Andrew Leigh

On Monday I rose to speak on Intellectual Property Laws Amendment Bill 2014 in the House of Representatives. 

Patents create short-term monopolies. The deal for a pharmaceutical manufacturer is simple. They make their formula public; in exchange, we give them a competition-free run of the market lasting up to 20 years. I will begin my speech today with the specifics of the Intellectual Property Laws Amendment Bill 2014 and then conclude with some broader contextual issues over the role of the patents system in boosting—or potentially impeding—innovation.

This bill is a worthy one, replicating as it does a bill put forward by the former Labor government last year. Its main purpose is to implement the TRIPS protocol, which enables manufacturers of generic pharmaceuticals to apply to the Federal Court for a compulsory licence to make and export a patented pharmaceutical product to address a health crisis in a developing country. As the previous speaker has noted, it delivers on the Australian government's commitment to the World Trade Organization's TRIPS protocol and does so with a humanitarian goal.

Developing countries, as the Parliamentary Library's brief has noted, often do not have the capacity to manufacture the medicines necessary to treat epidemics such as malaria, HIV and tuberculosis, so the interim waiver of the Trade Related Aspects of Intellectual Property Rights or TRIPS protocol agreed to by the General Council of the World Trade Organization provides a mechanism to supply such countries the medicines they need to address health epidemics. The TRIPS protocol provides that this can only be done under certain very specific provisions. Only pharmaceutical products needed to address public health problems in developing and least developed countries are included. Products may be imported by any least developed country member, but before the products are obtained the importing country must notify the TRIPS council of the details of the shipment and confirm that the country has insufficient manufacturing capacity for the products. Prior efforts must have been made to obtain authorisation from the patent owner, and these efforts must have been unsuccessful within a reasonable period of time, although that requirement can be waived during extreme urgency. Certain conditions are placed on licences granted under the TRIPS protocol to reduce the risk of pharmaceuticals being diverted from their intended recipient. And, where a licence is granted, adequate remuneration must be paid to the patent owner. These are, in my view, thoroughly reasonable limitations.

I note in passing the coalition's backflip on their position on this bill. In debate in the House of Representatives last year, Sophie Mirabella, the former member for Indi, and the member for Tangney voiced concern about this bill. Sophie Mirabella, for example, argued that the proposed amendments could place Australia in breach of a number of its obligations under the TRIPS protocol and said:

I might also stress that one of the reasons for the General Counsel's decision to limit waivers under article 31(f) of TRIPS in such a way to member countries was that it provided a clear incentive for nonmembers to join the organisation.

The member for Tangney said:

The Commonwealth exposes itself to the full weight of sanction of the WTO. How reckless and irresponsible a measure to endanger the economic sustainability of the nation and the livelihoods of millions. To entrench the budgetary emergency borders on treason.

They are feisty words, and I look forward to the member for Tangney's contribution to this debate given that the proposal to allow non-WTO members to access the system was not changed in the 2014 bill. It will indeed be interesting to see whether the member for Tangney, who described such a proposal as 'treason' when it was put forward by Labor, will now be voting for it or against it.

As the previous speaker has noted, it is a good bill. It is a bill which extends to developing countries, in situations of emergencies, access to life-saving medications. We saw during the HIV crisis of the late 1990s and early 2000s this issue come to the fore of international debate. It is indeed vital that we ensure that the most vulnerable have access to medications.

The patents system itself must always ensure that we boost innovation, particularly in the critical area of pharmaceuticals. It is not guaranteed that patenting will boost innovation. Indeed, as Alex Tabarrok has noted, we want to have patent protection that is strong enough to encourage more invention but not one that is strong enough to deter further invention or innovation. I will come back to Professor Tabarrok's views later in my comments.

A number of economists have recently noted some of the distortions that arise out of the patents system. In the case of cancer drugs, a patent application must be filed straight after a drug discovery, but clinical trials necessary for drug approvals take several years. The effect of that is to shorten the effective life of the patents. So, for example, a clinical trial for patients with metastatic prostate cancer lasts only three years compared to an 18-year long trial for those suffering from milder localised prostate cancer, as the Economist magazine has note

The result is that a trial based on short-term outcomes, three-year results, produces an effective patent life of 17 years—20 minus three years—whereas one that looks at long-term outcomes, say, an 18-year trial, might only leave two years of effective patent life. Economists have shown that the distorting effect of this is that there are 30 times more clinical trials for recurrent cancer drugs than for preventive drugs. Effectively, the patent system as it currently stands encourages pharmaceutical companies to produce drugs that increase life by small amounts at end of life, rather than those that are preventive drugs and are able to actually produce long-term cures. The current one-size-fits-all patent system does not deal with some of these distortions.

The issue of follow-on patenting has also been raised by a number of economists. A paper by Sotiris Vandoros of the London School of Economics has tracked sales of ACE inhibitors, used to treat blood pressure, and proton-pump inhibitors, and found that after drugs go off patent there is not a commensurate increase in total demand. Competition with generics does not appear to be cutting costs and increasing supply, as we would have hoped would occur at the end of the patenting system. The potential that follow-on patenting is undermining the tacit bargain that underpins patents is concerning to me. That tacit bargain is that we give the pharmaceutical company a 20-year monopoly and they place their ingenious finding into the public domain to be used by all at the end of the 20-year period. But follow-on drugs threaten that system from taking place.

Professor Alex Tabarrok suggests there is what he modestly terms a 'Tabarrok curve', which has patent strength on the horizontal axis and innovation on the vertical axis. He suggests that that will be a hump-shaped curve and that at a certain level of patent strength we will get the maximum amount of innovation from our patent system. But, as we continue to strengthen patents, Professor Tabarrok suggests that innovation may indeed decline. As he points out patents cannot encourage innovation if they raise its costs. In fields where innovation is a cumulative process, restricting patents would cause firms to lose some of their monopoly rights, but they would gain the opportunity to use the innovations of others. The result is greater total innovation. So it is absolutely vital that we ensure our patent system is at the peak of the Tabarrok curve and not falling to the left or right side of it—not too weak so as to fail to provide appropriate protection to pharmaceuticals, but not too strong so as to discourage innovations that build upon one another's.

Ours is a system that developed in 15th century Venice and then in 17th century England. It is vital that we continue to update the patent system to acknowledge the realities of the modern economy. Both for pharmaceuticals and also for information technology, I think there is cause for a careful re-visiting of the patent system, bearing in mind that patent strength must always be aimed at boosting total innovation and not merely the innovation of the particular patent holders at the time. I commend the bill to the House and look forward with bated breath to see how the member for Tangney casts his vote!