Abstract
This chapter examines the effect of the Patent Act on the availability of an essential drug in developing countries. Price discrimination by a Multinational Corporation (MNC) alleviates the problem of non-availability of the drug in a developing country compared to a uniform pricing strategy. Incorporating an upstream-downstream structure, we show that in the presence of parallel trade the MNC can earn a higher profit by serving both the developed and developing countries than by confining its operations in the developed country. Also allowing parallel trade instead of restraining it results in a higher profit to the MNC.
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Notes
- 1.
The British Government Department for International Development (Grace 2004) documented that the cost of the manufacturing facility in India that complies with international regulatory norms is about one –fourth of the cost of setting up a similar plant in the US or Europe. Further Civil construction is about US $8–12 per square foot in India compared to US $75 in the US. The cost of an Indian based laboratory analyst/chemist is only one fifth to one eighth of that of a US personnel. In addition, Indian scientists are well trained and equally knowledgeable but earn about one third of the Western counterpart’s salaries.
- 2.
The absence of strict patent regulation always brings the risk of imitation. Historically, Indian imitators are observed to be more cost efficient. This is seen to deter the flow of new technology to India in the process patent regime. With product patent in force, it is expected that MNCs may explore Indian markets with new technology and more technological collaboration can be conjectured.
- 3.
Treatment for exhaustion policies varies from country to country. The European Union pursues regional exhaustion, which means that goods, once purchased, may be freely resold within its frontiers, but parallel imports from non-member countries are excluded. In the US the first sale doctrine is up-held (i.e. rights are exhausted when purchased outside the vertical distribution chain). Parallel Import of pharmaceutical products is permissible in the US provided it satisfies regulatory norms. The International forum on the TRIPS related WTO agreement is however, silent about the issue of parallel trade. Article 7 of the TRIPS agreement clearly emphasizes that its objective is to “contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations”. TRIPS also address, or rather withholds from addressing the issue of parallel imports: none of its provisions, except those pertaining to national treatment and most-favoured-nation treatment is “used to address the issue of intellectual property rights” (Art. 6). In other words, parallel trade remains essentially a matter of national interest.
- 4.
Namely Astra-Zeneca, GlaxoSmithKline and Wyeth Lederle and international trading bodies such as Chemo, Hexal and Mitsui.
- 5.
The incident is widely quoted in a number of sources and is one of the most vivid evidences of parallel trade in the pharmaceutical sector. GlaxoSmithKline sued several participants engaged in parallel trade including the legal parallel trader partner in pharmaceuticals, Dowelhurst Ltd., for trade mark infringement see Gautam Nair 2002; Sarah and Rory 2003; Graham Dukes 2004, Also see case Glaxo Group Ltd vs. Dowelhurst Ltd, [2004] E.T.M.R. 39 (July 31, 2003) available at 2003 WL 21729286 and EWCACiv290 http://www.bailii.org/ew/cases/EWCA/Civ/2004/290.html.
- 6.
The references relate to cases to those of ECJ. See Case C −187/80 Merck & Co. Inc. versus Stephar B.V. and Petrus Stephanus Exler and Joined case C-267-268/95 Merck and Co. Inc. and others versus Princecrown Limited and others.
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Appendix A
Appendix A
7.1.1 Deterring Parallel Trade
MNCs can also counter parallel trade by strategically pricing its product. In fact, the potential for parallel trade emerges when there is a large price differential for the medicine between the two markets. The manufacturer can however, “choke off” the potential for parallel trade by charging a price in a way such that the lower uniform price of the developing country prevails in the developed market. The manufacturer then sets \( p_A^W \) in such a way that the retail price of the medicine are the same in the market of \( {M_{{dl}}} \) and \( {M_d} \) or in other words p B = p A. With p B = p A however the incentive for parallel trade is curbed. To set the same retail price for both the countries \( {p^A} = \frac{{{a_1} + P_A^W}}{2}{ } \) should be equal to \( \frac{{3{a_2} + c}}{4} \) or in other word
At price, \( { }P_A^W = \frac{{3{a_2} + c - 2{a_1}}}{2} \) the retail price for the medicine in country \( {M_d} \) is \( \frac{{3{a_2} + c}}{4} \) and there is no scope for parallel trade. The quantity that is demanded
By charging the low price of the developing country, the profit that the manufacturer earns from the country \( {M_d} \)
Let \( { }\Pi_U^M \) be the total profit the manufacturer earns (from the developed and the developing market) by charging the lower uniform price of the developing country in the developed world. Therefore
If \( \Pi_P^M \;>\; \Pi_U^M \), the manufacturer earns higher profit by accommodating parallel trade than by deterring it by charging the lower uniform price of \( {M_{{dl}}} \).
Cross-multiplying and simplifying the terms of \( \Pi_P^M \) and \( { }\Pi_U^M \) we get the following expressions \( 5a_1^2 + 6{a_1}{a_2} - 12{a_1}c - 12{a_2}c + 14{c^2} + 3a_2^2 \) and \( 108{a_1}{a_2} - 48a_1^2 - 12{a_1}c - 12{a_2}c + 12{c^2} - 48a_2^2 \)
For \( \Pi_P^M \;>\; \Pi_U^M \), we need to show that
which is always true. From the above result, we therefore conclude that for all values of \( {a_1}{ } \) and \( { }{a_2} \) the strategy of accommodating parallel trade dominates the strategy of deterring parallel trade.
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Mazumdar, M. (2013). The Problem of Availability of Patented Drugs Due to Product Patent and Parallel Trade: A Theoretical Approach. In: Performance of Pharmaceutical Companies in India. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2876-4_7
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