Analysis Of The Behaviors Related To Intellectual Property Rights And The Government Policy In The Pharmaceutical Industry

The pharmaceutical industry plays an important role in improving human health. About half of the pharmaceutical consumption comes from the elderly people, and the aging of China’s population increases the demand for medicines. As generic drugs are substituted for their more expensive brand-name counterparts, generic competition has become a major source of health care cost savings for the patients and the government. In addition, people are threatened by the serious infectious disease, such as SARS, avian influenza and A H1N1influenza. Sometimes the supply of brand-name drug is far from meeting the crying demand of the public, generic competition can ease the supply shortage situation to some extent. The process of developing new drug is lengthy, costly, and uncertain. Due to the limited technological skills, about97%of the Chinese drug manufacturers are generic drug producers and some generic dru gs’quality cannot be guaranteed. The brand-name drug manufacturers must face one of the biggest waves of drug patent expirations in history, a phenomenon referred to as the "patent cliff’. Patents on many blockbuster drugs will expire in the near future, opening up the doorways for generic production. The generic drug manufacturers should grasp this opportunity.This paper tries to answer the following questions:Will the patent licensing and compulsory licensing aimed at bringing the generic to the market improve patient welfare? Will the pay-for-delay settlement intended to delay the generic entry harm the patients? What can the government do to prevent the brand-name drug price from increasing in response to the generic entry? In an effort to forestall large sales declines, some brand-name pharmaceutical manufacturers are scrambling to delay generic production by patent layering and bad faith patent litigation. Confronted with these behaviors, what should the Chinese manufacturers do? What can the legislature do to improve the existing justice system? This paper uses case studies and comparative approach as research methods, and game theory helps modeling the behavior of the drug manufacturers. Taking the medical system and health insurance system into consideration, this paper analyzes the most concerning issues in the pharmaceutical industry, including the conditions under which brand-name drug and generic drug manufacturers will reach patent licensing agreements and the welfare effects of these agreements, the welfare effects of the pay-for-delay settlements, the reasons for the phenomenon of "generic competition paradox", the welfare effects of the compulsory licensing to the patients, the patent validity challenge decisions for the generic manufacturers confronted with patent layering,the motivation and influence of the bad faith patent litigation and the suggestions for dealing with it. This paper tries to help making decisions for the drug manufacturers; the analysis in this paper also has implications for the public policy.The main research contents and conclusions of this paper are as follows:1. Chapter2explores the conditions under which brand-name drug and generic drug manufacturers will reach patent licensing agreements and the welfare effects of these agreements to the patients and doctors. This paper shows that it is beneficial for the brand-name drug manufacturers to reach patent licensing agreements under certain conditions. It also shows that this agreement will benefit the patients if the medicine and pharmaceutical services are separated; this agreement will benefit the doctors, but it will make the patients worse off when the product differentiation between the brand-name and generic drugs is large and the reduction in deductable on the purchase of generic drugs is big in the "drug maintaining medicine" system. The welfare effects of the patent licensing agreements should be carefully evaluated, and the government should prohibit the agreements that will harm the patients.2. Chapter3compares the welfare effects of the fixed-fee pay-for-delay settlement with royalty settlement. The result of Chapter3shows that the brand-name manufacturers’ profit and the patient welfare are higher under fixed-fee contract than under royalty contract if the medical and pharmaceutical services are separated. The result also shows that the brand-name manufacturers’profit will be higher under royalty contract in the "drug maintaining medicine" system; the patient welfare will be higher if the doctor pays little attention to the patient utility, the product differentiation between brand-name and generic drugs is neither too large nor too small and the kickback gap between prescribing the brand-name and the generic drugs is relative small under royalty contract in the "drug maintaining medicine" system. If there is a reduction in deductable the patients are entitled to if they buy generic drugs as opposed to brand-name drugs, the pay-for-delay settlement can benefit the patients in certain circumstances in the "drug maintaining medicine" system. Since an outright prohibition on such settlements may harm the patients, the antitrust enforcers should carefully evaluate the welfare effects of such settlements.3. Chapter4shows that if the brand-name and generic drug manufacturers compete in a quality-differentiated duopoly, the market segment model under the assumption that patients are heterogeneous regarding their health insurance coverage can also explain the "generic competition paradox". Chapter4also shows that the "generic competition paradox" is more likely to occur if the product differentiation between the brand-name and generic drugs is large, the proportion of patient with higher health insurance coverage is small, the reduction in deductable on the purchase of generic drugs is low and the kickback gap between prescribing brand-name and generic drugs is large. To avoid the "Generic Competition Paradox", the government should improve the quality of the generic drugs, raise the proportion of patient with higher health insurance coverage and the reduction in deductable on the purchase of generic drugs, narrow the kickback gap between prescribing brand-name and generic drugs and prevent doctors receiving kickbacks from drug manufacturers.4. Chapter5explores whether the compulsory licensing can improve patient welfare. The result of Chapter5shows that if the medical and pharmaceutical services are separated the compulsory licensing will harm the patients when the product differentiation between the brand-name and generic drugs is large in the full coverage market; the compulsory licensing will harm the patients when the product differentiation between the brand-name and generic drugs is large, the reduction in deductable on the purchase of generic drugs is big and the royalty fee is high in the partial coverage market. Besides, the result of Chapter5shows that whether the compulsory licensing will benefit the patients in the "drug maintaining medicine" system also depends on the product differentiation between the brand-name and generic drugs, the reduction in deductable on the purchase of generic drugs and the royalty fee. Whether the government should grant the compulsory licensing depends on the realistic situation.5. Using three-stage games, Chapter6theoretically examines whether the generic pharmaceutical manufacturers should challenge the validity of the brand-name manufacturers’patent confronted with patent layering in the "drug maintaining medicine" system. The result of Chapter6shows that the generic drug manufacturers should challenge the validity of the product patents; on the contrary, they should not challenge the validity of the process patents. Chapter6explains why there exists such a sharp contrast in the patent validity challenge decisions for the generic manufacturers from economics.6. Chapter7shows that the brand-name manufacturers try to raise the rivals’costs by bad faith patent litigation; besides, bad faith patent litigation is also an entry deterring strategy for the brand-name manufacturers. Chapter7selects two typical cases that are Sanofi-Aventis Group versus Jiangsu Hengrui Medicine Co. Ltd. and Lilly versus Jiangsu Hansoh Pharmaceutical Co., Ltd to testify the conclusions put forward. The result of Chapter7shows that confronted with the bad faith patent litigation, the alleged infringers should improve their legal skills, such as vindicating themselves by proving that the patents are invalid or not infringed; the legislature should improve the existing justice system and fill up the legal loopholes; the compensation system is needed to avoid bad faith patent litigation.The originality of this paper lies in the following3points:1. No one has yet analyzed the patent licensing agreements in different medical systems from economics. This paper tries to fill the gap in the theoretical literature on this topic. Taking the medical system and health insurance system into consideration, it explores the conditions under which brand-name drug and generic drug manufacturers will reach patent licensing agreements and the welfare effects of these agreements using the theoretical framework of technology licensing in a quality-differentiated Stakelberg model. No one has yet compared the welfare effects of fixed-fee pay-for-delay settlement with royalty settlement in different medical systems, this paper tackles this project. The theoretical literature on compulsory licensing is mainly in the field of jurisprudence, this paper fills the gap in the theoretical literature by analyzing the welfare effects of compulsory licensing to the patients from economics.2. This paper enriches the theory of market segmentation which is the most commonly accepted explanation to the "generic competition paradox". The theoretical literature on "generic competition paradox" seldom considers vertical product differentiation. Under the assumption that patients are heterogeneous regarding their health insurance coverage, this paper explains the "generic competition paradox" that demonstrates the increase of brand-name drug price in response to generic entry in a vertically differentiated duopoly.3. Taking into consideration of the current development of Chinese pharmaceutical industry, this paper changes the assumptions of the existing research according to the actual situation. This paper tries to make the patent challenge validity decisions for the generic pharmaceutical manufacturers by theoretically examining the brand-name manufacturers’ choices of patent breadth. This paper analyzes the motivation and influence of bad faith patent litigation from economics, and also provides some suggestions on how to deal with the bad faith patent litigation for the government and the drug manufacturers.The main limitation of this study is that it does not provide empirical examination of the conclusions, because I do not have the access to the IMS Health dataset. Further work is required to test the conclusions with econometric models. In addition, the results depend crucially on the model specifications. In case of asymmetric information the results may be different. If the rules of the games are changed, the conclusions will also be different. For example, taking into account the price regulation policy whether the price of brand-name drug will increase after the generic entry needs further explorations. Even if not granted, sometimes the compulsory licensing can be used to threaten the brand-name manufacturers to supply more drugs at lower price. Confronted with the process patent layer, if the litigation costs are high the generic drug manufacturers should challenge the validity of the process patent after caught up in patent disputes.