[Ip-health] TRIPS Agreement and Investment

[Daya Shanker]

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Recently I reviewed on article by Margaret Kyle from Duke University (forme=
rly
from London School of Business) and Anita McGahan, Toronto University
(formerly from Harvard University) entitled Investment in Pharmaceuticals
Before and After TRIPS: How Public Policy, Technology and Globalization Sha=
ped
Drug Development presented at 8th Annual Wharton Technology Conference on 2=
5th
-26th April 2008 (available at
http://emertech.wharton.upenn.edu/ConfAgendas_2008/Agenda_TechMiniConf_2008=
.html).
This article appears to be heavily promoted. I got reference to this articl=
e
in other conferences. However some of the contentions in this article appea=
r
to be quite disturbing if not misleading. There are two contentions in this
article. One says =93A major objective of TRIPS was to create incentives fo=
r
new-drug development for diseases that primarily affect the poor, called
=93neglected=94 or =93poverty=94 diseases, by protecting the profits of inn=
ovating
firms through temporary patent monopolies.=94 This statement was followed b=
y a
similar statement =93One of the principal purposes of the TRIPS Agreement w=
as to
encourage the development of new drugs for treating poverty diseases. The
results of our multi-level analysis suggest that this major implantation of
policy had several major effects. First, TRIPS was important in stimulating
collaborative research and new-firm formation in least-developed and
developing countries. Analysis of the locations of researching organization=
s
provide compelling evidence that the formation of pharmaceutical firms,
collaboration among firms, and participation by firms from low- and
middle-income countries were strongly associated with TRIPS compliance. We
have evidence that TRIPS was central in the development of foundational
pharmaceutical capabilities in least-developed and developing countries.=94=
 And
the other one which tries to create doubt about AIDS as a poverty disease s=
ays
=93In other words, if HIV were classified as a global disease instead of a
poverty disease, then even the phase 1 project starts for deaths in
TRIPS-compliant countries would be insignificantly different from zero. Thi=
s
sensitivity was motivated by the fact that HIV is a borderline poverty dise=
ase
as only slightly more than 10% of global deaths from HIV occur in
least-developed countries.=94 Can somebody find out the reasons behind this
article? I am pasting my analysis of this article. The TRIPS Agreement was =
for
everything else except to create incentives for drug development for povert=
y
diseases and HIV is totally and abasolutely a poverty disease.
This is an interesting study but there appear to be certain critical
weaknesses in this paper. These weaknesses are because of certain factual
inaccuracies which have to be removed before the paper acquires some
legitimacy. The main issue on which the authors have constructed their
argument appears to be disturbing where the author claims that =93A major
objective of TRIPS was to create incentives for new-drug development for
diseases that primarily affect the poor, called =93neglected=94 or =93pover=
ty=94
diseases, by protecting the profits of innovating firms through temporary
patent monopolies.=94 This assertion was again repeated on page 6 which for=
med
the very basis for theoretical and empirical analysis and appears to form t=
he
basis for this study. Nowhere either before or during the TRIPS Agreement, =
was
this issue ever mentioned. Some of the major developments leading to the
completion of the TRIPS Agreement have been discussed by Gervais (1998),
Braithwaite and Drahos (2000) Shanker (2002) and Mathew (2002). Nowhere and=
 I
repeat nowhere this assertion behind the TRIPS negotiations was mentioned.
There is a pro-monopoly group led by Patricia Danzon (2000) from Wharton
Business School having American Enterprise connection and Di Masi et al (19=
91,
2002) from Tufts University but except for claiming that it costs substanti=
al
amount to develop these medicines, and Americans should not be alone burden=
ed
with such costs, they have never made this claim of the major objective of
TRIPS being the development of medicines for poor of the world.   Jacques
Gorlin who is credited with drafting the original proposal for the TRIPS
Agreement and bringing all major industries together under the banner of IP=
C
also has never made this claim. The authors have not provided any reference
for this statement on which their whole article is based.
The interpretations such as TRIPS being effective at stimulating
commercializable research on drugs for which markets and complementary
institutions exist =93in anticipation of extension of these markets and
institutions into least developed and developing countries=94 is also not
supported by any other evidence. This is again extension of the original
argument of authors that a major reason for the TRIPS was to encourage West=
ern
pharmaceutical industry to develop medicines for poor world=92s diseases.
The TRIPS Agreement was introduced in the Uruguay Round Negotiations a litt=
le
mysteriously. The Ministerial Declaration at Punta del Este only stated the
need to =93=85clarify provisions and elaborate as appropriate new rules and
disciplines=94 with an aim to =93=85develop a multilateral frame work of pr=
inciples,
rules and disciplines dealing with international trade in counterfeit goods=
,
taking into account work already undertaken in GATT.=94[1] The TRIPS Agreem=
ent
which has been enacted was never part of the agenda.
There is another statement on page 4 =93 Without systems of enforcing for
enforcing patents, some pharmaceutical companies argued that protection was
thin at best.=94 There is no reference for this and then there are dispute
settlement bodies of the WTO apart from Trade Reviews at regular intervals.
There is a continuous monitoring by Western pharmaceutical industries and
their regular submissions to the USTR which places these countries at
different grades of apparent misdemeanours and recidivism.
Next paragraph also appears to be factually incorrect. There has been no
amendment of TRIPS either in 2002 or in 2003. If the authors mean the Doha
Declaration on Public Health as one of the amendments, it was issued in
November 2001 (Declaration on the TRIPS Agreement and Public Health,
WT/MIN(01)/Dec/2 (Nov. 14, 2001) [hereinafter Doha Declaration], available =
at
http://www.wto.org/english/thewto_e/minist_e/mindecl_trips_e.pdf[1].) and n=
ot
in 2002 and it was not an amendment. In fact the USA declared it as politic=
al
document i.e. not worth anything. The Doha Declaration reiterated what was
mentioned in the TRIPS Agreement regarding compulsory licensing except the
paragraph 6 which refused to accept the Article 30 solution of the TRIPS
Agreement for providing access to medicines to countries not having suffici=
ent
manufacturing capacity. The Doha Declaration did not deal with the issue of
compulsory licensing during national health emergency. The issue of compuls=
ory
licensing is covered by Article 31 of the TRIPS Agreement and Article 5(A) =
of
the Paris Convention for the Protection of Industrial Property as incorpora=
ted
in the TRIPS Agreement which stipulate a large number of circumstances for =
the
issue of compulsory licensing including non-working or insufficient working=
 of
patents. There is no such thing called national health emergency either in =
the
TRIPS Agreement or in the Doha Declaration. Article 31(b) of the TRIPS
Agreement deals with the issue of compulsory licensing in the case of
=93national emergency or other circumstances of extreme urgency=94 where ef=
forts
to obtain authorization form right holder is waived. I do not know why
national health emergency has been repeated again and again. There is no su=
ch
term either in the TRIPS Agreement or in any related document.
Similarly in the year 2003, there was no amendment of the TRIPS Agreement. =
In
a very controversial decision, the WTO General Council few days before the
Cancun WTO Ministerial Conference issued waiver of conditions of certain
provisions of Article 31 of the TRIPS Agreement temporarily(WTO, Decision o=
f
30 August 2003, Implementation of Paragraph 6 of the Doha Declaration on th=
e
TRIPS Agreement and Public Health, WT/L/540 (30.8.2003) available at
http://www.wto.org/english/tratop_e/implem_para6_e.htm[2]. [hereinafter 30t=
h
August 2003 Decision]  The General Council Chairperson=92s Statement, 30.8.=
2003
available at http://www.wto.org/english/news_e/trips_stat_28aug03_e.htm[3]
[hereinafter the Chairperson=92s Statement].). This statement about amendme=
nt of
TRIPS in 2002 and 2003 was again repeated on page 7. This assertion of
amendment of TRIPS in 2002 has again been repeated in page 11 while
hypothesizing that the number of new pharmaceutical firms would be lower in
countries which are not TRIPS compliant (Hypothesis 8).
The first amendment of the TRIPS Agreement came only in the year 2005 on 6t=
h/8th
December at Hong Kong which basically added exports as one of the rights of
the patent holder (Amendment of the TRIPS Agreement: Decision of 6th Decemb=
er
2005, WT/L/641 dated 8th December 2005 available at
http://www.wto.org/English/tratop_e/trips_e/wtl641_e.htm[4]). This is also =
not
an amendment but approval to the change and so far only 14 members of the W=
TO
have accepted this change. It needs acceptance of two-thirds of Members of =
the
WTO to convert it into an amendment (WTO (2008) Members Accepting Amendment=
 of
TRIPS Agreement, available at
http://www.wto.org/english/tratop_e/trips_e/amendment_e.htm[5] dated 17th
January 2008)
Reference to DiMasi, Hansen and Grabowski (2003) have also been used
incorrectly. Their estimated figures are more than US$800 million. Their 19=
91
figure (DiMasi et al 1991) is US$500 million or so. In 2003 article they ad=
ded
opportunity cost to increase the cost of development. It is difficult to
accept their figures as it is based on privately supplied information by
pharmaceutical industry which they refused to share with anybody (Light and
Warburton 2005), at least not with this reviewer. A major part of their
figures was contributed by phase 3 clinical trials which is more to do with
regulatory structure in the USA and is thus country specific.
A sentence on page 6 which forms the basis of theoretical analysis is
difficult to understand. It says =93Because drugs for these diseases (pover=
ty
diseases) are associated with  low per-patient profitability, even a modera=
te
increase in market size may be sufficient to spur additional investment. Th=
us
we allow for the possibility that TRIPS implementation may have led to
systematic differences in the inception of each phase of clinical trials
between poverty and global-disease projects because of the lower risks
associated with research.=94 The TRIPS Agreement is being implemented in va=
rious
phases. If developing countries have not permitted patenting of drugs till =
the
year 2000 or least developing countries have not been permitting patenting
till the year 2016, it does not mean that they are not TRIPS compliant.

After describing 5 hypotheses, the authors have again made an incorrect
statement that =93The 2002 Doha Declaration provided incentives for least
developed and developing countries to develop local research and manufactur=
ing
capacity in the event that the country elected to exercise its rights to
compulsory licenses.=94 The 2001 Doha Declaration was basically reiteration=
 of
Article 31 in the TRIPS Agreement with the exception of paragraph 6 as I ha=
ve
already mentioned. The attempted amendment of the TRIPS Agreement in 2005
virtually killed any incentive the countries would be having because of the
development of highly protected market segmentation. The incentive to devel=
op
any science and technology has also become reduced because the patent claim
has been extended to basis scientific processes, basic chemicals occurring =
in
nature and to reach through chemicals and is being grabbed by anybody who
wants to grab. I have seen lawyers claiming patents on business methods.
Innovation is always cumulative.
While describing data there appears to be certain confusion. In fact data
description does not provide clear information about data used in OLS. If w=
e
go by table 3 (I could not find any reference to table 3 in the text) there
are only 30 countries with all the countries of the European Union, the USA=
,
and Japan which would presumably be TRIPS compliant. China joined only in t=
he
year 2000 or 2001 and the Russian Federation is a nonmember. If this is the
totality of information, I do not see any least developed country in this
list. Number of projects as the dependent variable mainly confined to the U=
SA
and Europe would make the data highly skewed and I do not see how this has
been corrected during the analysis.
Where there is a mention of phase 1, I presume it pertains to clinical tria=
ls.
Normally, patent is first obtained before any clinical trial is started. In
the case of medicines, on the basis of concepts alone, patents are granted.
This was how patent for AZT was granted to Wellcome Borough. At the time of
the patent, there was no trial at all. Trials are done subsequently.
On page 14, there is one statement which is adding a bit of confusion as to
which country would be rated as TRIPS compliant or TRIPS-non-compliant. The
concerned sentence says that =93We also researched every country for histor=
y of
disputes, and adjusted the estimate date of compliance if the country was
identified through the WTO dispute resolution process as non-compliant in
TRIPS in violation of the rules.=94 There were two major disputes pertainin=
g to
patents. One pertained to India=92s patent application submission box or ma=
il
box under Article 70(8) of the TRIPS Agreement where both the USA and the
European Union brought the issue of submission box for patents during the
transition period and the other pertains to Canada=92s Bolar Exemption
provisions. Both of them had exceptionally minor implications. The dispute
regarding Canada was controversial because here the dispute settlement pane=
l
led by Prof. Hudec observed that objective and principles are irrelevant in
the interpretations of the provisions of the TRIPS Agreement. (Shanker 2002=
).
This observation of the Canada pharmaceutical was attempted to be corrected=
 by
the Doha Declaration of 2001.
The formation of new firms in TRIPS compliant countries are shown as positi=
ve
sign of the effect of the TRIPS agreement. This assertion itself can be
questioned. The extremely protectionist effect of TRIPS and unlimited
expansion of monopolistic subject matter with total dilution of inventive s=
tep
is forcing firms and the governments of Japan, China, Korea and even India =
to
claim as much of patent as possible. These patents have very little to do w=
ith
innovation but more to do with the strategy to deal with aggressive squeezi=
ng
of foreign firms by domestic firms in the US market (Reitzig 2004, Reitzig =
et
al 2006).
The data does not appear to include deaths by HIV in Africa and whether suc=
h a
high death figure led to initiation of more projects. Africa is also a
continent having highest number of least developed countries. Some of the
countries in Africa have 40 percent HIV infection rate and the death rates
from HIV are the highest. I do not know whether Africa has been included or
not but if I go by the table 3, I do not see any inclusion of African count=
ry
in the analysis.
The discussion about HIV on page 17 appears to be a little disturbing. HIV =
is
universally known to be a poverty disease and data about its prevalence and
resultant deaths have been regularly published by the UNAIDS in conjunction
with the WHO. Why HIV has been described as a global disease is questionabl=
e.
The UNAIDS report for 2003 gives the death figures because of HIV in Africa=
 as
2.2-2.4 million whereas the HIV infection is between 25-28 million. If one
adds countries of South and South East Asia and Eastern Europe, the prevale=
nt
infection constitutes nearly 90 percent of the total infection and 90 perce=
nt
of deaths because of HIV. The countries having HIV are the poorest in the
world. How HIV is being labeled as a global disease in the sense it pertain=
s
to the developed world is a bit surprising. The UNAIDS has continuously giv=
en
these figures for 2002, 2003, 2004, 2005, 2006 and even 2007 where they
reduced the numbers of infection from 40 million because of a survey done i=
n
India financed by the USA. At this stage I am not going into this but the
reduction is quite nominal although it is in few million.
The authors have called HIV a borderline poverty disease as only slightly m=
ore
than 10% of global deaths from HIV occur in least-developed countries. This
statement is false and the integrity of data is highly questionable. Since =
I
do not have access to data constructed by authors, at this stage I am not
questioning the integrity of the authors and am willing to accept that thes=
e
incorrect information both regarding facts, theories and references are
genuine mistakes and authors have not bothered to verify them even
superficially. I am not going into more details now but I will be writing t=
o
the chair of group separately about this.
I am willing to work with authors of this paper to help them develop their
paper although I have doubts about integrity of this paper as it does not g=
ive
an impression of a genuine research. I did not find a single statement or l=
ine
which appears to be genuine or truthful. I am hoping that this paper is not
financed by some interested industries and authors have done an independent
research. But it is a disturbing piece of writing.
Braithwaite, J. and Drahos, P. (2000) Global Business Regulation, Cambridge=
,
Cambridge University Press
Danzon, P. (2000) Testimony of the U.S. Senate Committee on Health Educatio=
n,
Labor and Pensions, 13th June 2000, Retrieved on 20th August 2004 from t <
http://www.senate.gov/~labor/hearings[6]>
DiMasi, J., Hansen, R. D. Grabowski, H. G. and Lasgna, L. (1991) Cost of
Innovation in the Pharmaceutical Industry, 10 J. HEALTH ECO. 10, 107-142
DiMasi, J., Hansen, R. D. Grabowski, H. G. (2003) The Price of Innovation: =
New
Estimates of Drug Development Costs, J. Health Economics, 22/2, 151-185
Gervais, D. (1998) The Trips Agreement: Drafting History and Analysis, Lond=
on,
Sweet and Maxwell
Gorlin, Jacques (2002) U.S. Industries, Trade Associations, and Intellectua=
l
Property Lawmaking, Cardozo Journal of International and Comparative Law, 1=
0,
pp. 5-34
Light, Donald W. and Warburton, Rebecca N. (2005) Setting the record straig=
ht
in the reply by DiMasi, Hansen and Grabowski, Journal of Health Economics, =
24,
1045-1048
Matthews, D. N. (2002b) Globalising Intellectual Property Rights: The Trips
Agreement, London, Routledge
Reitzig, Markus (2004) The Private Values of =91Thickets=92 and =91Fences=
=92: Towards
an Updated Picture of the Use of Patents Across Industries, Econo. Innov. N=
ew
Technology, 13(5) July, pp. 455-476
Reitzig, Markus, Henkel, Joachim and Heath, Christopher (2006) On Sharks,
Trolls and Other Patent Animals: =93Being Infringed=94 a  Normatively Induc=
ed
Innovation Exploitation Strategy, available at http://ssrn.com/abstract=3D8=
85914[7]
Shanker, D. (2002) The Vienna convention on the law of Treaties, the disput=
e
Settlement System of the WTO and the Doha Declaration in the TRIPS Agreemen=
t,
36 J. WORLD TRADE, 36/4, 721-772
UNAIDS/WHO (2005) AIDS Epidemics Update, December 2005 Retrieved on 15th Ju=
ly
2006 from http://www.unaids.org/epi/doc/report_pdf.asp
[8]UNAIDS (2006) REPORT ON THE GLOBAL AIDS EPIDEMIC, p. 3, 6th July, 2006
Retrieved on 15th July 2006 from
http://www.unaids.org/bangkok2004/GAR2006_html?GAR2004_oo_en.htm[9]




[1] General Agreement on Tariffs and Trade (GATT) Punta Del Este Declaratio=
n,
available at http://www.sice.oad.org/trae/Punta_e.asp[10] (Sept. 20, 1986).
Ministerial Declaration of the Thirty-Eight Session at Ministerial Level, N=
ov.
29, 1982, GATT B.I.S.D. (29th Supp.) at 19 (1983) had discussed the issue o=
f
counterfeit goods. Gervais (1998)

=3D=3D=3DReferences:=3D=3D=3D
  1. http://www.wto.org/english/thewto_e/minist_e/mindecl_trips_e.pdf
  2. http://www.wto.org/english/tratop_e/implem_para6_e.htm
  3. http://www.wto.org/english/news_e/trips_stat_28aug03_e.htm
  4. http://www.wto.org/English/tratop_e/trips_e/wtl641_e.htm
  5. http://www.wto.org/english/tratop_e/trips_e/amedment_e.htm
  6. http://www.senate.gov/~labor/hearings
  7. http://ssrn.com/abstract=3D885914
  8. http://www.unaids.org/epi/doc/report_pdf.asp
  9. http://www.unaids.org/bangkok2004/GAR2004_html?GAR2004_oo_en.htm
 10. http://www.sice.oad.org/trae/Punta_e.asp