The effects of extending intellectual property rights protection to developing countries: A case study of the Indian pharmaceutical market

Abstract

Under the TRIPS agreement, WTOmembers are required to enforce product patents for pharmaceuticals. The debate about the merits of this requirement has been and continues to be extremely contentious. Many poor developing economies claim that patent protection for pharmaceuticals will result in substantially higher prices for medicines, with adverse consequences for the health and well-being of their citizens. On the other hand, research-based global pharmaceutical companies, which claim to have lost billions of dollars because of patent infringement, argue that prices are unlikely to rise significantly because most patented products have therapeutic substitutes. In this paper we empirically investigate the basis of these claims. Central to the ongoing debate is the structure of demand for pharmaceuticals in poor economies where, because health insurance coverage is so rare, almost all medical expense are met out-of-pocket. Using a product-level data set from India, which is unique in terms of its detail and coverage, we estimate key price and expenditure elasticities and supply-side parameters for the fluoroquinolones sub-segment of the systemic anti-bacterials (i.e., antibiotics) segment of the Indian pharmaceuticals market. We then use these estimates to carry out counterfactual simulations of what prices, profits (of both domestic firms and multinational subsidiaries) and consumer welfare would have been, had the fluoroquinolone molecules we study been under patent in India as they were in the U.S. at the time. Our results suggest that concerns about the potential adverse welfare effects of TRIPS may have some basis. We estimate that in the absence of any price regulation or compulsory licensing, the total annual welfare losses to the Indian economy from the withdrawal of the four domestic product groups in the fluoroquinolone sub-segment would be on the order of U.S. $713 million, or about 118% of the sales of the entire systemic antibacterials segment in 2000. Of this amount, foregone profits of domestic producers constitute roughly $50 million (or 7%). The overwhelming portion of the total welfare loss therefore derives from the loss of consumer welfare. In contrast, the profit gains to foreign producers are estimated to be only around $57 million per year. JEL Codes: O34, D12, D4, L65, F13 ∗Comments welcome. We would like to thank Isher Ahluwalia, former Director, Indian Council for Research on International Economic Relations for providing us with access to the primary data used in this study. We also thank seminar participants at Yale and the 2003 NEUDC conference for helpful comments.