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Patent Ownership v. Private Company Incentive


Editor's note: In July of 2022, Wen Xie, a Patent Attorney, joined me for an episode of Dial P for Procurement that considered whether the World Trade Organization's decision to waive COVID-19 patents would impact private companies' incentive to innovate. She has considered following the story - which now includes therapeutics and diagnostics. Read this update from Wen and then listen to the original conversation for more context.



Last year, when the WTO nations agreed to waive IP for COVID vaccines, experts feared that the waiver would be expanded further. WTO members originally agreed to limit the vaccine waiver period to five years, perhaps to indicate a modicum of respect for private rights. But the gesture was an empty one.

The current vaccine waiver disregards the incentives of rational actors at every level, and now the WTO believes the IP waiver should now be expanded to therapeutics and diagnostics.

When patentees invoke their rights five years from now should they expect any kind of effective enforcement? Are the courts really going to tell patent infringers to cease operations after five years of capital investments and sales?

If we want to know what will happen to COVID vaccines, therapeutics, and diagnostics as a result of waiving IP protections, we can simply look at the generic drug industry. Generics are just drugs with expired patents, so waiving IP rights effectively pushes up their expiration dates.

Waiving IP rights for COVID diagnostics and therapeutics only ensures that these diagnostics and therapeutics will now be manufactured abroad, not in the United States: namely in China and India.

The absence of product patents in pharmaceuticals from 1972 to 2005, combined with foreign investment restrictions in the 1970s and 1980s, led to the development of a rare and successful manufacturing industry in India. Today, India supplies 20% of global exports of “generic” drugs, having the largest number of FDA approved plants outside the US. India is estimated to supply 40% of the generic formulations in America.

But India gets 70% of its active pharmaceutical ingredients (APIs) from China due to the latter’s cheaper land, electricity, and higher volumes of production. For some well-known drugs, such as paracetamol, amoxicillin and ibuprofen, India is almost 100% dependent on China.

Up until the mid-1990s, the US, Europe, and Japan produced 90% of the world’s APIs. Today, Chinese manufacturers make around 40% of all APIs used worldwide, with China and India being the source of 75% to 80% of the APIs imported to the US. The move offshore was driven by the pharmaceutical industry’s desire for cost savings and less stringent environmental regulations.

Experts fear that centralization of the global supply for APIs in China makes it vulnerable to interruption, whether by mistake or design. If disruptions occur for an essential ingredient made in China, the United States will wait in line along with Europe, Africa, and other countries to obtain it. More than anything, public health experts fear that if a global public health crisis occurs, China will likely keep its domestically produced medicines at home and stockpile them to secure access for its citizens before seeing to the needs of other nations.

Waiving IP Protection for Covid Biopharmaceuticals Enables Other Countries to use These Drugs as Geopolitical Weapons at the Expense of the US

The US Food and Drug Administration reported shortages of thirty three drugs related to treating COVID-19 between January 31 and August 31, 2020. The drugs ranged from cardiovascular treatments to anti-infectives. COVID-19 patients require a range of therapeutic and preventive agents, and the types of drugs, devices, and supplies needed to provide an adequate response are vast. Thus, hospitals treating severe COVID-19 cases faced significant challenges in maintaining supplies, ranging from vasopressors and sedatives to bronchodilators. In turn, many states sought access to Strategic National Stockpile supplies only to find that such life-saving therapies were not available. Biopharmaceutical company supply chains’ reliance on other countries for APIs and other raw materials, including catalysts and reagents used in R&D, necessitated much longer lead times for sourcing these materials.

Despite fears, China did not issue any restriction or ban on export of many essential medical goods, and that had a lot to do with the fact that China also relies on the US and major European countries for brand-name medicines. In fact, much of China’s anti-cancer drugs are imported. This inter-dependence (rather than dependence) in pharmaceuticals, keeps other countries from sealing their borders during times of emergency.

When it comes to sudden emergency needs, medicine is not that different from energy or weapons. “If for some reason all the energy used in the United States, say, was produced in China, the American people wouldn’t allow it,” said Luis Gomes, senior vice president of operations at the Portuguese API maker Hovione. “People need to understand that we need to have certain internal capabilities with public medical supply as well.”

“In the context of what is happening between the United States and China and Europe, I think nobody has any doubt about China’s ability today to bring the world to its knees should they stop supply of medical devices or raw materials or intermediates for the pharmaceutical industry,” said Andrew Badrot, CEO of C2 Pharma, a Luxembourg-based API supplier that outsources manufacturing.

Most of the shortages for COVID treatments during the pandemic were due to sudden surges in demand. Any future biopharmaceutical shortage will be caused by the same problems - if we need it, so will everyone else. At the same time. And if these drugs are produced abroad, they will likely be kept abroad. The concerns we faced at the start of the pandemic are more likely to come to fruition if we take away the biopharmaceutical industry’s incentives to invest in manufacturing capabilities within our borders by waiving their IP.

Instead of waiving IP, it is in the best interests of US public health to focus domestic investments while maintaining a robust global supply chain for essential pharmaceuticals. Increasing manufacturing capacity is costly and time consuming, as it may require establishing or expanding facilities.

Waiving IP for Covid Biopharmaceuticals only Leads to Untraceable Drugs and more Vulnerable Supply Chains

Instead of waiving IP for COVID therapeutics and diagnostics, we should be working to enhance supply chain transparency and efficiency via a system of traceability built around tracking serialized products throughout the shipping and distribution process.  Numerous countries and regions have established systems to track and trace medical products from the manufacturer down to the end user. Most low- and middle-income countries need to catch up, and the focus should be on helping these countries establish medicine traceability with respect to COVID-19 vaccines and therapeutics.

The World Bank opined that if done right, the COVID-19 response would leave a lasting legacy for safer and more efficient medicine supply chains in many countries. But building such a vast network of traceability would require protecting COVID-19 vaccines and therapeutics from falsification and diversion, along with public-private collaboration, and national-level support. Emergency responses require pragmatic, agile, and well-coordinated action. Waiving IP will only undermine the effort to thwart falsification and diversion of medicines rather than enhance these efforts.

Just like with semiconductor industry, we need to give the biopharmaceutical industry incentives to invest in domestic production so that we do not rely on other countries for emergency medicines in times of great need.

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