Publisher’s Note: CPA’s website is proud and thanks the author of this article for receiving his permission to republish it on this website. The article, written by one of Afghanistan’s prominent former diplomats, has great bearing to the health situation in our country. Lack of access to basic medicine and primary health services in Afghanistan is taking the lives of hundreds of thousands of Afghanistan annually. Each year, hundreds of thousands more, including babies and young children, become disabled because their parents are unable to pay for the medicines that they need. The effects of lack of access to medicine and their consequent economic implications for the country have no doubt devastating.
At the same time that this tragic situation continues to take human toll in countries such as Afghanistan, health authorities at the world level been saying that access to health should be a right for all. Still today we are observing, in the least developing countries, in particular, those that live in a long conflictual situation where people die for lack of access to treatment because they are not available where they would be. We are seeing people die because the diseases they are afflicted with have not been sufficiently researched biomedically. We are seeing people die in suffering because the drugs they need are not available or they are fake, or they are too expensive. This situation is recognizably unbearable; health and overall public policy have failed dramatically as far as human health in LDCs is concerned.
There is an urgent need for a holistic approach, situated at the intersection of economy and law, disciplines that are not necessarily used to meet in university spheres, often creating blind spots in the reflecting and limiting the door of the sketched solutions. Because in reality, the technicality of the subject of health policies should not mask simple issues: building capacity within countries to respond to urgent situations. The work in the interdisciplinary sphere, which this article feeds on all the encounters made over the years, the right strategies are available to ensure that life-saving treatments are available in hospital pharmacies. That is the building of the capacities to address acute health situations with proper cooperation between countries in the South with those in the North. We render here a tribute to the countries who, through their actions, have enabled their population to have access to life-saving drugs. In some cases, they carried out these strategies hand in hand with their government and with private enterprises. -But what we need are strong headwinds and hope, tenacity, and broad views, in the face of unethical situations depriving a major part of the population of access to life-saving treatments.
ACCESS TO MEDICINES:
TRANSFER OF TECHNOLOGY AND CAPACITY
BUILDING
ASSAD OMER*
Access to Medicines: Transfer of Technology and Capacity Building
Dr. Assad Omer
Wisconsin International Law Journal
Vol 20, No. 3 (551-562)
INTRODUCTION
The pharmaceutical industry is a technology intensive and science-based industry. The pharmaceutical industry can be divided into three product groupings:
o Chemicals having therapeutic value (Bulk drugs), o Intermediates, and o Formulations (medicines ready for consumption by the patients).
The technological sophistication decreases in that order. Therefore, Research and Development (R&D) is an important aspect of the pharmaceutical industry in the three above groupings.1 Accordingly, R&D in basic research is more intensive and will lead to new invention. There are only a few countries (10)2 with a sophisticated pharmaceutical industry and a significant research base. There are other countries (l7)3 that are not active in discovering new molecular entities but who have the innovative and the technological capability including capability to reverse engineer already discovered drugs. And there are a number of other countries that have capability to produce therapeutic ingredients and finished products4 and large number of countries that need to acquire a certain degree of technological capability in order to enter into even the most basic sector of the pharmaceutical industry for producing finished products.
Actually, technological advances in general, and in particular in chemical field, have contributed to the creation of new markets and the transformation of innovation and production processes. These changes and the attendant shift towards global market necessitate a continual search
——————————————————————————————————————-
* Assad Omer, Officer-in-Charge, International Arrangements Section, IPCB, Division on Investment, Technology and Enterprise Development, UNCTAD. Ideas expressed in this article do not necessarily reflect those of the UNCTAD.
1 For a general discussion of the pharmaceutical industries’ three groupings, see The World’s Pharmaceuticals Industries. An International Perspective on Innovation, Competition and Policy, UNIDO, United Nations, Vienna and New York, 1992.
2 These are countries with a sophisticated pharmaceutical industry and R&D that include Belgium, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and United States.
3 These countries are Argentina, Australia, Austria, Canada, China, Denmark, Finland, Hungary, India, Ireland, Israel, Mexico, Portugal, Republic of Korea, Spain, Russia, and ex-Yugoslav Federation.
4 Such as Bolivia, Brazil, Cuba, Egypt, Indonesia, Norway, Poland, Romania and Turkey.
—————————————————————————————————————-
for alternative strategies by firms and for improved policy instruments by governments that will enable them to respond more effectively to the new global competition. This factor was behind the wave of mergers, acquisitions and collaboration arrangements among the wide range of pharmaceutical firms that occurred in recent years. Mergers and acquisitions are seen as a means of gaining access to the technology of the firm acquired, of realizing economies of scale and scope, of creating the necessary revenue base for R&D activity, and of speedily penetrating world markets by improving both market access and distribution. The increased cost of R&D is added to this trend.
At the same time, increased technology-based global competition and mounting R&D costs have led pharmaceutical firms to regard the protection of their technological assets as crucial. This has sometimes led to less attention being given to other crucial aspects such as the process of technology assimilation by local firms in developing countries and the upgrading of technological capabilities in the host country. In this article, the focus will be on the latter with a brief example of efforts made in some developing countries to acquire required capabilities in producing and distributing pharmaceutical products.
ACQUISITION OF TECHNOLOGICAL CAPABILITIES
The increasingly decisive importance of technology for health and nutrition and the fast pace of technological development is recognized by all countries and in particular by developing ones. It is recognized that technology not only has an effect on increased productivity and improvement of goods and services, including in the areas of health and nutrition, but it also raises concerns about the adequate protection for such technologies.
Thus, the main policy focus in most developing countries has been on the formulation of policies and legislative instruments for the promotion and encouragement of technology transfer in the local economy. Most countries have put in place legislation in order to attract more technology, while at the same time establishing mechanisms, which would encourage maximum utilization and better absorption of the imported technology. Technology acquisition is based on the fact that human resource development at the managerial and technical levels has become a key factor in this area. In this connection, my article will briefly look at early efforts made by highlighting general trends in firms’ strategies and government policies with regard to transfer of technology.
EARLY INITIATIVES AND RECENT POLICIES5
An important initiative was related to the restructuring of legal arrangements for transfer of technology. In view of the asymmetries in technological development between countries, the elaboration of a code of conduct for the international transfer of technology was proposed. The aim was to establish a legal instrument to:
- Facilitate and promote the transfer of technology process,
- Reconcile differences in the approaches and experiences of countries concerning transfer of technology,
- Give guidance and provide a framework for national legislation in the field of technology
It was also envisaged to further the convergence of national laws, and to remedy abusive or anticompetitive practices in the transfer of technology agreements.
These motivations and concerns have found specific expression in the structure and coverage of the draft code, the centerpiece of which was chapter 4, which dealt with restrictive practices. However, the position of the various groups of countries on the provisions dealing with transfer of technology transactions, particularly in the area of licensing practices, were influenced by existing policies and by prevailing conceptual approaches to international transfer of technology and technological development. It should be noted that discussions took place at a time when the international milieu differed drastically from that prevailing today.
Indeed, in the late 1960s and 1970s, a number of governments enacted laws and regulations on transfer of technology or incorporated technology import guidelines into their foreign investment policies. Government agencies were also established to screen technology transfer transactions and to assist local firms in the negotiation of contracts. The pioneering countries in this respect included the member States of the Cartagena Agreement (Andean Group), Argentina, Brazil, India, Mexico and the Philippines and later on Nigeria.5
The objectives sought through these technology transfer regimes included: (a) the improvement of the commercial conditions of agreements, particularly the prices charged (taking into account foreign exchange and tax avoidance problems); (b) the elimination or reduction of restrictive
—————————————————————————————————————–
5 This article draws on the work of the UNCTAD secretariat in related areas of transfer of technology, to which the author has made important contributions. See also Assad Omer, An Overview of Legislative Changes in S.J. Patel, R. Roffe, A. Yusuf (eds.) (2001), International Technology Transfer, Kluwer Law International, The Hague, Boston, London, 295-315).
—————————————————————————————————————–
practices; and (c) the unpackaging of the different components transferred. Other objectives included the avoidance of the importation of technology, which was already locally available, the improvement of conditions for the assimilation and adaptation of the transferred technology, the control of the intra-firm operations of TNCs, and the reduction of the duration of contracts. These initiatives influenced the interest of some countries in adopting a code of conduct on the international transfer of technology referred to above.
The strategies of the governments of developing countries relating to the acquisition of technology, including in the field of pharmaceuticals, have undergone many changes.
Recent years have witnessed a growing recognition of the importance of collaboration among firms in the transfer of technology and technological capability building. Intellectual property rights protection is considered an important element in the framework of the transfer of technology and foreign direct investment by many governments as an important means used by firms to safeguard their technological assets.
NEW POLICY FRAMEWORKS
Technological advances, the transformation of production processes and the attendant shift towards global competition necessitate a continuous search for alternative strategies by firms as well as improved policy instruments by governments. These developments have given rise to conceptual and policy shifts. Firms in developing countries appear to be shifting their objective in technology transfer transactions from the mere acquisition of technical knowledge to the acquisition of the technological capability.
Collaboration among firms becomes an increasingly important strategic feature for acquiring technological capacity. New forms of collaboration agreements have been developed. These differ from the earlier generation of “traditional joint ventures” among firms and from the “new forms of foreign investment” which took place in developing countries during the 1960s and 1970s (e.g. licensing and know-how agreements, turnkey contracts, and joint ventures). In a North-South context, cooperation between supplier and acquirer is usually concerned with aspects related to the proper implementation and absorption of the technologies, but does not embrace the creation of a new product or process. What distinguishes collaboration agreements from the above-mentioned more traditional forms of transfer of technology is the fact that the cooperating partners are both acquirers and suppliers of technology. The barter of technological information and knowledge based on reciprocity is therefore institutionalized by means of a contract.
Technological collaborations are principally taking place among firms in developed countries, and particularly in high-technology sectors such as chemicals and pharmaceuticals. The wave of collaboration comprising R&D cooperation so far does not extend to any significant extent to firms in developing countries. Although it is more common for the latter to be involved in joint ventures or technological collaboration (such as subcontracting arrangements), the number and scope of such arrangements are still relatively limited in comparison with those of developed countries. There are, however, exceptions to this — electronic and also pharmaceutical firms from several countries of Asia and Latin America are involved in a network of technological collaboration arrangements with firms located in developed countries.
Patents and other methods of intellectual property protection have thus become important strategic and marketing assets (including in the context of cross-licences); this is the case particularly in the pharmaceutical, chemical, computer, semi-conductor, and (to a lesser extent) petroleum, machinery and fabricated metal products industries. What seems to be important for firms are not intellectual property rights in isolation, but the whole “package” of technological assets. Technology suppliers’ concerns about keeping control of their technology have also had a marked impact on their transfer strategies, which have become more selective and cautious. This is more evident in the field of chemicals and pharmaceuticals where knowledge advances facilitate the use of technology and copying.
Moreover, a significant learning process has taken place in a number of developing countries. Many firms have acquired a capacity to negotiate the terms and conditions of technology transfer contracts better, partly because of improved cooperation with the competent governmental authorities. In some Asian and Latin American countries, large firms, which have been buyers in the technology market for a long time, have also learned to search for alternative sources of technology and to participate in collaboration schemes. Recipient firms have also become more sensitive to the importance of personnel training, including training overseas, and have often found suppliers to be cooperative in this respect.
LEGISLATIVE RESPONSES
In view of these developments, considerable attention has been given by governments in recent years, both at the national and the international levels, to the creation of an environment conducive to technology transfer and development. Many of the control and screening mechanisms have been abolished.
The control of contractual mechanisms and the screening process have had a definite impact on licensing agreements, especially with regard to royalty payments, restrictive practices and duration of contracts. However, it is not clear to what extent other objectives may have been attained, especially in view of the fact that transactions, such as contracts for the acquisition and/or installation of machinery and equipment, or public procurement, including pharmaceutical products, are usually outside the competence of technology transfer agencies. It should also be mentioned that much more focus on the “control” might have led to less attention being given to other crucial aspects, such as the process of technology assimilation by local frms, the upgrading of technological capabilities in the country and the monitoring of the implementation of contracts.
Therefore, technology transfer regimes have been altered in order to address some of the deficiencies. Special technology transfer régimes have been streamlined to reflect development priorities with respect to specific industrial sectors or technologies. Special programmes with respect to new technologies have also been adopted in some countries. Technology- importing firms in some countries are given advice on training and R&D programmes, while suppliers are invited to contribute to R&D either in the recipient enterprise or in the country generally. Better data and advisory services are also being provided to local firms with respect to the selection of technologies and foreign suppliers and the negotiation of contracts. These requirements have brought about a new policy approach, which focuses more on effective collaboration between partners to attain real technology transfer rather than on the mere control of contractual aspects of transactions. A number of countries have further liberalized, in varying degrees,
the provisions of their technology transfer legislation or have relaxed their implementation. This has been due to the following elements:
- Concerns about the possibility of “disincentive” effects on foreign investment and on technology transfer and absorption, particularly of new technology including pharmaceuticals and electronics;
- The belief in some countries that the increased negotiating capabilities of national enterprises may have lessened the need for government intervention;
- The accumulation of more experience by the competent authorities, leading to greater selectivity and flexibility in the application of controls; and
- Foreign firms’ concerns on the restrictive nature of the legislation.
As mentioned earlier, a large number of developing countries have modified their intellectual property legislation to strengthen protection or introduce new enforcement measures. The main purpose of the legislation was to provide more legal certainty and security for investment with a view of facilitating the transfer of technology and stimulating R&D activities, thus improving the attractiveness of their industries technology transfer.
As the pharmaceutical industry was more sensitive about the existence of appropriate intellectual property rights protection in host countries, the new legislation contains numerous elements which follow the mainstream trends in intellectual property protection on the subject. The scope of patentability includes all processes and products, including chemicals, pharmaceuticals, biotechnology and plant varieties, while the term of protection has been extended to 20 years. Importation of a patented product obtained from a patented process is considered “locally producing” the patented invention and, therefore, compulsory licences are restricted to exceptional circumstances. Another feature of the legislation is the distinction made between micro-organisms, plant varieties and biotechnological processes, which are patentable, and essentially biological processes, plant and animal species, biological materials, genetic material and inventions relating to the living matter that compose the human body, which are not patentable.
CAPABILITY BUILDING IN THE NEW ENVIRONMENT
The policy approach for technology acquisition and capability building has undergone enormous changes during the last two decades as referred to above. As an important source of innovation, technology transfer remains a critical component of capability building. It is a process and as such it should be understood to mean both the successful learning of information by one party from another party, and the effective application of that information in generating marketable products and services. Such transfers are costly and require investment by both parties in a process with uncertain outcomes. Parties involved in the process should view modern technology transfer as a dynamic and evolving process that requires constant adaptation.
As an important source of innovation, the process of technology transfer responds positively to investment protection through intellectual property rights, normally patent and trade secret laws. Moreover, the technological sophistication of the information transferred to such pharmaceuticals through these channels often depends on the local structure of the intellectual property protection regime.
Mention should be made of the fact that the strengthening of intellectual property protection could increase the costs of acquiring and diffusing modem technologies to the extent that their suppliers can negotiate higher license fees and royalties and exert tighter control over local uses. Under certain circumstances, the exercise of intellectual property protection in licensing technology may be misused and may distort the market or create inefficiencies, such as by limiting access to potential licensees and competitors.
The Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS)6 requires the specification and implementation of minimum standards for protection of intellectual property rights, which should strengthen incentives for innovation and technology trade in the long term. Developing countries are concerned that although TRIPS and other World Trade Organisation (WTO) agreements contain some provisions to facilitate and promote access to technology, there is nevertheless still a gap between intention and implementation.7 The technological gap between developed and most developing countries is wide and may be increasing. One reason for this is that the existing market and non-market mechanisms have often failed to promote the effective transfer of technology. Technologies may be transferred through a variety of mechanisms. For example, much technology is diffused internationally through the importation of machinery and equipment and technical materials. However, such imports have been limited in many developing countries by debt problems and unstable commodity revenues. Flows of advanced technological knowledge today tend to be more closely associated with foreign direct investment and licensing in technologically sophisticated industries. These activities largely have been concentrated in a few regions or countries. There are
—————————————————————————————————————-
6 For a comprehensive study of the TRIPS implications for Developing Countries, see The TRIPS Agreement and Developing Countries, UNCTAD, United Nations, New York and Geneva, 1996.
7 The concerns of the international community with regard to encouraging the transfer of technology to developing countries, as well as concerning their technological capabilities, are enshrined in several dozen international instruments. The main issue is how to enhance the effectiveness of international arrangements, i.e. how to translate good intentions into good practices. On this subject, see Compendium of International Arrangements on Transfer of Technology, UNCTAD, United Nations, New York and Geneva, 2002.
——————————————————————————————————————-
also risks that access to the critical technologies may be limited in an overly protectionist intellectual property environment that does not properly balance incentive to innovate against the needs for dissemination of knowledge.
CASE-AT-POINT: INDIA
As an example of the policy approach to transfer of technology and capability, India’s comprehensive policy regime for the pharmaceutical industry is an interesting case. The main component of the strategy was to expand the domestic pharmaceutical industry by relying essentially on the Indian enterprises, and to keep the prices of pharmaceutical products within affordable limits.8
The drug policy of 1978 was pursuing five broad objectives:
- Develop a strong sector within the pharmaceutical industry with the public sector playing a leading role,
- Channel the activities of the foreign firms in accordance with the national priorities and objectives,
- Deepen the production base of the domestic industry by ensuring that the production of drugs took place from as basic a stage as possible
- Encourage research and development and improve the technological sinews of the industry, and
- Provide drugs at reasonable
Foreign firms faced a tight régime with regards to the production of formulations. The policy imposed three conditions on the foreign firms intending to expand their operations in India: (i) the ratio between production of bulk drugs and formulations that these firms could maintain in their final output was 1:5, as compared with 1:10 allowed for the Indian firms, (ii) licenses to the foreign firms were provided only if the firms agreed to supply 50 percent of their production of bulk drugs to non-associated formulators, and (iii) foreign firms producing formulations based on imported bulk drugs and intermediates had to start manufacturing from the basic stage within two years.
—————————————————————————————————————-
8 Based on preliminary findings of a forthcoming UNCTAD publication on “Transfer of Technology for Successful Integration in the Global Economy: A Case Study of the Pharmaceutical Industry in India.”
——————————————————————————————————————
The drug policy with regards to technological capability had two components: i) local R&D facilities, and ii) the importation of technology wherever necessary.
Alongside the development of indigenous capabilities, the new drug policy emphasised the role that the technology imports could play in the technological up-gradation of the pharmaceutical industry. With respect to agreements for the technology transfer entered into by public sector entities, the policy stated that efforts should be made to ensure that such import of technology provided for horizontal transfer of technology.
The pharmaceutical industry was subjected to rigorous price controls in order to make drugs available at a reasonable price. Another reason was to create an incentive structure for the domestic producers to produce new formulations for use as active ingredients in new drugs, as products of original research in country.
In the mid 1990s, the government allowed 51 percent equity to be held by foreigners. During the same period imports of almost all drugs were allowed on Open General Licence as the restrictions on their imports were removed. This led many of the firms, which had reduced their equity stake to less than 40 percent to increase their equity stake to 51 percent. Apart from this, not much of FDI has come into this sector.
With regard to technological development, there was a close interaction between private firms and publicly funded laboratories of the Council for Scientific and Industrial Research (CSIR). The three laboratories, the National Chemical Laboratory (NCL), Pune, the Central Drug Research Institute (CDRI), Lucknow, and the Indian Institute of Chemical Technology (IICT), Hyderabad have contributed a lot to the advancing technological knowledge in the field of pharmaceuticals. Incentives were provided for the firms that engage in R&D.
It is recognized that the Patent Act of 1970 played a major role in the development of technological capability of the Indian firms. By granting only process patents for drug invention (not products), reducing the patent term, and bringing these inventions under automatic compulsory licenses, it became very unattractive for foreign firms to apply for a patent. In fact, this is actually what happened: there was a reduction in the number of foreign patent applications in the pharmaceutical sector. This gave the Indian firms the opportunity to first copy the technology and cater to the domestic market. Later, when the patent expired, it allowed the firms to export. It seems that the process patent regime was adopted in the view of encouraging innovations.
Moreover, the drug policy provided until 1994 that firms which did not use high technology while producing bulk drugs or formulations had to bring down their foreign holding to 40 percent in order to be considered Indian firms. On the basis of that regulation, foreign firms faced a relatively tighter regime with regards to the production of formulations. They also were obliged to have R&D facilities in the country and spend at least 4 percent of their sales turnover as recurring expenditures on R&D facilities. In the medium term, the growth prospects for Indian firms are very encouraging. With a number of important medicines going off patent in the next decade, there will be enough room for the Indian pharmaceutical industry to expand. In comparison, long-term prospects are quite uncertain. It depends on the reaction of the Indian pharmaceutical industry to put resources into R&D and discover and develop new molecular entities. It also depends on how fast it can adopt molecular biology into its research program.
The government policy aimed at increasing the production of bulk drugs from as basic a stage as possible had largely achieved its objective by the year 2000. India is self sufficient for up to 70 per cent of its bulk drugs and for almost all of its formulations. It can be said that the overall impact of policies was favorable for the building up of the technological capability in the pharmaceutical industry. The performance of some firms such as Ranbaxy Laboratories (which has more 29 patent applications made under the Patent Cooperation Treaty) shows that most firms are able to devise strategies meeting the challenges posed by the opening up of the Indian economy.
CONCLUSION
Finally, it needs to be emphasized that in principle, the technological capability may be built through the national efforts and through the transfer of technology from producers to users by means of the market and other mechanisms. Advances in pharmaceutical technologies could facilitate such transfers if recipient firms that possess adequate skills, access to scientific and technical information, absorptive capacity, and financing for adoption and adaptation use them effectively. However, there are also risks that access to these critical technologies may be limited in an overly protectionist intellectual property environment that does not properly balance incentive to innovate against the needs for dissemination of knowledge. A key component of any transfer process is the effective transfer of the skills and the intangible know-how that would ensure production capability. These can be of greater developmental value than the transfer of tangible goods and inputs.
