August 05, 2007

Prabir Purkayastha

WHEN the Mashelkar Committee’s Report was losing credibility for “lifting” the operative part of its report from a submission made to the committee, Ashok Desai, a well known economist and the consultant editor of Telegraph wrote an interesting defence of Mashelkar in his column. According to him, plagiarism was a trivial crime and the much larger issue was the content of the report. He then proceeded to give his view on Indian pharmaceutical industry and patents, which read more like a handout of a large pharmaceutical company than a serious piece.

We also agree that plagiarism is a less important issue and the far more serious one is that Mashelkar and Co. did not address the question they were asked to examine –– whether it is TRIPS compliant to limit patents to only New Chemical Entities. Apart from lifting the operative paragraph from the Basheer submission denying this possibility, the Mashelkar Report throws no further light on this question. We have discussed these issues earlier and will not do this again. Instead, let us examine the position on patents that Desai articulates.

Desai has three major positions. One is that patent holders “own” the inventions. In Desai’s view, “a patent gives its owner a right to stop anyone, including himself, from producing his invention.” This is a rather startling formulation – that the patent holder has a right to stop even himself from production, whatever that means. A patent holder has the sole right for reproducing his invention and through the protection of the state, can prevent others from doing so. It is this monopoly over reproduction of the invention the State gives to the patent holder that is at the heart of the patent system.

We also note that Desai seems to be quite blissfully unaware of distinction between product and process patents. As we shall see, this leads him astray on the content of the Indian Patents Act, 1970. According to him, the Indian government wanted to stop the flow of foreign exchange and therefore passed a Patents Act in 1970 that “withdrew patent protection from food, chemical and pharmaceutical products”. The Indian companies post 1970, “could read foreign patents, and follow the process description to produce and sell the drugs in India”.

 The Indian Patents Act, 1970 did not withdraw patent protection from food, chemicals and pharmaceuticals. Instead, it allowed only process patents and not product patents in food, chemical and pharmaceuticals. That meant that you could not patent the end product itself but only the process through which it was produced. Many of the biotechnology patents, which have netted companies such as Monsanto billions of dollars, are process patents. So process patents are not trivial, as Desai seems to think. The Indian companies could not just read foreign patents and follow the process description as Desai claims, but had to invent new processes.

Further, it was not the demand of the Indian companies that lead to the Indian Patents Act being modified. It was the US Senate Anti-Trust and Monopoly Subcommittee (1959-1963) headed by Senator Kefauver that had exposed the amount of price rigging in the drug industry not only in the US but also in India. The Committee noted that antibiotics prices were highest in the world in India and far higher than even of the US. In the US, this led to the Kefauver-Harris Drug Act of 1962 to control the US drug prices.

In India, it resulted in a review of the Patents Act. A number of committees went through the Patents Act, not in order to reduce imports as Desai states, but to increase competition and reduce pharmaceutical prices. The objective was a very simple one: how to provide medicines at reasonable prices to the Indian people. It was felt that removing the product monopoly would lead to more manufacturers and therefore a competitive environment. That it allowed the Indian pharmaceutical industry to grow was a consequence of breaking this monopoly and not the primary objective.

 A NECESSARY SOCIAL EVIL

Far from regarding India as opposed to a patent regime, the World Intellectual Property Organisation (WIPO) at that stage used to argue that the Indian Patents Act shows that developing countries could provide different levels of patent protection. Therefore, WIPO recognised Indian Patents Act as a valid form of protecting innovation, even though India had kept out of WIPO. It was only the pressure of the US that patents entered the GATT negotiation under the guise of Trade Related Intellectual Property Rights (TRIPS) and finally to the change of the 1970 Act.

The need for patents has always been articulated as a necessary social evil. The US Constitution allows the Congress, “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Thus even in the US, this exclusive or monopoly rights is given not because the inventor somehow owns the idea embodied in the patent but in order to promote science and technology, therefore larger societal goals.

Patent as an incentive, gives a monopoly to the inventor for a certain period in lieu of which he/she makes the invention public. In economic terms, this monopoly allows the patent holder to extract rent from all users of the patents: it is the State allowing the patent holder the right to levy a private tax. Therefore, the question arises whether patents (or monopolies) are the best form of providing such incentives?

Even if we accept that material incentives need to be given to the inventors, patent monopolies however are not the only one form of incentives. Others could be a royalty for the inventor from any producer who wanted to work the patent, but not a monopoly over all reproduction of the invention. This is what in patent literature would be referred to as an automatic license of right. Or it could be the State offering prizes from its kitty for socially useful inventions, a policy that a number of states have followed in the past for encouraging inventors.

PROMOTING INNOVATION?

The question is whether the monopoly patent regime has helped in promoting innovation. For this, let us start with the most celebrated innovation, which in all text books is stated to be one of the key elements of Industrial Revolution: the Steam Engine. James Watt perfected his version of the steam engine for which he secured a patent in 1769. In 1775, using the influence of Mathew Boulton, his rich and influential business partner, he succeeded in getting the Parliament to pass an Act extending his patent till 1800.

This gives us an opportunity to examine the developments in steam engines and deciding whether the Watts patent helped in promoting innovation or did it actually stifle development.

The major beneficiary of the advances in steam engines would have been the mining industry in Cornwall. Watt spent his entire time suing the Cornish miners if they tried to make any advances over his design.

The firm of Boulton and Watts did not even manufacture steam engines then, they only allowed others to construct the engines based on Watt’s designs for which they claimed huge royalties. If we examine the increased efficiencies of steam engines and plot it against time, we find that after the initial Watts breakthrough, during the period that Watt had monopoly, all further improvements virtually stopped, starting again only after the expiry of his patents. During the period of Watt’s patents the U.K. added about 750 horsepower of steam engines per year. “In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; while between 1810 and 1835 it is estimated to have increased by a factor of five.” (Against Intellectual Monopoly by Michele Boldrin and David K Levine, http://www.dklevine.com/general/intellectual/againstnew.htm). The major advance in steam engine efficiency took place not because of Watt’s invention but afterwards.

Interestingly, all those who made further advances, such as Trevithick, did not file patents. Instead, they worked on a collaborative model in which all advances were published in a journal collectively maintained by the mine engineers, called the “Lean’s Engine Reporter”. This journal published best practices as well as all advances that were being made. This was the period that saw the fastest growth of engine efficiency. (Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine, Alessandro Nuvolari, Eindhoven Centre for Innovation Studies, The Netherlands, May 2001).

If we look at the research on increased patent protection helping innovation, very little concrete evidence has ever been found for this thesis. In fact, the evidence not only of Cornish mines but also in UK and the US of blast furnaces in the 19th century, show that collective innovation settings (Collective Invention, Robert Allen, Journal of Economic Behavior and Organization 4, 1983) lead to a faster diffusion of technology and more innovation as opposed to the closed, patent based monopolies. Thus, the advances in the two key elements of industrial revolution – steam engines and steel – both came out of a non-patented and open sharing environment. The recent advances of Free and Open Source Software is not an anomaly but merely the reflection that an open model of developing knowledge is a faster and surer way to innovation than conferring State monopolies.

Desai may say well, may be they did not work in the past, but currently patents are great for promoting innovation. Let us look at the more recent data. In a forthcoming back (Innovation at Risk, Princeton University Press by James Bessen and Michael J. Meurer, http://researchoninnovation.org/dopatentswork/), two researchers have analysed the numbers in terms of revenues generated from patents as against cost of filing, maintaining and defending patents in courts. In their view, the data shows that except in the case of pharmaceuticals, patents generate far more litigation costs than revenue. The numbers are clear: domestic litigation costs – 16 billion dollars in 1999 alone – was about twice the revenue for patents. Even in this, almost two thirds of the revenue was from pharmaceuticals and chemicals. Worse, the more innovative the company, more was the likelihood of it being sued. The software and business method patents fared the worst, with costs far outstripping the benefits of patenting. Even if we examine, not the broader question of whether societies benefit due to greater innovation, but the very narrow one of whether companies that are innovative, benefit from patenting, the answer is that they do not. This answer that Bessen and Merurer come to is no different from what others have discovered in the past: if patents did not already exist, it would be a poor way of rewarding innovation.

Research of Bessen and Meurer, Boldrin and Levine also show that patents do not promote innovation in societies either. Most of the historical data from countries that had different forms of patent protection do not show significantly different rates of innovation. Neither are current data any different.

SUPER PROFITS OF PHARMA COMPANIES

We come now to the last bastion of patents: the pharmaceutical and chemical companies. In all the high technology sections of the economy, this is the only sector that still wants patent protection. All others, and these include not only the IT companies but also electronics and other advanced technology sectors have increasingly come around to the view that the current patent regime is stifling innovation. IBM, from being an aggressive promoter of patents and extorting royalties from its patent portfolios, is now part of an umbrella that seeks patent reforms. Increasingly, such companies are coming together with Free and Open Source community to oppose software and business method patents. The pharma sector stands as the only one where large, global companies continue to support the current patent system wholeheartedly and push their Governments to change the patent laws of other countries. The question here is has strengthening of the patent system, as exemplified by TRIPS, brought about greater innovation in pharmaceuticals?

Let us look at what Fortune, not the most socialist of magazines, says about pharmaceutical patents. “From 1992 to September 2003, pharmaceutical companies tied up the federal courts with 494 patent suits. That's more than the number filed in the computer hardware, aerospace, defense, and chemical industries combined. Those legal expenses are part of a giant, hidden "drug tax" –– a tax that has to be paid by someone. And that someone, as you'll see below, is you. You don't get the tab all at once, of course. It shows up in higher drug costs, higher tuition bills, higher taxes – and tragically, fewer medical miracles” – ”Americans spent $179 billion on prescription drugs in 2003. That's up from ... wait for it ... $12 billion in 1980.” (The Law of Unintended Consequences, Clifton Leaf, September 19, 2005). Yes, the pharmaceutical companies are making money out of the patents system, however the price is being paid by high prices and fewer drug discoveries. If patents supposedly spur a race for innovation, this is not happening; the race is only to the patents office and to the law courts.

Of course, American companies can charge high prices for their drugs to the American consumers. What happens if these drug prices then are charged from the developing countries where people have yearly income of less than a thousand dollars? If we look at the second and third generation of AIDS drugs, there is no way a third world patients can pay for treatment with patented drugs: it is more than his/her yearly income. Not at these prices. So enforcing monopoly rights of the patent holders means death sentences for such patients.

However, this is not the only issue. The current patent regime encourages the search for only blockbuster drugs, drugs for patients who can pay large amounts. It neglects drug research in other areas, where patients may be many more but who do not have the power to pay. Treating erectile dysfunction is far more “economically” beneficial for companies than treating malaria. No surprise that we have three new blockbuster drugs for this (Viagra being of course the most well known one), while none for malaria.

The interesting question is why are neo-liberal economists such as Desai, with their love of free markets, so fond of patent monopolies, that too given by the state? The answer is quite simple. Free market is the rhetoric; the reality is that they support global capital. And if global capital wants monopoly, not only through market power but also through state grants, then they will find arguments for justifying that too.

Only this can explain the steadfast support that economists from Friedman, Samuelson to Desai extend to the patents regime, even when neither data nor the logic of free market they supposedly espouse, support such a position.