Pharmaceuticals in India

Brian Ferguson writes about the perverse incentive effects of patent laws in India:

Re: the Econoclast's post on India, the Indian Pharmaceutical industry
is a particularly interesting case. India has a very large pharmaceutical
industry, especially in terms of number of firms, the country has a long history of high quality scientific research in general, and a lot of the so-called neglected diseases(the diseases associated particularly with poorer parts of the world) are found in India. Yet when the multinational pharmaceutical industry is being criticised for neglecting those diseases, the Indian industry is never mentioned, even though despite having the human and physical capital, and having the pool of patients right on its doorstep, the Indian pharmaceutical industry devotes its efforts to making knock-offs of rich-country drugs for treating rich-country conditions.

The reason it behaves as it does is a simple matter of incentives. India basically doesn't recognize pharmaceutical patents (its 1970 patent Act recognized process, but not product patents). This has two consequences: one is that it's profitable to make knock-off drugs because the Indian companies can free ride on the research of the multinationals, and so their only costs are production costs. That's a positive incentive to produce copycat drugs. The other consequence is a negative incentive - if an Indian drug company did do research into treatment for a neglected, third world disease, and did find a successful treatment for it, it would be unable to profit since all of its competitors would be able to free ride on its research. So despite having a large patient pool right there, there's no incentive to develop drugs for that group's health problems, and therefore no such research is done. that might change in the near future since India has finally signed onto TRIPS.

The multinational drug companies are criticized for not spending enough of their revenues on research, but the Indian industry only spends about 2% of its sales revenue on research, a much smaller fraction than the multinationals spend. Even the research done in government labs hasn't halped since those labs have been under instructions to develop methods by which Indian companies could produce substitutes for imported drugs, rather than doing basic research.

Critics of the patent-based drug industry should take a good look at the Indian case before they demand the elimination of patents. As Brian notes, India has recently signed onto TRIPS. Here are some details. And here are some more.