Company profits depend on the 'welfare payments' they get from society

The free market is a myth. From drug patents to quantitative easing, businesses make money because of state help

• 
• • Ha-Joon Chang
  • The Guardian, Friday 5 April 2013

Swiss drugmaker Novartis's headquarters in Basel. ‘Switzerland infamously had no patent law until 1888, half a century after its introduction in most of rich capitalist countries.’ Photograph: Christian Hartmann/Reuters

Earlier this week, India's supreme court ruled that the country will not grant a patent to Novartis, the Swiss pharmaceutical company, for the cancer drug, Glivec. Being a new version of an existing drug, the ruling said, it does not deliver enough innovation to warrant a patent. Novartis condemned the ruling as "a setback for patients that will hinder medical progress for diseases without effective treatment options".

This statement is rich coming from a company from Switzerland – a country that infamously had no patent law until 1888, half a century after its introduction in most rich capitalist countries.

Even after 1888, Switzerland refused to award pharmaceutical and other chemical patents for two decades, the new patent law having stipulated that patents are granted only to "inventions that can be represented by mechanical models". The country introduced chemical patents only in 1907 under intense pressure from Germany, whose technologies its pharmaceutical companies were liberally "borrowing". Ciba-Geigy and Sandoz, whose merger in 1996 created Novartis, were among those companies.

What is more, until 1978, Switzerland granted patents only for chemical process (that is, how you make a chemical) and not for chemical substance (that is, the chemical itself), on the reasonable ground that the substance had always existed in nature and the "inventor" has only found a way of isolating it. This was actually a rather widely accepted view at the time. Germany and France had only just introduced chemical substance patents in the late 1960s. Canada and Spain refused to grant patents to pharmaceutical substances until 1992.

Despite all this history, the pharmaceutical industry is extremely aggressive with substance patents, as in the case of Glivec, because it knows that its profit level will fall dramatically without them. Unlike a BMW or an Airbus, chemical substances are very easy to copy. Even if the processes of manufacturing them are patented, you can relatively easily come up with alternative processes. Without the artificial monopoly conferred by the patent, the inventor of a chemical substance can make only little money (generic drugs typically cost 5% of drugs with patent monopoly).

Patent monopoly creates a lot of problems. It allows the patentee to charge the maximum to consumers. This may not be a problem if the patented product is a luxury item, like parts that go into a smartphone, but can violate basic human rights if it involves things such as life-saving drugs. Patent monopoly also blocks technological progress in the relevant fields during its duration (20 years), as other people cannot use the patented technologies in developing other technologies.

Despite all these problems, we, as society, grant patent monopoly because we believe that it brings more than compensating benefits. By giving greater incentives to invest in developing new technologies, patent monopoly can create more innovative technologies. This means that society has the right not to grant a patent for a technology when it feels that the benefits are outweighed by the costs, as in the Indian court ruling against Novartis.

The pharmaceutical industry most starkly reveals how profits are "social" creations – it makes its profit because it is granted artificial monopolies in the form of patents. But it is not alone in this respect.

Another obvious case is the banking industry. Today, many banks all over the world would not have existed but for the huge public money poured into them in the aftermath of the 2008 crisis. Even in the case of those that have not been bailed out, their profits would have been much lower (or their losses far bigger, in the case of loss-making ones) without the cheap money showered on them – without any condition, unlike in the case of state supports such as unemployment benefit – through cuts in interest rates and thequantitative easing by the Bank of England.

In other instances, the social protection of business is more roundabout. The horsemeat scandal has revealed that British supermarkets and the European meat industry have made higher profits from the relaxation of regulations regarding food standards, introduced by the coalition government in 2010 in the name of cutting government spending and, more important, "red tape". The Poundland scandal has revealed that British retail stores would make lower profits if they were not allowed to use the claimants of unemployment benefits as unpaid workers.

I can go on, but the point is that all businesses make what profits they make only because the government, and the electorate as the ultimate sovereign (at least in theory), helps them in all sorts of ways – free money (banks), free workers (Poundland), monopoly rights (pharmaceutical companies), implicit permission for substandard products (supermarkets).

Once we accept that the amounts of profit companies make are ultimately determined by these "welfare payments" society decides to confer upon them, we begin to see the problem with the free-market view that has dominated the world for the last few decades.

For far too long we have been told by the business lobby and free-market ideologues that profit is the objective indicator of a company's contribution to the economy, when it is really socially and politically determined. Poor people receiving government benefits have been told far too often that they are spongers, when the rich get even more government benefits.

It is time that we dispensed with the myth that the market is a force of nature that should not be meddled with. Markets are social creations that can be, and have been, modified for social purposes.

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West should learn from India’s high patent standards

SA Aiyar
07 April 2013, 06:03 AM IST

 

 

 

The Supreme Court’s denial of a patent for Glivec, an anti-leukaemia drug made by Novartis of Switzerland, has been widely but wrongly hailed by NGOs and castigated by pharmaceutical companies as an attack on patents and a victory for cheap medicine. Actually, the Court fully upheld the principle of patents, but set a high bar for deciding what’s innovative and what’s mere tweaking. 

Instead of attacking the verdict, Western countries should raise their standards too. Their overliberal grant of patents has led to the tiniest design changes becoming patentable. This was exemplified by last year’s ridiculous battle between Samsung and Apple on whether features like a rounded rectangular cellphone screen and finger movements were patentable. Smartphones are a great invention, but hardly justify the grant of as many as 25,000 patents, many for piffling details. 

Till 1995, India refused to patent drug molecules. But as a consequence of WTO membership, India in 2005 allowed product patents for drugs, but only for innovations after 1995. This meant no patent for Glivec, which was patented first in 1993. To get around this, in 2006 Novartis tried to patent a new variation of Glivec, for which it claimed improved efficacy. Some other countries granted patents for this variation. But the Indian Patents Office rejected the claim as insufficiently innovative. So too has the Supreme Court. 

Many NGOs hailed the judgment for the wrong reason. The Cancer Patients Aid Association, which led the fight against Glivec, declared: “We are happy that the apex court has recognised the right of patients to access affordable medicines over profits for big pharmaceutical companies through patents.” 

False: no such right was recognized by the court. It simply said Novartis had not proved that the new variation was innovative enough. The court clarified that it would grant patents for variations that were more efficacious, but set a higher standard for proof than many western courts do. 

NGOs are wrong to paint Novartis as a bloodsucker that pauperizes patients. Glivec has saved lakhs of leukaemia patients from death. This is a great boon, and we must encourage more such life-saving boons by granting patents for new drugs. However, this does not mean giving patents for mere tweaking and “evergreening” of existing drugs through minor variations. 

Normally, governments promote competition and prohibit monopolies. But temporary monopolies (patents) are justified to promote innovation in drugs and other fields. The patent regime should ensure that the public benefit from innovation far exceeds the cost imposed by monopoly profits. This implies a high bar for granting patents. But the US and other western countries have been giving patents so liberally and broadly that these lead more to lawsuits than innovation, leaving lawyers as the chief beneficiaries . Patents are supposed to spur innovation, but when granted over-liberally they create so much lawsuit risk and cost that they end up hampering innovation, not aiding it. 

The Economist (UK), no basher of multinationals, acknowledges that over-liberal “proliferation of patents harms the public in three ways. First, it means that technology companies will compete more at the courtroom than in the marketplace. Second, it hampers follow-on improvements by firms that implement an existing technology but build upon it as well. Third, it fuels many of the American patent system’s broader problems, such as patent trolls (speculative lawsuits by patentholders who have no intention of actually making anything); defensive patenting (acquiring patents mainly to pre-empt the risk of litigation, which raises business costs); and “innovation gridlock” (the difficulty of combining multiple technologies to create a single new product because too many small patents are spread among too many players).” 

Patent trolls buy up patents in bulk, typically from bankrupt companies, not for actual use but simply to hit other innovators with lawsuits for patent infringement, forcing them to settle to avoid fat legal bills. One US study estimated such legal costs at $ 29 billion in 2011 alone. 

Last year, Google bought Motorola’s failing smartphone business for $ 12.5 billion, to access its 17,000 patents. Microsoft and others paid $ 4.5 billion for 6,000 patents from Nortel. Most of these will never be used in actual production: they are simply kept as legal weapons for possible lawsuits. This has nothing to do with innovation, which patents are supposed to promote. 

The West’s over-liberal patent system is broken. It should learn from India’s much tougher system. Patents should be seen as monopolies, to be given sparingly only for genuine innovations where the public benefit clearly exceeds the monopoly cost. This means setting a high bar for innovation. High standards are desirable for patents, as for everything else.

Novartis loses landmark patent case in India

India’s Supreme Court dealt a significant blow to Western drugs firms on Monday when it rejected an application by the Swiss pharmaceutical company Novartis to patent an anti-cancer drug.

Until recently patent and intellectual property disputes have been limited to HIV drugs as campaigners have accused Western firms of profiteering while poor patients in developing countries die. The Novartis ruling however marks a widening of the conflict to other proprietory drugs. Photo: Alamy

By Dean Nelson, in New Delhi

1:51PM BST 01 Apr 2013

22 Comments

The company said the decision raised serious, wider implications for the industry and reflected India’s ‘growing non-recognition’ of intellectual property.

Its ruling, however, was hailed by campaigners and Indian pharmaceutical firms as a victory for the country’s poor who cannot afford expensive Western medicines. Indian drug firms sell generic versions of Western drugs for up to one tenth of the price.

India’s trade minister Anand Sharma yesterday hailed the decision as an “historic judgment” which reinforced Indian laws preventing companies from extending patent protection unfairly by minor tweaks to their products, a process known in India as ‘ever-greening. Y.K Hamied, chairman of Cipla, one of India’s largest generic drugs companies, said the ruling will “pave the way for affordable medicines in India.”

Novartis however yesterday warned the ruling will discourage expensive investment in new drug treatments. The decision “provides clarification on Indian patent law and discourages innovative drug discovery essential to advancing medical science for patient," it said in a statement.

“The primary concern of this case was with India's growing non-recognition of intellectual property rights that sustain research and development for innovative medicines. As a leader in both innovative and generic medicines, Novartis strongly supports the contribution of generics to improving public health once drug patents expire,” it added.

The company had applied for a patent for a new tablet version of its anti-cancer drug Glivec, which had taken years to develop, it said. The Supreme Court however ruled that the tablet did not amount to an advance sufficient to merit a patent. Around 16,000 Indian cancer patients use Novartis' Glivec - 95 per cent free of charge, the company said, while an estimated 300,000 use cheaper Indfan versions.

Until recently patent and intellectual property disputes have been limited to HIV drugs as campaigners have accused Western firms of profiteering while poor patients in developing countries die.

The Novartis ruling however marks a widening of the conflict to other proprietory drugs. Merck, the US-based drugs company is facing a dispute with the Indian pharmaceutical firm Glenmark which has launched a generic version of its diabetes drug Januvia which is almost a third cheaper.

“It's all about interpretation of section 3(d) of the Indian Patent Act,” said Ran Chakrabarti, a commercial lawyer based in New Delhi.

“Essentially, it says that you can't tweak something that already exists and then patent it, if it doesn't enhance the known efficacy of that thing, or result in a new product. No doubt lawyers will have spent a lot of time pouring over the meaning of 'enhance', 'efficacy' and 'new product', but it looks as if the Supreme Court has ruled that this is old wine in a new bottle.

"Drug companies are going to have to come up with something pretty unique to get patent protection, and while that's good news for consumers, it pushes the threshold for innovation northwards,” he added.

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A Just Order

Editorial in The Hindu

The Supreme Court order rejecting a plea to grant patent protection for Glivec, a cancer-fighting drug from Novartis, is a landmark. It will greatly strengthen the quest for access to affordable medicines in India. The decision affirms the idea that a patent regime loses its social relevance when a drug is priced beyond the reach of the vast majority of a country’s people. That pharmaceutical companies employ high pricing to limit the number of beneficiaries of “blockbuster” patented molecules and even older “evergreened” medicines is an irony, because making additional copies of a drug is not expensive. On the other hand, cost control and dispensing of essential medications in government-run health facilities is affected, because many States have no centralised procurement system. It is unsurprising, therefore, that less than 10 per cent of medicines sold in India are under patent, while the vast majority are branded generics. The court order should prompt producers of patented drugs to move towards liberal licensing and low cost manufacture in India, the pharmacy of the South that produces Rs.100,000 crore worth of medicines annually and sells nearly two thirds within the country. It is a matter of concern that at least a dozen pharmaceutical innovations used in the treatment of cancer, HIV/AIDS, and Hepatitis B and C are not affordable to even the upper middle classes, and impossible to access for the poor.

It would be a gross distortion to paint the Glivec order, which follows the compulsory licensing of Bayer’s drug Nexavar, as an innovation killer. There is evidence to show that major pharma companies recover more than the cost of innovation of a drug in a single year from the United States market alone. Moreover, the costing done by industry has come in for criticism from scientists and policymakers on the grounds that the bloated, irrelevant investments of recent decades are used as the baseline to make calculations. It should not, as the industry claims, cost a billion dollars (and take a dozen years) to produce a new drug; the informed estimate is a third of that figure. The contested field of drug discovery now calls for greater scrutiny of costs and therapeutic value, and control of prices through various legal avenues available under the Indian Patents Act and the Trade-Related Aspects of Intellectual Property Rights as confirmed by the Doha Declaration. It would naturally strengthen the case for grant of patents and consensus pricing, if the industry opens its books for verification. Until the golden mean is reached, governments with vast populations that are denied access to medicines due to economic reasons can justifiably use unilateral price control mechanisms.

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Calling big pharma’s bluff

 e

DWIJEN RANGNEKAR in the hindu

   

 

The lesson from the Supreme Court ruling on Gleevec is that pharmaceutical multinational corporations need to focus research on genuine innovations rather than on ways to evergreen their patents

The much awaited Supreme Court judgment on Gleevec has been delivered. Novartis has failed in reversing the rejection of its patent. And, predictably — like a scratched record — there have been suggestions that pharma investments in India will dry up and take flight to China. At each twist of this case, Novartis has produced such bluster. We need to pay attention to the judgment as it is a nuanced handling of difficult questions concerning a hastily drafted section — Section 3(d) of the Indian Patents Act, which allows new forms of existing drug formulations to be patented only if they result in increased efficacy. The judgment adopts a gentle caution in parsing out Section 3(d); yet, it is firm in reading 3(d) as a “second tier of qualifying standards” for patentability. Further, the judgment also stands out by reprimanding the “artful drafting” of patent applications adopted by big pharma.

CHRONOLOGY

To begin, it is useful to draw out some of the chronology concerning Gleevec that the judgment reveals. The story of the patent begins with Jurg Zimmerman’s invention of derivatives of N-phenyl-2- pyrimidine-amine, one of which in freebase form was called “Imatinib,” and together constituted a U.S. patent application (no. 5,521,184) granted on May 28, 1996 (which, the judgment terms “the Zimmermann Patent”). Subsequently, a European patent was also acquired. Later, a patent application was filed for the beta crystalline form of Imatinib Mesylate (the subject in dispute) in January 2000. Initially rejected, the patent was awarded in May 2005 following Novartis’s appeal to a U.S. appellate court. What is interesting is that the filings for new drug approval, submitted in April 1998, was for Gleevec, and a filing for original drug approval in February 2001 was for Imatinib Mesylate. Confusing as this may seem, the judgment highlights this to establish that Imatinib Mesylate was covered by the Zimmerman patent and that Gleevec was its market name. Any remaining doubt, the judgment notes, is extinguished by the application for patent term extension: “This application leaves no room for doubt that Imatinib Mesylate, marketed under the name Gleevec, was submitted for drug approval as covered by the Zimmermann patent.”

CONTEXT

One of the useful aspects of the judgment is in distilling the significance of “context” in giving meaning to statute. Early on, it notes that to understand the import of the various amendments introduced in the third amendment to the Patent Act, 1970 — to come into full compliance with TRIPS — it is “necessary to find out the concerns of Parliament … What was the mischief Parliament wanted to check and what were the objects it intended to achieve through these amendments?” In this respect, the judgment recalls not only the heated Parliamentary debate, but also the concerns of public health practitioners the world over, and of public statements and petitions from U.N. agencies and civil society organisations. With India being the leading global supplier of bulk drugs, formulations and generic Antiretrovirals (ARV), the global concerns layered domestic worries about affordability of drugs.

Evidence in a widely cited study by the National Institute of Health Care Management, Changing Patterns of Pharmaceutical Innovation, is telling. Between 1989 and 2000, the U.S. Food and Drug Authority approved 1,035 new drug applications — of these, 65 per cent contained active ingredients that were already on the market (i.e. incrementally modified drugs), 11 per cent were identical and only 15 per cent were considered a “highly innovative drug.” Mischief like this results in a patent thicket around a single molecule to delay generic entry which Section 3(d) seeks to avoid. Consequently, the Supreme Court heralds Section 3(d) as a “second tier of qualifying standards for chemical substances/pharmaceutical products in order to leave the door open for true and genuine inventions but, at the same time, to check any attempt at repetitive patenting or extension of the patent term on spurious grounds.”

The significance of this rendering of Section 3(d) is borne out in the Supreme Court’s mix of caution in parsing out the section and firm pronouncements on patent drafting. Section 3(d) states, the mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such process results in a new product or employs at least one new reactant.

And, has the following explanation appended: For the purposes of this clause, salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations and other derivatives of known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy.

MADRAS HC READING

Recall that the Madras High Court’s reading that efficacy is a pharmacological idea associated with the ability of a drug to produce a desired therapeutic effect independent of potency, i.e. “healing of disease.” And, the Intellectual Property Appellate Board (IPAB) had noted with respect to enhanced efficacy that “it is not possible to quantify this term by any general formula” and that an assessment would “vary from case to case.” In revisiting these readings, the Supreme Court also had the views of Shamnad Basheer (as an intervenor-cum-amicus) and Anand Grover (Counsel for Cancer Patients Aid Association). The latter had argued for a strict reading of 3(d) which would see efficacy entirely in pharmacological terms. While Basheer agreed that all advantageous properties may not qualify under 3(d), he held that increased safety and reduced toxicity should be seen favourably. Even as the Supreme Court recalls the concerns that author 3(d) — thus, urging a “strict and narrow reading” for medicines — it prefers to delay definitive pronouncement and allow for jurisprudence to develop on this matter. Yet, it is firm in noting that enhancements in the “physical properties” of a product would render a patent application foul of 3(d).

It is here that the evidence — either in the patent applications or submitted later through affidavits to Controller were found wanting in establishing enhanced efficacy. Take for instance the “Massimini” affidavit, filed before the Controller and directed at 3(d), where two points emanate. First, that the beta crystalline form of Imatinib Mesylate is highly soluble, and second that it demonstrates a number of improved physical properties (e.g. flow properties, thermodynamic stability). Yet, in probing, it becomes clear that the comparison is to Imatinib — and not Imatinib Mesylate, where the latter is the “known substance” in terms of 3(d). Which leaves the issue of increased bioavailability — and here the court finds “there is absolutely nothing on this score apart from the adroit submissions of the counsel” and dismisses the argument.

ON DRAFTING

A final aspect of the judgment that needs highlighting is the pronouncement concerning drafting. The careful interrogation of the sequence of events leading to the patent application for the beta crystalline form of Imatinib Mesylate opened up gaping holes in the claims made by Novartis. These included that Gleevec was “‘disclosed” in the Zimmerman patent and this point is also implied by Novartis’s legal notice to NATCO in the U.K. to stop production of its generic version, VEENAT. In response, Novartis argued that even while Gleevec could be claimed by the Zimmerman patent, it was not fully disclosed in an enabling manner. Thus, seeking to differentiate between claims and disclosure. This wonderful legalese was eloquently rejected by the Supreme Court; both, in terms of U.S. legal history that was cited and in terms of the argument’s merits. And it’s useful to quote at length: “We certainly do not wish the law of patent in this country to develop on lines where there may be a vast gap between the coverage and the disclosure under the patent; where the scope of the patent is determined not on the intrinsic worth of the invention but by the artful drafting of its claims by skilful lawyers, and where patents are traded as a commodity not for production and marketing of the patented products but to search for someone who may be sued for infringement of the patent.”

LAPSES

Looking back over the last several years, it is useful to recall the several lapses committed by Novartis. It failed to heed petitions by health groups and civil society to drop the case. For that matter it failed to also heed the wisdom of its own shareholders who urged it to withdraw the challenge. And at the Supreme Court along with losing the case, we also find that the Gleevec patent application “appears to be a loosely assembled, cut-and-paste job, drawing heavily upon the Zimmermann patent.”

The judgment should be well noted and celebrated. It recalls the context of 3(d) and reminds us of the matters of concern that punctuated its crafting. While the section may have been hastily drafted and insufficiently specified, it has the elements to withstand ever-greening. Pharma companies will always be rewarded for their inventive work and effort — and by drawing in a secondary qualifier, they will have to focus their efforts on genuine inventions rather than overlapping patents.

(Dwijen Rangnekar is Associate Professor of Law at the University of Warwick, U.K. E-mail: d.rangnekar@warwick.ac.uk)