legislate on intellectual property on their territory and provided the entire intellectual property system in the world with a certain uniformity. Currently, all Latin American countries adhere to the binding agreement with the World Trade Organization (WTO).
What this agreement determines is that any sector of technology, without discrimination and regardless of whether the products were imported or produced locally, can obtain a patent for the period of 20 years as long as it meets the three universal criteria for patentability: it must represent absolute novelty, i.e. a new feature that is not part of the existing body of knowledge in its technical field; inventive step, i.e. it must not be obvious to a person skilled in the art; and industrial application, i.e. it must be capable of being reproduced and used for commercial purposes. (9)
In addition, a period of protection of undisclosed information lasting five years is included for pharmaceutical products, since any company wishing to market a new pharmaceutical product must provide the public authorities with the relevant scientific and technological information, as well as the data corresponding to clinical trials demonstrating effectiveness and safety. (10) There are also definitions of non-patentability, which state that methods of surgical or therapeutic treatment of the human or animal body, or diagnostic methods applied to the human or animal body will not be considered as inventions susceptible to industrial application.
Despite the fact that all Latin American countries adhere to the uniform international system that frames the TRIPS Agreement, laws regarding the patentability of new medicines are dictated internally and patent rights are granted by national governments exclusively within each territory, so there is variability between countries in the effective respect of property rights based on their legislation. (11)
However, not all the pharmaceutical industry allocates its resources to the inventive development of drugs. A distinction can be made between two large economic blocs within the industry: the innovation laboratories and the generic laboratories. Generic laboratories develop their business model based on the work already done by other pharmaceutical companies, because it involves the reproduction of drugs that, either due to the passage of time or because they have not been registered nationally, do not have patent protection and can be produced on a large scale by any company that meets the requirements and processes of each drug. This market is highly competitive, given the relatively low costs required to imitate and reproduce existing drugs. As the active ingredients of the drug are the same in any of the brands, the only competitive advantage that the producing company has is the brand, which translates into hard competition that slowly erodes prices. After a drug is stripped of the patents that protected it, generic drugs quickly enter the market, and the gradual price reduction mentioned above takes place. (12)
Objections to the patent system
One of the main objections to the patent protection system, and perhaps the one we see most often in this type of debate, is that by giving the monopoly on the use, production, distribution and marketing of a drug to the company that innovates it and allowing it to set its prices freely without any competition, there may be an abuse of this power and effectively impose very high prices that constitute an obstacle to access to health. But in taking this position, some errors or omissions in the analysis are made which are fundamental to understanding a complex issue such as the one addressed.
One of the mainly misunderstood arguments is that the patent system mitigates a market failure. As mentioned above, the innovative process of a new drug involves very high research and development costs that are not recoverable. The very nature of the pharmaceutical industry requires the dissemination of the product’s technical data and the work behind it in order for it to be approved. The dissemination of methods and active ingredients without protection means that multiple competitors can enter the market and take advantage of the costs incurred by the innovating company. What the patent system does here is to allow a company that has invested resources for more than a decade, with a high degree of uncertainty, to be rewarded for its efforts, to recover costs and to incur profits, thus providing the main incentive for innovation. Without this mechanism we would not have seen any of the enormous advances in medicine and pharmacology that have taken place over the last few decades. Furthermore, it should be mentioned that although patent protection has a 20-year duration, what actually happens is that this time is counted from the date the application is filed and not from its commercialization. Therefore, if the time it takes to approve the application and the time it takes to register the product for commercialization with the corresponding body in each country is taken into account, the effective duration of patent protection in reality is approximately 7 to 10 years (13) depending on the country.
Another unjustified fear that corresponds to the analysis of the pricing issue and which constitutes a great bias, is the fact that we tend to think that the potential high prices of medicines will be reflected in already existing medicines. This is completely misleading, as the patenting system is designed exclusively for innovative medicines which are still within the protection period or for medicines which do not currently exist on the market and meet needs which are currently unmet. If the patent system succeeds in providing an incentive for new medicines to be discovered and therefore the needs of millions of people are met, then the whole population will be in a better position to benefit.
The last of the arguments against the patent system, which in turn is widely seen in other sectors of the economy and represents a strong lack of knowledge about economic laws and how actors in a society behave, is the International Reference Pricing (IRP) or the International Price Index (IPI). When we talk about IRP or IPI, we are talking about price controls by governments. The stated objective of these measures is to democratize access to pharmaceutical products and to ensure that as many people as possible can have their medical needs met. At first sight this is a laudable goal, but it presupposes a lack of understanding about what prices actually work and what role they play in people’s lives. The prices of any good or service are signals. These signals determine how much individuals in a market value the good or service, leading other business-minded individuals to move existing resources from a less efficient location to a more efficient one. (14) To understand it from the supply and demand side, what prices do is move both supply and demand so that they can find their equilibrium point in a free market. When these signals are artificially modified by governments, market actors do not perceive that information to be wrong and act on the information provided to them. For example, if for some reason the price of a certain good or service is artificially high, what will happen is that producers will waste resources producing goods that people do not value as the signals (prices) say, conversely, if the price of a certain good or service is artificially low, consumers will demand more of the good and the available supply will not be able to satisfy the demand resulting in the already known shortages.
Every time the government intervenes in prices, of whatever kind, it distorts these signals, breaks the equilibrium point and imposes inefficiencies on the market. Subsequently, the part of society who values the good or service that was controlled will suffer the consequences of this intervention. Many times the consequences are not instantaneous, however, which gives governments the possibility of not paying the political costs of intervening unilaterally in the market, and making future governments and other actors in society pay that cost in the future, harming the sectors with fewer resources the most.
What in principle seems a noble idea is nothing more than a highly counterproductive option in achieving its objectives. In short, a price control would effectively lower the prices that citizens have to pay for a drug, but this would entail other costs associated with much greater potential savings: the destruction of part of the incentives required to innovate would lead companies to reduce their R&D budgets and this would translate into fewer innovative drugs in the future and a lower quality of life.
Latin American scenario
The situation of most Latin American countries in terms of property rights is not good, nor is their performance compared to the rest of the world in terms of the number of patents and innovation. According to the latest report by the World Intellectual Property Organization (WIPO) (15) the Latin American region covers the tiny 0.6% share of worldwide patent applications by 2019, a trend that is repeating itself every year. Focusing exclusively on the pharmaceutical industry’s patents, the numbers are not good either. By 2018, according to the WIPO IP Statistics Data Center, only 1064 pharmaceutical patents were granted in the entire Latin American region, only the African continent obtained worse numbers that year, the rest of the regions are far from these figures. It should also be noted that the number of patents granted in Latin America is mainly concentrated in Brazil and Mexico, with 662 and 374 patents respectively. Here we can see a graph prepared by the authors based on WIPO statistics, showing the evolution of the number of patents granted in the pharmaceutical industry by region and by year since the TRIPS agreement.
The Property Rights Alliance (PRA) prepares the International Property Rights Index (IPRI) every year. This index, which collects information from over 129 countries representing 94% of the world’s population and 98% of the gross domestic product, is based on three main areas (Legal & Political Environment; Physical Property Rights; and Intellectual Property Rights). Patent protection is part of the Intellectual Property Rights axis.
It is worth noting the importance of the IPRI in many other areas that affect the quality of life of the population. This index has a strong relationship with other economic and social indicators of well-being, such as gender equality, entrepreneurship, research and development, human development, civic activism, corruption and Internet connection measurements. In countries where property rights protection is stronger, very good results can be found in the corruption perception and biotechnology innovation indices.
In order to have an overview of what is happening in the world, 3 graphs are attached, the first one corresponds to the general IPRI index of the year 2019 and the second one specifically to the section of patent protection that composes the index. The darker the country, the worse its performance. Finally, the third image shows how the region is positioned in relation to other groups in the general index, being well below the main advanced economies.
This poor performance of Latin America in terms of pharmaceutical innovation is clearly related to the lax legislation on property rights in the countries of the region, such legislation does not provide the legal certainty required to attract investment, and therefore, without investment, we do not see good results.
The right to health and medicines as one of the means to access it is a consensus achieved in most of society. Public policies must be oriented towards ensuring that more and better drugs and medical treatments are available to more and better people, and there is only one way to achieve this: more innovation.
The scenario proposed by the pharmaceutical industry (16) for the coming decades is more than hopeful, the recent advances in human genetics represent a very promising future in which there will be a more comprehensive knowledge of the human body that will allow all medical and pharmaceutical work in general to be carried out more efficiently. Another promising point in the industry is the implementation of robotics in the application of drugs, recent studies indicate the potential of merging these two branches, which will allow a new focus on what is known so far in the supply of medicines.
The innovation landscape that emerges requires us to understand the role of property rights and prices. If society wants to see these new developments coming and thus enable access to health for as many people as possible, what we need to do is to make clear what the incentives will be. Proper protection of property rights and the freedom of the market to set its own prices provide the right incentives for innovation to happen, while price controls undermine these incentives. Asia and North America have understood this message and have seen it in their results, Latin America must take the lead and act accordingly.
It should also be understood that innovation has played a very important role in our lives in recent decades and will continue to do so in the years to come. What is expected from new technologies is beyond the limits of what we can imagine, we should not limit this capacity for innovation that we humans have, on the contrary, we should do everything in our power to enhance it.
3. Zozaya, N., Alcalá, B. and Galindo, J. (2019), The offset effect of pharmaceutical innovation: A review study. Retrieved 2 Nov. 2020, from https://journals.sagepub.com/doi/full/10.1177/2284240319875108
4. Siegel, R.L., Miller, K.D. and Jemal, A. (2020), Cancer statistics, 2020. CA A Cancer J Clin, 70: 7-30. doi:10.3322/caac.21590. Retrieved 2 Nov. 2020, from https://acsjournals.onlinelibrary.wiley.com/doi/full/10.3322/caac.21590
5. Innovative medicines save on direct and indirect costs (2020) CAEME, Innovation for health. Retrieved 2 Nov. 2020, from https://www.caeme.org.ar/los-medicamentos-innovadores-ahorran-en-costos-directos-e-indirectos/
6. Sectorial Report: Laboratories and Pharmaceutical Industry (2013) BDO Argentina. Retrieved 2 Nov. 2020, from http://www2.congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/283461E971984BB605257C2E007D7291/$FILE/BDO_Reporte_Sectorial_Ind_Farmaceutica.pdf
7. How much does it cost to produce a new medicine? (2019) CAEME, Innovation for health. Retrieved 2 Nov. 2020, from https://www.caeme.org.ar/cuanto-cuesta-producir-un-nuevo-medicamento/
8. Cadillo Chandler, D.M. (2014), The Role of Patents in the Latin American Development: ‘Models of protection’ of Pharmaceutical Patents and Access to Medicines in Brazil, Chile and Venezuela. Hanken School of Economics. Retrieved 2 Nov. 2020, from https://helda.helsinki.fi/dhanken/bitstream/handle/10138/135695/273_978-952-232-238-8.pdf?sequence=1&isAllowed=y
9. The path taken by intellectual property in the Argentine Pharmaceutical Industry (2019) CAEME, Innovation for health. Retrieved 2 Nov. 2020, from https://www.caeme.org.ar/el-camino-que-recorrio-la-propiedad-intelectual-en-la-industria-farmaceutica-argentina/
10. Díaz, A. (2008), Latin America and the Caribbean: Intellectual property after free trade agreements. Economic Commission for Latin America and the Caribbean (ECLAC). Retrieved 2 Nov. 2020, from https://eco.mdp.edu.ar/cendocu/repositorio/00560.pdf
11. Shadlen, K. (2020), Pharmaceutical Patents in Latin America: Global Change, National Responses. Oxford Research Encyclopedia of Politics. Retrieved 2 Nov. 2020, from https://oxfordre.com/politics/view/10.1093/acrefore/9780190228637.001.0001/acrefore-
12. Díaz, A. (2008), Latin America and the Caribbean: Intellectual property after free trade agreements. Economic Commission for Latin America and the Caribbean (ECLAC). Retrieved 2 Nov. 2020, from https://eco.mdp.edu.ar/cendocu/repositorio/00560.pdf
13. The value of medicine from a social perspective in Argentina and surrounding countries (2020). Weber and CAEME. Retrieved 2 Nov. 2020, from https://www.caeme.org.ar/wp-content/uploads/2020/08/Libro_CAEME_DIGITAL_compressed_compressed.pdf?x56967
14. Hedger, P. (2019), Poison Pill: Importing foreign drug price controls. FreedomWorks Foundation. Retrieved 2 Nov. 2020, from https://fw-d7-freedomworks-org.s3.amazonaws.com/POISON%20PILL.pdf
15. Patent Cooperation Treaty Yearly Review 2020: The International Patent System (2020). World Intellectual Property Organization (WIPO). Retrieved 2 Nov. 2020, from https://www.wipo.int/edocs/pubdocs/en/wipo_pub_901_2020.pdf
16. From vision to decision: Pharma 2020 (2012). PriceWaterhouseCoopers (PwC). Retrieved 2 Nov. 2020, from https://www.pwc.ru/en/pharmaceutical/publications/assets/pwc-pharma-2020.pdf
Santiago Remón is a Research Assistant at Fundacion BASES. Franco M. López is the research director at the foundation.