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Global Diffusion of New Drugs: The Role of
Patent Policy, Price Controls and Institutions
Iain Cockburn, Jean Lanjouw and Mark Schankerman
U.S. Patent and Trademark Office Economics Lecture
Series: Understanding the Innovation Economy
8 December 2011
Introduction
• Welfare depends on “effective access” to new drugs
• Effective access turns on:
– Drug launches in country
– Local prices of new drugs
– Mechanisms for distribution
Government policy/institutions affect all three
elements. Trade-off between incentives for launch
and accessible prices after launch.
We focus on three leading policies:
• Patent Policy: new drug manufacturing processes and
compounds
• Price Regulation
• Government Drug Procurement/Regulatory Institutions
These policies interact in shaping private incentives to
launch new drugs.
Key Research, and Policy, Questions:
• Do patent and price regulation policy choices affect
whether/when new drugs are launched in a country?
Does the duration of protection matter?
• Do health policy institutions have any effect on drug
launches, and if so, why?
• Do these factors matter for low and medium income
countries as much as for upper income countries?
Related Economics Literature
Empirical work on impact of price controls
 Kyle (2004)
• 21 OECD countries, 1577 molecules during 1980-2002
• Negative impact of price controls on drug launches
Empirical work on impact of patent policy
 Qian (2007)
• Weak effect of patent policy on domestic drug patenting
 Danzon, Wang and Wang (2005)
• 25 major markets, 85 new chemical entities 1994-1998
• Launches more likely/faster for larger markets, higher prices
Economics of Drug Launches
Launch = first appearance of a molecule in a country, whether
proprietary or generic
Price controls
• Reduce price-cost margins, and thus returns to market entry
• With fixed costs of entry → fewer/delayed launches
Process patents
• Short process patents (“India strategy”) facilitate generic
competition based on process innovation. Two effects:
 weakened incentives for product innovators →
fewer/delayed launches
 greater local capacity to produce copies → more/faster
launches
Economics of Drug Launches, cont.
• Long process patents can be used by drug companies to block this
kind of generic, process-based entry, with two competing effects:
 weakened incentives for process innovators → fewer/delayed
launches
 greater incentives for product innovators (less generic
competition) → more/faster launches
Product patents
• Longer, or stronger, property rights increase private returns to
market entry and thus incentives to enter
• With fixed costs of entry → more/faster launches
The Launch Data
IMS Health “LifeCycle: Drug Launches” database
All product launches in 80+ countries - most cases for 1982-2002
• Trade names of drugs
• Anatomical Therapeutic Classification (ATC)
• Composition (chemical constituents)
• Month and year of first sales in a given country
Indian market data from ORG-MARG
• Only subset of therapeutic classes, incl. antibiotics, ulcer, cancer
• Includes products launched 1986-98
We match products on the basis of active ingredient (NCE)
“Names Game”
• 130k records of product launches
• ~ 2500 molecules, identity obscured by spelling variations,
language, use of brand vs. generic name etc.
• For the 2500 molecules, we identify >250k synonyms from
multiple reference sources to allow standardization on INN
(International Nonproprietary Name) or equivalent
• Sample selection: remove pre-1981 and drugs launched only
in subset Japan/Taiwan/Korea
Background on Drug Patent Protection
• Process patents: cover new methods of manufacture of
pharmaceuticals
• Product patents: cover new compounds
• Statutory patent term: 1-20 years (application v. grant date)
– 1994 TRIPS Agreement harmonized term to 20 years, but
with transition periods for some countries
• Measure of “Strength” of Property Rights
– Legal rules affecting content of patent protection
– Enforcement (institutional quality measures)
Patent Policy Variables
Process and Product Patent Duration Dummies:
• None = no process/product patents
• Short = duration ≤ 10 years
• Medium = duration >10 and <16
• Long = duration > 15 years
Total of 6 dummies (3 for process, 3 for product patents)
Pro-patent Index
• Count of various statutory provisions, including:
–
–
–
–
–
–
–
Same patent term for domestic/foreign applicants
Term extension available
Liability for contributory infringement
Preliminary injunctions available
Patents non-revocable if not worked
No patent working requirement
Compulsory licenses not usually issued
• Based on Ginarte/Park + other country sources
Price Regulation Policy
• None = no formal drug price regulation
• Weak = formal but not extensive or restrictive
• Strong = formal and extensive/restrictive
• In regressions, we aggregate None + Weak
(no significant difference in their effects, itself a
noteworthy finding)
Control Variables
Demographics
–
–
–
–
GDP per capita (in PPP)
Population size and age composition
Gini coefficient of income inequality
Health expenditures per GDP
Health Policy Institutions
– Dummy for formal National Drug Policy
– Dummy for National Formulary
– Dummy for Essential Drug List
Other
– Index of bureaucratic (regulatory) quality
– Index of rule of law
Income groups:
• Low, Middle and Upper (World Bank categories)
Drug categories:
• All
• FDA Approved
• FDA Approved and Priority Reviewed
Observations at level of molecule/country/year:
980 distinct molecules, 76 countries, 1982-2002
First Look: Univariate Analysis
• Extent of drug launches
– How many countries gain access to new drugs?
– How does this vary with the quality of drugs and per capita
income level?
• Launch lags: Non-parametric Kaplan-Meier survival
curves for different
– Patent regimes
– Price control regimes
– Income levels
Number
countries
launched
All drugs
FDA-approved
approved (%) drugs (%)
FDA drugs,
priority review
(%)
1-5
55.6
30.6
26.2
6-10
11.1
11.7
9.5
11-24
13.8
17.2
15.8
25+
19.5
40.5
48.5
All drugs
FDA-approved FDA drugs,
launched (%) drugs (%)
priority review (%)
Income Level
Low
11.0
17.0
25.0
Lower Middle
18.0
30.0
33.0
Upper Middle
23.0
38.0
44.0
Upper
24.0
42.0
48.0
Summary
• Spatial diffusion of drugs varies widely, with majority of
drugs limited to very few countries
• This geographic disparity is less sharp for more
“important” drugs (FDA approved, Priority Reviewed)
• Likelihood of drug launches rises with income per
capita. High and low income countries differ by a factor
more than two, even for “important” drugs
In summary
• Lags are long, and many drugs are not launched at all
in most countries
• Patent protection reduces launch lags: both moving
from None to Short/Medium (‘Other’) and from
Short/Medium to Long
• Strong price controls increase launch lags
• Higher per capita income reduces launch lags
Hazard Model Analysis
• Weibull model with time-varying covariates
– Monotone hazard rate: prob. of first launch falls with time
– Adjusts for censoring (drugs may not have launched yet)
• Robust to other, more flexible functional forms (e.g. log-logistic)
• Therapeutic category dummies in all regressions
• Standard errors clustered at drug level (partial control for
unobserved random drug effects)
• Interpretation: Negative of coefficients represent percentage
impacts on the median (and mean) launch lag
(1)
(2)
(3)
(4)
log(population)
0.073**
0.072**
0.075**
0.083**
log(GDP/cap)
0.223**
0.054**
0.033*
0.078**
0.230**
0.167**
0.190**
Log(Health Exp/GDP)
Price Controls
-0.143**
-0.159**
-0.130**
-0.146**
Pro-patent Index
0.274**
0.122**
0.115**
0.200**
SPROC
0.248**
0.270**
0.232**
0.234**
MPROC
0.250**
0.222**
0.195**
0.200**
LPROC
0.041
0.033
-0.027
0.026
SPROD
0.106
0.030
-0.060
-0.006
MPROD
0.112**
0.173**
0.119**
0.109**
LPROD
0.393**
0.379
0.311**
0.284**
Demographics
No
No
Yes
Yes
Bureaucratic Quality
No
No
Health Institutions
No
No
Yes
Yes
Yes
FDA-approved dummy
(1)
(2)
(3)
1.373**
1.383**
1.361**
Gini Coefficient
0.016**
% Pop Age 65+
0.035**
(4)
BQ* FDA drugs
-0.002**
BQ* non-FDA drugs
-0.012**
National Drug Policy
0.038
0.014
Essential Drug List
0.234**
0.238**
National Formulary
0.171**
0.168**
Summary of Hazard Model Estimates
Incentives matter:
• Effective market size
–
–
–
–
Population and income per capita reduce launch lags
Health expenditures per capita more than income per capita
Inequality raises effective demand (given mean income)
Older population raises demand and reduces launch lags
• Price-cost margins: price regulation raises launch lags
• Patent regime
– Duration: Both short and long patents make a difference
– Details of protection matter too: Pro-patent Index
Summary continued
Health Institutions matter:
• Essential Drug List and National Formulary strongly reduce
launch lags, but not National Drug Policy.
• These two institutions may be “gatekeepers” and thus have
informal effect of reducing prices, but they strengthen entry
hurdles for generic and proprietary drug competition.
• More effective (regulatory) bureaucracy screens out “low
quality” drugs (non-FDA approved), increasing their launch lags.
This screen is, sensibly, weaker on “high quality” drugs.
Robustness 1
• FDA-approved drugs (high quality drugs) only
• Low/middle income countries only
• Introducing random (unobserved) drug effects
• Random (unobserved) country effects
• Control for domestic technical capability for generic
competition (counts of U.S. chemical patents)
Robustness 2: FIML with Instruments
• Endogeneity: Are we confounding influence of policy regimes
with unobserved country (fixed) effects? Do ‘high quality’
countries adopt stronger patent regimes (or less price controls),
and that is why these regimes are correlated with faster drug
launches?
• Statistical tests reject hypothesis that policy regimes are
exogenous, so we estimate full model treating price control
regime, process and product patent regimes as endogenous
• We need variables (instruments) that affect the choice of policy
regimes, but do not affect launches except through these
regimes.
• Specification includes
–
–
–
–
Hazard model for drug launches
Equation for price controls (Probit)
Equation for process patent regime (Ordered Probit)
Equation for product patent regime (Ordered Probit)
• Political/legal structure variables:





index of severity of political constraints
political orientation of executive (L-C-R)
ethno-linguistic fractionalization
legal origins
number of bilateral trade agreements
Baseline
Pol Cons +
Exec L/C/R
+ Ethno-ling
Fraction.
+ Legal
Origins
+ Number
RTA
-0.179**
-0.486**
-0.441**
-0.423**
-0.164**
Pro-patent
0.118*
0.250**
0.206*
0.044
0.169**
SPROC
0.258**
0.300**
0.290**
0.147**
0.343**
MPROC
0.174**
0.419**
0.397**
0.314**
0.377**
LPROC
-0.082
0.433**
0.403**
0.372**
0.205**
SPROD
-0.016
0.033
-0.006
0.032
-0.086
MPROD
0.115**
0.362**
0.286**
0.256**
0.276**
LPROD
0.334**
0.818**
0.685**
0.531**
0.663**
Demographics
Yes
Yes
Yes
Yes
Yes
Health
Institutions
Yes
Yes
Yes
Yes
Yes
Price Controls
What Changes with FIML?
• Impacts of price controls and patent regimes are larger with
instruments than in the baseline, nearly double the size
• Estimates are very stable across different sets of instruments
• LPROC now matters too (in baseline, it did not)
• SPROD is the only regime that has no effect consistently
• Health institutions still matter: National Drug Policy and
National Formulary are most important
Key Lessons and Next Steps
• Patent policy matters
– Both process and product patents speed up
launches, but short patents have no effect
• Strong price regulation delays launches
• Regulatory/procurement institutions also matter
• Need to consider how these policies interact to ensure
maximum incentive effects, but weighed against ability
of population to purchase the “available” drugs
Next Steps
• Update drug launches through 2010 to capture more
of post-TRIPS experience
• Get more detailed information about health policy
institutions, and new policies such as data exclusivity,
and on reference pricing policies
• Study impact of these policies not just on drug
launches but also on extent of use