The impact on social welfare of introducing patents for pharamaceuticals in India

NOVEMBER 9, 2004

There is something of a growing belief, I think, among academic economists that patents are a particularly costly way of promoting innovation. Shubham Chaudhuri, assistant professor of economics at Columbia University in New York source

A recent paper by Chaudhuri, Goldberg and Jia entitled Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India (2003-12-24) provides some very interesting evidence about the social welfare impact of the extension of patents to pharmaceuticals in India -- a change which will take place as a result of the TRIPS agreement. Below I provide an abstracted summary and you can download a copy of the the paper from (Update 2006-04: a revised version will come out in the March 2006 edition of the American Economic Review)

From Tables 12 and 14 and 36ff. All figures converted to millions USD at (then) current exchange rate. Figures are for scenario where all 4 quinolones are withdrawn.

Estimated Impact of the Introduction of Product Patents for Fluoroquinolone Antibiotics in India as a result of TRIPS requirement of Pharmaceutical Product Patents
Loss Scenario Consumer Losses Domestic Producer Losses Foreign Producer Gains
High -653 -50 57
Medium (no upward price adjustments as a result of product withdrawals) - 495 -50 9.4
Low (assume that the welfare losses due to the reduction in variety that would result from patent protection are a purely transitional phenomenon and subtract these from our upper bound estimates) -169 -50 31.12

From the Abstract

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 anti-bacterials 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.

Foreign Producers:

These estimates indicate that the total profit gains to foreign producers would be only about Rs. 2.6 billion or approximately U.S. $57 million per year. To put this number in perspective, sales of Cipro, the main patented ciprofloxacin product of Bayer, were roughly U.S. $1.6 billion in 2000 (Hensley (2001)). While we do not want to put too much emphasis on these results, they do suggest that the promise of patent-induced profits in less developed economies is unlikely to shift the R&D priorities of global pharmaceutical companies. [p.36]

Substitution with cheaper (patent expired) drugs

Substitution with cheaper (patent expired) drugs doesn't help that much (moreover if it worked too well then TRIPs doesn't help innovation because patent drugs won't get any revenue):

Lastly, we find that expenditure switching across sub-segments has a limited role in containing consumer welfare loss. The claim of TRIPS proponents that any adverse effects arising from the introduction of a patent in a particular market would be mitigated by the availability of close therapeutic substitutes is thus only valid if there are patent-expired substitutes available within fairly narrowly defined therapeutic categories. [p.38]