Many past posts have
discussed the applications of economics concepts and principles in different
facets of life. It has been argued often that the applications are perhaps sub
conscious but nevertheless can be theorized. There are often applications that
can be theorised through economic thinking while rationalising those actions. The
current post will seek to delve into the intellectual property rights (IPRs)
and how their application gets rooted in economics. While IPRs need an engagement
at depth, the current post will limit to a few examples that highlight the economics
at work.
Ever-greening of patents
In 2014, the
Supreme Court of India invalidated the patent on Gilvea, the anti-cancer drug
developed and marketed by Novartis. The patent on the drug had expired in 2006
but the pharma giant wanted to extend the patent. It had made use of the
application of the concept of ever-greening. Patents are an outcome of a
trade-off between short term and long term prospective rewards. An off patent
product would result in numerous spill-overs yet would be apparently detrimental
to innovation. This is due to the innovators not getting the adequate rewards
while benefiting the free-riders given the instantiation involved in production
of drugs and related products. Yet a strong patent regime would possibly result
in the tragedy of anti-commons thus susceptible to under-production of the drug.
Hence there has to be a fair balance between the short term rewards for the
innovators and the long term benefits to the society. The patent thus is
usually granted for a period of fifteen years. To the drug firms however, they
desire to extend their monopoly further. Therefore they resort to a tactic
called ever-greening. They make cosmetic changes to the drug, for instance, a
drug that is injected is released as a tablet or a solution. The firms go on to
claim patent on these new forms of delivery claiming them as new products.
Gilver case was essentially involved a cosmetic change in delivery form. The Supreme
Court in the instant case held that for ever-greening, there must be a
perceptible change or innovation and mere cosmetic changes are not valid for
patent to be extended.
The ever-greening
is essentially a tool to erect a permanent barrier of entry. Once the drug goes
off patent, numerous firms can produce the drug resulting in the emergence of competition
that might be relatively speaking closer to perfect. This potentially wipes out
the opportunity for earning supernormal profits that sustain the drug firms
during the period of their monopoly. The firms would not want to cede the
market and hence try these tactics.
Compulsory licensing
Talking of
supernormal profits, there is of course a possibility that firm given its
market structure would like to appropriate the whole of consumer surplus. This might
lead to scenario wherein large sections of population are unable to access the
drugs. This is not unusual. This has been the story of anti-HIV drugs in many
parts of Africa. While HIV is chronic disease that can be managed in the West,
it is a killer disease in many parts of Africa, the only reason being the lack
of access to drugs on grounds of non-affordability. This is something that is
of concern as firms race with each other to produce the first vaccine against
the virus unleashed by China. If the firms engaged in development of vaccine
enforce their patents and refuse to allow its production by other firms, then
the goal of universal vaccination might be in peril. Therefore it would be
pertinent to understand what options government has.
While the firms
can engage in first degree or second degree of price discrimination, the
markets might not become the best way to resolve the societal needs. The government
intervention at times might stabilize the market. If there is a market failure
on account of inability to intersect the demand and supply points, the
government can step in to allocate the resources. They have a tool called
compulsory licensing. While there have been uses, though rarely and of course
with generation of rancour, the solution to the COVID crisis perhaps lies in
compulsory licensing of the vaccine. There are indications that some firms like
Moderna have announced their indication not to enforce the vaccine, it might
not be true for the all the firms.
Under compulsory
licensing, the government will put all the patents associated with the production
of the vaccine under a common pool. Any producer who wants to manufacture the
vaccine can dip into the pool, use the products and pay a fixed royalty, the
proceeds of which will go the firm whose drug is being produced. This would be
a tool to avoid the anti-commons problem in vaccine development and production.
In fact, it is not just about production, but even the vaccine manufacturers
may need to avail patents of different agents to develop and produce that
vaccine. So compulsory licensing might be a boon for those vaccine developers
too. In normal times, it is not unusual for many drugs to remain in the labs
since they cannot produce as the patent holder of one of the ingredients has
refused to part with the patent or has demanded very high prices well above the
consumer surplus.
It might be a
different matter given the bargaining power of the government and the firms and
the volumes that are required to vaccinate universally, the invocation of
compulsory licensing might not happen. The firms themselves might want to hunt
for partners who have the production capacity to cater to the demands of the
large section of the population. Further, the generosity of the firms in not
enforcing the patents might sound socially responsible thus giving them few brownie
points. However, it is in their self-interest that they would not enforce
patents rather than a manifestation of their concern for global wellbeing in
health.
The two examples
serve as manifestations on how economics becomes foundational in building up
the applications for intellectual property rights. Essentially they seek to
create barriers of entry and the mechanism to circumvent the barriers of entry.
Some more examples would be taken up for discussion in the subsequent posts.
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