Patent policy and public health in developing countries: lessons from Japan.

417Bulletin of the World Health Organization | May 2006, 84 (5) Special Theme – Intellectual Property Rights and Public Health Perspectives Patent policy and public health in developing countries: lessons from Japan Reiko Aoki,a Kensuke Kubo,b & Hiroko Yamane c Introduction The relevance of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement to developing coun- tries has been widely discussed at inter- national fora, particularly regarding the impact of pharmaceutical product pat- ents. Product patents restrict the ability of local firms to manufacture copies of new drugs, possibly leading to less com- petition, higher drug prices, and lower welfare in developing countries. These are the unintended public health conse- quences of what is primarily an industrial policy tool. In this context, we examine the Japa- nese experience of introducing product patents in 1976 which also attracted heated discussion at that time. The an- ticipated price increase and product shortage were largely avoided, while the number of available products increased.1 Negative consequences of product pat- ents were largely averted through a series of well-coordinated policy instruments, the examination of which may provide suggestions for developing countries. Japan’s pharmaceutical patent policy Japan’s peculiar patent and utility model systems are said to have encouraged technology diffusion and incremental innovation in the overall economy.2 The pharmaceutical patent system after 1976 was designed with the similar intention of streamlining the transition to the product patent regime. Two components of this system merit attention from the viewpoint of developing countries. One is the narrow interpretation of patent breadth, and the other is the system of “dependent-patent arbitration”, a lesser known patent policy effective for promoting cross-licensing by threat of compulsory licensing. We examine these a Department of Economics, and Japan Studies Centre, New Zealand Asia Institute, University of Auckland, Auckland, New Zealand. b Institute of Developing Economies, Japan External Trade Organization, and Department of Agricultural and Resource Economics, University of California, Berkeley, California, USA. Correspondence to this author (email: kuboken@ide.go.jp). c National Graduate Institute for Policy Studies, Tokyo, Japan. Ref. No. 06-029728 policy tools in turn, before discussing their effects on the R&D activities of Japanese pharmaceutical firms. Narrow patents Breadth, or scope, is an important mea- sure of the degree of patent protection. Broad patents provide stronger protec- tion to patentees against competition from similar innovations. In contrast, narrow patents provide weaker protec- tion to patentees, but create wider free- dom to operate for subsequent innova- tors. In practice, patent breadth derives from the scope of claims allowed by the patent office, the application by courts of the “doctrine of equivalents,” and other parameters of patent policy. When product patents were introduced, the Japanese patent system favoured narrow patents. Firstly, examiners at the Japan Patent Office were encouraged to liter- ally interpret patent claims, which are verbal descriptions of the invention. In other words, only those claims supported by working examples were permissible — a practice that persisted until 1995.3 Secondly, the “doctrine of equivalents”, a liberal interpretation of patent claims used in the US, was not applied expressly in Japan until a Supreme Court ruling first endorsed it in 1998.4 Thirdly, until 1988, the Japanese practice of allowing only one claim per patent created “holes” in the technology space, which were exploited by Japanese firms.5 Dependent-patent arbitration The Japanese patent system provides for a wide range of grounds for compulsory licensing: (1) local working, (2) working of “dependent patents”, and (3) public interest.6 A dependent patent is one that must be used in conjunction with another patent in order to produce com- mercial value. When Japan introduced product patents, the dependent-patent arbitration scheme became part of the government’s effort to appease concerns about the adverse impact of product patents on downstream innovations such as novel manufacturing processes and new uses for existing pharmaceuticals. Under this scheme, the patent holder on a downstream invention (e.g. novel process) could request that the Japanese Patent Office (JPO) conduct binding ar- bitration over a cross-licensing contract with the holder of the upstream patent (e.g. product patent on new drug), if the parties fail to reach a voluntary licensing agreement. Downstream inventors were thus assured of a means of avoiding fore- closure from the upstream technology. Effects on the Japanese pharma- ceutical industry The working example requirement indeed forced pioneering pharmaceuti- cal patents to have narrow claims, and helped Japanese firms with underdevel- oped R&D programmes to patent new chemical entities (NCEs).3 Many Japanese drugs are structur- ally similar to existing ones (so-called “me-too” drugs) and not sold in other countries. Narrow patent scope has contributed to this tendency, in com- bination with other factors such as the price premium for new drugs under the National Health Insurance pricing scheme, and the leniency of the new drug approval system with respect to effectiveness.W7 The common argument against promoting structurally similar drugs is that it results in wasted resources from duplicative research. However the major effect of the Japanese product patent regime that encouraged the de- velopment of structurally similar drugs was to ease the change in direction of R&D. Product patents, whether or not they promote me-too drugs, eliminate the need for innovators to protect their products through process patents. Under 418 Bulletin of the World Health Organization | May 2006, 84 (5) Special Theme – Intellectual Property Rights and Public Health Perspectives References 1. Aiko R, Saiki T. Implications of Product Patents: Lessons from Japan. WHO- CIPIH study, 2005. Available from: http://www.who.int/intellectualproperty/ studies/R.Aoki.pdf) 2. Maskus K, McDaniel C. Impacts of the Japanese Patent System on Productivity Growth. Japan and the World Economy 1999;11:557-74. 3. Saiki T. Development of Pharmaceutical Industry and its Relations to Protection of Medicine Patents. Intellectual Property Prism 2003;2:1-18. In Japanese. 4. Takenaka T. The Doctrine of Equivalents in Japan. CASRIP Publication Series: Rethinking International Intellectual Property 2000;6:125-32. 5. Sakakibara M, Branstetter L. Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law Reforms RAND Journal of Economics 2001;32:77-100. 6. Industrial Structure Council. The Arbitration System in Japan document prepared for the 7th Meeting of the Patent Strategy Planning Related Issues Working Group under the Patent System Subcommittee, Intellectual Property Policy Committee, Tokyo; 2004. In Japanese. the process patent regime before 1976, Japanese firms doing research on NCEs had to patent multiple processes to preempt rivals.W8 After the introduction of product patents, Japanese firms do- ing NCE research were released from the need to “build fences” with process patents. The aggregate number of pro- cess patents dropped dramatically after 1976 even though the total number of pharmaceutical patents was increasing.1 As process R&D decreased, scientific resources were redirected to other areas, including research on new chemical en- tities. Because patent scope was narrow, firms that were accustomed to R&D of processes found it relatively easy to shift into R&D of products. A large part of this research may have been on structur- ally similar drugs, but even such research often leads to safety and/or effectiveness improvements.W9 The dependent-patent arbitration scheme also promoted R&D by Japanese firms. By 2004, there had been a cumula- tive total of 14 cases involving depen- dent patents brought to the JPO for arbitration, all of which were withdrawn by the requestor prior to arbitration.6 Despite the small number of cases, the mere possibility of arbitration would have altered the cross-license bargaining process in favour of downstream patent holders, similar to the threat of compul- sory licensing. Indeed, major US firms claimed that the Japanese patent system during the 1970s and 80s forced them to enter into cross-licensing contracts with infringing Japanese firms, rather than to litigate.W10 Although the narrow-scope pat- ent system, in combination with the dependent-patent arbitration scheme, may have excessively rewarded minor inventions including structurally similar drugs, it was a transitional phase under which domestic firms acclimated to the product patent regime.3 Indeed, Japan’s narrow patent and dependent-patent arbitration policies were repealed in the 1990s, albeit under pressure from the US. By then, several important phar- maceutical inventions had come from Japanese pharmaceutical firms, such as the statins group of cholesterol-lowering drugs. Implications for developing countries The Japanese experience presents one model that may be considered by devel- oping countries that are in the process of adopting a product patent regime. Narrow patents may encourage more firms to compete in product R&D. In addition to benefiting innovating do- mestic firms, the increased competition between pioneer drugs and structurally similar drugs will lower pharmaceutical prices without relying on generic com- petition or price control.W9 Linking compulsory licensing to R&D by do- mestic firms would be a reasonable way to stimulate innovation and encourage voluntary cross-licensing. Prerequisites to the socially mean- ingful use of a narrow patent regime are: (a) some level of domestic R&D capa- bility; and (b) a well-functioning drug approval system. These are indispensable in ensuring the safety and effectiveness of structurally similar drugs developed by firms. An alternative model is given by the Indian product patent system under the Patents Act, 2005. This system enables Indian firms to manufacture copies of new drugs somewhat earlier than rivals in other countries, thereby preserving some advantage in the generic pharma- ceutical markets of developed countries. The system is supported by: (a) strict patentability requirements which pre- clude certain classes of pharmaceutical inventions from being patented, thereby preventing the originators from extend- ing the exclusivity of new drugs through patenting incremental inventions, and reinforced by: (b) the absence of patent- term restoration; and (c) the Bolar pro- vision which allows early working of patents by generics manufacturers. In addition to giving Indian firms an early-mover advantage in the gener- ics markets of developed countries, the Indian patent system may benefit domestic consumers — as well as the consumers of other developing countries — through the early development of generic products. However, it should be noted that strict patentability requirements, al- though not incompatible with narrow scope, may lower the incentive for in- cremental R&D by domestic firms. This is because while narrow scope rewards new products at the cost of existing ones, strict patentability requirement rewards incumbents at the cost of new products. Conclusion Japan’s experience in using its patent sys- tem to promote incremental innovation demonstrates the possibility of attaining the dual goals of introducing product patents and maintaining reasonable drug prices, without discouraging innovation by domestic firms. In this context, a series of coordinated policy instruments, i.e. narrow patent scope, adequate pat- entability, and cross-licensing provisions, has been shown to be effective. On the other hand, India’s new patent policy demonstrates that developing countries may want to shorten the exclusivity period on new drugs by, inter alia, rais- ing the hurdle on patentability. Such a policy will strengthen the competitive- ness of domestic firms in global generics markets, but may reduce their incentives to invest in incremental innovation in domestic markets. This trade-off should be recognized by the policy-makers of developing countries when they design patent systems. O Competing interests: none declared. (References prefixed “W” appear in the web version only, available from www.who.int/bulletin) Bulletin of the World Health Organization | May 2006, 84 (5) Special Theme – Intellectual Property Rights and Public Health Perspectives References 1. Aiko R, Saiki T. Implications of Product Patents: Lessons from Japan. WHO- CIPIH study, 2005. Available from: http://www.who.int/intellectualproperty/ studies/R.Aoki.pdf) 2. Maskus K, McDaniel C. Impacts of the Japanese Patent System on Productivity Growth. Japan and the World Economy 1999;11:557-74. 3. Saiki T. Development of Pharmaceutical Industry and its Relations to Protection of Medicine Patents. Intellectual Property Prism 2003;2:1-18. In Japanese. 4. Takenaka T. The Doctrine of Equivalents in Japan. CASRIP Publication Series: Rethinking International Intellectual Property 2000;6:125-32. 5. Sakakibara M, Branstetter L. Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law Reforms RAND Journal of Economics 2001;32:77-100. 6. Industrial Structure Council. The Arbitration System in Japan document prepared for the 7th Meeting of the Patent Strategy Planning Related Issues Working Group under the Patent System Subcommittee, Intellectual Property Policy Committee, Tokyo; 2004. In Japanese. 7. Kneller R. Autarkic drug discovery in Japanese pharmaceutical companies: insights into national differences in industrial innovation Research Policy 2003;32:1805-27. 8. Murayama K. On the Experience of Product and Pharmaceutical Patent Introduction in Japan Tokkyo Kanri 1983;33:1261-71. In Japanese. 9. US Congress, Office of Technology Assessment. Pharmaceutical R&D: Costs, Risks, and Rewards. Washington, DC; 1993. 10. General Accounting Office. Intellectual Property Rights: US Companies’ Patent Experiences in Japan. Washington, DC; 1993.