The Welfare Implications of Patent Protection, Pricing and Licensing in the Indian Oral Anti-Diabetic Market

Abstract

We evaluate the welfare effects of differential pricing, voluntary licensing, and compulsory licensing in the Indian market for oral anti-diabetic (OAD) drugs. This market includes a new class of molecules called DPP-4 inhibitors, all of which are under patent protection in India. The Indian prices of DPP-4 inhibitors are higher than those of other drugs in the same segment, but only a fraction of the price in the U.S. and other developed countries (i.e., the patent holders practice international differential pricing). The patent holders also license the products out voluntarily to local manufacturers who have wider geographical reach in the Indian market. Our methodology involves the application of a discrete choice demand model to market data from IMS India. The model allows us to calculate consumer welfare, under the status quo as well as under counterfactual policy scenarios such as compulsory licensing whereby the government forcibly assigns the right to sell the patented product to local manufacturers. It also allows for the simulation of market outcomes under different pricing and licensing strategies by the patent holders. Our results indicate that differential pricing and voluntary licensing together have a large positive impact on consumer welfare in the OAD market. We find that the assignment of compulsory licenses for DPP-4 inhibitors to local manufacturers generates an increase in consumer welfare, but the magnitude is small. We also simulate the welfare impact of freeing one of the molecules in the OAD segment from price control, and find it to be negative and large. These findings have significant implications for the policy choices faced by the Indian government.