Attracting Pharmaceutical Investment to South Africa
A recent Deloitte's report, using the pharmaceutical manufacturing sector as an example, showed that in 2006 the South African economy derived a direct investment benefit of some R10 billion from that sector. The tax revenue alone generated R1.6 billion. Capital investment contributed R1.8 billion.
Remuneration of the pharmaceutical company employees (excluding skills development) was R0.9 billion. Importantly, as a result of their higher wages, spending by the employees created a multiplier effect of 1.79, compared with the 1.6 of the automobile and 1.3 of the IT sectors.
Pharmaceutical research and development (R&D) could make an even greater contribution to SA’s economic growth. Unfortunately the potential for growth is being hampered because government health care regulators do not appear to have the same appreciation, or interest, as their colleagues dealing with science, technology, trade, industry and finance, in the role that innovation plays in competitiveness and economic development.
Innovation has the potential to address our most pressing social and human challenges. It can lead to better outcomes, such as lower mortality rates, improved resource utilisation, lower rates of hospitalisation, production of cost-effective medicines and a reduction in the proportion of health to total spending in the economy. And more research leads to more jobs.
A lack of skills and slow regulatory approval for new medicines are among the most pressing problems facing the pharmaceutical sector. SA should take deliberate action to expand current R&D expenditure by, for example, tailoring the regulations for pharmaceuticals and particularly for clinical trials to fit that purpose. SA was in the lead just five years ago but now clinical trial development is growing much faster in India and China.
Cross cutting policy on innovation includes the protection of intellectual property (IP), a competitive tax environment, the degree to which competition laws encourage or discourage innovation-based competition, and the openness of the economy to trade and investment.
Creation of innovative medicines is complex, requiring cutting-edge science and technology, long-term commitment and substantial investment. At the heart of innovation lies IP protection. Any government wishing to attract large IP-based investment needs to develop a track record that includes strong IP protection, a stable, business-friendly environment, low taxes, minimal bureaucracy and a flexible labour market.
It is not that SA has poor IP protection. With the removal of some niggling problems relating to pharmaceuticals, SA could become even more attractive to investors. In fact, SA was joint 23rd with the United Arab Emirates, placing it just inside the top 20 per cent of the 115 countries ranked on the overall 2008 International Property Rights Index (IPRI) ranking, which measures a country’s legal framework, the strength of its physical property rights enforcement and its respect for intellectual property rights. The research shows that there appears to be a significant correlation between a country’s intellectual property rights score and GDP per capita, potentially predicting a higher GDP per capita with improvements in this score.
SA IP protection ostensibly covers newly registered medicines for 20 years. In reality, however, this period is greatly diminished because the patent period starts to run from the time the patent application is lodged. The registration processes are slow and, in order to ensure effective legal protection, companies have to register their patents prior to commencing clinical trials. The total time taken up by the slow registration process and the clinical trials can reduce the effective IP protection term by up to 5 and even 7 years in some cases, which considerably reduces the commercial value of the patent. Slow registration is not just a barrier to pharmaceutical investment; it is a barrier to patients getting new medicines. Many companies do not bother to register and sell their products in countries that provide inadequate protection, particularly if the products are also subject to price controls.
SA does not have a mechanism for extending the patent life of a pharmaceutical product whose effective patent term has been reduced by delays in the registration process. Other countries have overcome this problem by introducing what they call Supplementary Protection Certificates (“SPCs”). Falling in line with such standard practice regarding the effective patent life of pharmaceuticals would play a significant role in building investor confidence in the commitment of the SA government to pharmaceutical IP protection. It would also encourage the establishment of more research centres in the country, which would add much-needed skills development in this valuable manufacturing field.
Another problem that could deter investment in pharmaceutical R&D and even registration of some medicines in SA is that the Medicines and Related Substances Act does not provide for data protection during the process of registration. If competitors gain access to innovator company data during early filing and registration the rights of the company doing the filing could be seriously compromised.
Conditions in SA therefore do not compare well with other potential investment destinations for pharmaceutical R&D and production. Effective data protection standards will deliver de facto market exclusivity for the specific drug product or indication that is the subject of the clinical investigations. Such protection is important, not only for multinational companies but also for innovators in developing countries. And, especially in countries like SA that have a strong pool of scientific talent and a trove of indigenous knowledge.
It is the interrelatedness of patent life, registration of medicines and the data associated with these activities that makes the adoption of effective data protection necessary, especially for a country wishing to attract additional investment in this sector. The case for the introduction of SPCs and data protection is based in part on the SA constitutional requirement that public administration must be fair and equitable and also on the requirement that the administration should carry out the intentions of the legislature, which surely intended that patent protection should in fact be provided for the full period stipulated in the statute, not a lesser period determined by administrative tardiness or discretion.
A country that has robust patent protection for pharmaceutical products, effective patent law, data package protection and patent term restoration will be considered an attractive investment destination. Reforming patent law in SA will bring about a twofold benefit: firstly, a continual stream of new innovative products for currently unmet medical needs, and secondly, access to a similar stream of less expensive generic products over the longer term.
It is not for the comfort and benefit of investors that governments provide patent protection for pharmaceuticals, regulatory environments conducive to ease of doing business, and other conditions intended to make their countries attractive investment destinations: it is for the benefit of the country’s citizens. In the case of pharmaceuticals it is to improve access to medicines, jobs, skills, technology and all the other benefits that citizens can derive from the presence of a large and thriving pharmaceutical manufacturing industry.
By Eustace Davie
Director of the Health Policy Unit, a division of the Free Market Foundation.
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