Regular THCB readers know that we are big fans of Stratfor.com, the strategic intelligence firm based in Austin Texas. While Stratfor is probably better known for their analysis of international and national security issues (Think The Economist with a wonky American accent and a healthy obsession with non-state actors and special interest groups), the firm also provides very good coverage of domestic public policy issues, keeping an eye firmly trained on Washington. Analyst Bart Mongoven, the author of the Stratfor Public Policy Intelligence Report is a personal favorite of mine. Today he writes on the evolving definition of intellectual property rights in the international arena, examining recent developments that may signal changes that could be felt everywhere from the market for consumer goods to the pharmaceutical industry. If you enjoy this piece, be sure to sign up for Stratfor’s free email report. — John

The World Intellectual Property Organization
(WIPO) will hold its annual meeting beginning Sept. 24, at which time
representatives of its 184 member countries will likely endorse the so-called
WIPO Development Agenda. WIPO rejected the ideas expressed in the Development
Agenda just two years ago, but leading industrialized countries appear rather
suddenly to have changed their positions. As a result, this agenda will
reflect a fundamental change in how intellectual property rights (IPR) will
be viewed globally in the coming decades. \u003cbr\>For the past 40 years, the\nworld's largest economies have enforced their position globally that\nintellectual property rights are sacrosanct. The 1994 World Trade\nOrganization (WTO) agreement on Trade on Intellectual Property Rights (TRIPS)\nadded some exclusions for emergencies, but in general WIPO and TRIPS rules\nhave been reflexively protective of patents and copyrights.\u003cbr\> \u003cbr\>In the\npast 10 years, however, this approach has come under increasing fire from\ngovernments in developing countries (including WIPO members), human rights\nand humanitarian groups, relief organizations and anti-capitalist groups.\nThese entities argue that the system retards the economic growth of\ndeveloping countries and even results in deaths because citizens cannot\naccess medicines and other patented life-saving technologies. Most detractors\nof the current regime argue that the absolute protection of intellectual\nproperty rights is doing far more harm than good — economically and socially\n– and some of them are calling for a radical shift that would essentially do\naway with recognition of IPR entirely. \u003cbr\> \u003cbr\>As production of goods\nbecomes more and more efficient, especially with modern industrial processes\nreaching low-wage countries such as China, goods are becoming less expensive.\nIntellectual property, on the other hand, is coming to be seen as expensive.\nWhether in drugs, music, seeds or even designer handbags, the price gap\nbetween patented products and the raw cost of the materials — that is, the\nprice of the intellectual property — is growing. With that growth,\nintellectual property rights are more frequently being abrogated. Any\ngovernment tax authority will attest that the amount of cheating is directly\nrelated to the perception that the cost of a product is unfairly high.\u003cbr\>\n\u003cbr\>Though change is afoot, the world is nowhere near doing away with\nintellectual property protection. Still, the tide has shifted the WIPO\nstance, as well as the outlook of a number of other players. Most important,\nthe fairly absolute approach to intellectual property protection looks shaky.\nThe coming regime will likely give corporations a rationale for protecting\nIPR in some cases, but not others. In doing so, it will force changes in a\nnumber of industries and business models. “,1]
);
//–>

For the past 40 years, the
world’s largest economies have enforced their position globally that
intellectual property rights are sacrosanct. The 1994 World Trade
Organization (WTO) agreement on Trade on Intellectual Property Rights (TRIPS)
added some exclusions for emergencies, but in general WIPO and TRIPS rules
have been reflexively protective of patents and copyrights.

In the
past 10 years, however, this approach has come under increasing fire from
governments in developing countries (including WIPO members), human rights
and humanitarian groups, relief organizations and anti-capitalist groups.
These entities argue that the system retards the economic growth of
developing countries and even results in deaths because citizens cannot
access medicines and other patented life-saving technologies. Most detractors
of the current regime argue that the absolute protection of intellectual
property rights is doing far more harm than good — economically and socially
— and some of them are calling for a radical shift that would essentially do
away with recognition of IPR entirely.

IPR
Fundamentals

The global intellectual property system was designed
to ensure a creator’s monopoly on the use and sale of his or her invention.
The inventor could be a writer or musician producing copyrighted material, or
a chemist inventing a new paint color. Patents have been extended (with some
controversy) to processes and to living organisms that have been developed
through biotechnology. In all of these cases, the current legal structure
allows the inventor to benefit from the monopoly for a certain amount of
time, after which the property falls into the public domain.

Many
advocates of changes to these laws argue that ownership of an idea is an
absurd concept in many cultures — and that it therefore is unfair to
strictly enforce IPR protections in those cultures. They also argue that it
is unfair to demand that people from these countries jump through the
necessary hoops, such as hiring a patent lawyer, to secure patents on their
own inventions (something they consider to be knowledge rather than
property)
— particularly when the system requires that they buy from a company that
has patented their traditional knowledge. For instance, they oppose allowing
a foreign multinational to patent a seed that has been cultivated by
indigenous groups for decades. (The United Nations on Sept. 13 adopted a
declaration on the rights of indigenous peoples that mentions indigenous
control over intellectual property, while WIPO has a separate working group
on indigenous issues.)

In industrialized countries, meanwhile, patent
and copyright protections are generally uncontroversial, and the patent
system is long-standing and thoroughly engrained. The entry of the U.S.
Patent Office, for example, bears a quote from Abraham Lincoln, who said the
creation of the U.S. patent system "added the fuel of interest to the fire of
genius, in the discovery and production of new and useful things." Even the
most ardent supporters of reform are not calling for an end to IPR
protections, but rather for changes, such as expanding the extraordinary
circumstances under which protections can be abrogated or further limiting
the time the creator enjoys a monopoly. \u003cbr\>In 1967, WIPO was formed to\ncentralize the world's patent and copyright information. It operates a\ndatabase of patents and awards internationally recognized patents to\ninventors. More than any other body, WIPO ensures an invention receives\nglobal patent protection the first time it is patented anywhere in the world.\nIn addition, WIPO promotes adherence to IPR among its member countries, and\nthus has come to be seen as the global champion of intellectual property\nprotection. \u003cbr\> \u003cbr\>WIPO's hand was strengthened by the 1994 TRIPS regime.\nIn agreeing to TRIPS, countries acknowledged that the protection of\nintellectual property rights is central to free trade, and each agreed to\ncombat piracy and respect patent and copyright protection.\u003cbr\> \u003cbr\>\u003cb\>The\nComing Revolution\u003c/b\>\u003cbr\>\u003cbr\>Intellectual property protection has entered the\npublic's mind through three very different spheres — pharmaceuticals,\nexpensive consumer products and media (especially music). City dwellers come\ninto contact with intellectual property violations every time they pass a\nstreet vendor selling knockoff Prada, Gucci or Louis Vuitton products for $20\nor pirated new-release DVDs for 75 cents or less. The designer bags look and\nfeel very close to the "real" item, and the only thing their manufacturer\nfailed to do was invent the style. The materials used in a Prada handbag cost\na fraction of the bag's retail price.\u003cbr\> \u003cbr\>Similarly, the music industry\nsells for around $16 a CD that is available for free on the Internet, yet the\nactual material in the CD and its packaging cost pennies. The rest of the\ncost is in intellectual property, marketing and distribution. \u003cbr\> \u003cbr\>Though\nthe music and movie industries and luxury brand name goods are besieged by\nIPR problems, their global importance pales in comparison to that of the\npharmaceutical industry. At the center of the pharmaceutical industry's\nproblem is compulsory licensing. Under the compulsory licensing clause in\nTRIPS, member countries can break a patent and manufacture a drug themselves\nin emergency situations, such as a malaria outbreak. Using this clause,\nhowever, some governments have actively encouraged the copying and selling of\npatented drugs without the payment of a royalty to the drug's inventor. As a\nresult of increasing episodes of compulsory licensing, the pharmaceutical\nindustry's core business model is under attack. “,1]
);
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In 1967, WIPO was formed to
centralize the world’s patent and copyright information. It operates a
database of patents and awards internationally recognized patents to
inventors. More than any other body, WIPO ensures an invention receives
global patent protection the first time it is patented anywhere in the world.
In addition, WIPO promotes adherence to IPR among its member countries, and
thus has come to be seen as the global champion of intellectual property
protection.

WIPO’s hand was strengthened by the 1994 TRIPS regime.
In agreeing to TRIPS, countries acknowledged that the protection of
intellectual property rights is central to free trade, and each agreed to
combat piracy and respect patent and copyright protection.

The
Coming Revolution

Intellectual property protection has entered the
public’s mind through three very different spheres — pharmaceuticals,
expensive consumer products and media (especially music). City dwellers come
into contact with intellectual property violations every time they pass a
street vendor selling knockoff Prada, Gucci or Louis Vuitton products for $20
or pirated new-release DVDs for 75 cents or less. The designer bags look and
feel very close to the "real" item, and the only thing their manufacturer
failed to do was invent the style. The materials used in a Prada handbag cost
a fraction of the bag’s retail price.

Similarly, the music industry
sells for around $16 a CD that is available for free on the Internet, yet the
actual material in the CD and its packaging cost pennies. The rest of the
cost is in intellectual property, marketing and distribution.

Though
the music and movie industries and luxury brand name goods are besieged by
IPR problems, their global importance pales in comparison to that of the
pharmaceutical industry. At the center of the pharmaceutical industry’s
problem is compulsory licensing. Under the compulsory licensing clause in
TRIPS, member countries can break a patent and manufacture a drug themselves
in emergency situations, such as a malaria outbreak. Using this clause,
however, some governments have actively encouraged the copying and selling of
patented drugs without the payment of a royalty to the drug’s inventor. As a
result of increasing episodes of compulsory licensing, the pharmaceutical
industry’s core business model is under attack. \u003cbr\>The current business\nmodel is fairly simple. Drug patents give the inventor a monopoly on the drug\nfor a set number of years, during which time the maker charges a high price\nfor the drug. Only a small percentage of new drugs that begin safety trials\nmake it to market, so the high price allows the company to recoup not just\nthe development and production costs of the drug, but also the development\ncosts of all the failed drugs in the manufacturer's pipeline. The high prices\nalso provide for salaries for managers and sales staff, for advertising and\nfor enough profit to encourage shareholders to keep the company open. \u003cbr\>\n\u003cbr\>Once the monopoly period is over, the drug's inventor loses the patent\nand anyone can make and market the drug. Companies that specialize in making\ndrugs, but not inventing them — the generics manufacturers — step in and\nsell the drugs for a fraction of the name brand cost. \u003cbr\> \u003cbr\>For the\npharmaceutical business model to work, then, a drug must make a lot of money\nin seven years to satisfy the company's needs.\u003cbr\> \u003cbr\>\u003cb\>Pressure to\nChange\u003c/b\>\u003cbr\> \u003cbr\>In the 1990s, the development of costly AIDS drugs\ninitiated a chain of reactions that has led to changes in how IPR is viewed.\nThese drugs severely stalled the outbreak of AIDS in patients who were HIV\npositive, and had an immediate impact on HIV mortality in the West. In part\nbecause they were expensive, however, they were slow to reach poorer\ncountries, areas where AIDS happens to be more prevalent. As a result,\ncountries began to demand access to free AIDS drugs. The pharmaceutical\ncompanies, however, hesitated. They had reasons beyond the IPR issue for not\ngiving away AIDS drugs, but the fear of setting a precedent should they do so\nwas a major concern. When it became clear that they could either give away\nAIDS drugs or face compulsory licensing, they chose to protect the integrity\nof IPR and began to sell the drugs at greatly reduced prices. Many read the\ndrug companies' hesitation as insensitivity, which paved the way for a wide\nopen discussion on where pharmaceutical companies' social responsibility\nbegins and ends. “,1]
);
//–>

The current business
model is fairly simple. Drug patents give the inventor a monopoly on the drug
for a set number of years, during which time the maker charges a high price
for the drug. Only a small percentage of new drugs that begin safety trials
make it to market, so the high price allows the company to recoup not just
the development and production costs of the drug, but also the development
costs of all the failed drugs in the manufacturer’s pipeline. The high prices
also provide for salaries for managers and sales staff, for advertising and
for enough profit to encourage shareholders to keep the company open.

Once the monopoly period is over, the drug’s inventor loses the patent
and anyone can make and market the drug. Companies that specialize in making
drugs, but not inventing them — the generics manufacturers — step in and
sell the drugs for a fraction of the name brand cost.

For the
pharmaceutical business model to work, then, a drug must make a lot of money
in seven years to satisfy the company’s needs.

Pressure to
Change

In the 1990s, the development of costly AIDS drugs
initiated a chain of reactions that has led to changes in how IPR is viewed.
These drugs severely stalled the outbreak of AIDS in patients who were HIV
positive, and had an immediate impact on HIV mortality in the West. In part
because they were expensive, however, they were slow to reach poorer
countries, areas where AIDS happens to be more prevalent. As a result,
countries began to demand access to free AIDS drugs. The pharmaceutical
companies, however, hesitated. They had reasons beyond the IPR issue for not
giving away AIDS drugs, but the fear of setting a precedent should they do so
was a major concern. When it became clear that they could either give away
AIDS drugs or face compulsory licensing, they chose to protect the integrity
of IPR and began to sell the drugs at greatly reduced prices. Many read the
drug companies’ hesitation as insensitivity, which paved the way for a wide
open discussion on where pharmaceutical companies’ social responsibility
begins and ends. \u003cbr\>This conversation has altered the pharmaceutical\ncompanies' leverage in certain places, most visibly in two developing\ncountries that have an increasingly large middle class but a large poor\npopulation as well: Thailand and India.\u003cbr\> \u003cbr\>In Thailand, the government\nand the U.S.-based pharmaceutical lobby PhRMA have launched a public war of\nwords. The Thai government says that, under the compulsory license clause of\nTRIPS, it should be allowed to break the patent on "essential" AIDS-related\ndrugs and have its government-backed pharmaceutical agency produce generic\nversions of them. PhRMA said the compulsory licensing step was unwarranted\nbecause it already has been providing low-cost drugs to Thailand voluntarily.\nThe most controversial case involved Abbot Laboratories, which ended up\npulling its top AIDS and heart-related drugs from the Thai market after\nBangkok, enacting a compulsory license law, began production on generic\nversions. Even the U.S. government became involved, adding Thailand to its\nlist of countries that do not abide by the intellectual property rights of\nU.S. companies. \u003cbr\> \u003cbr\>In India, Swiss-based Novartis lost a patent suit\nover what constituted a new or improved drug under Indian patent law.\nNovartis said that an update to its leukemia drug Gleevec (also called\nGlivec) regarding how the drug is absorbed into the body represented a major\nimprovement of the drug and that the drug therefore should be subject to\npatent in India (earlier versions of the drug, which were not subject to\npatent in India, are now made generically in India). An Indian court in\nChennai ruled against Novartis' claim that Indian patent law, which disallows\npatents to be placed on drugs on which only minor modifications have been\nmade, did not comply with TRIPS requirements. The Indian court instead\nreferred the issue back to the WTO — a time-consuming and costly maneuver\nthat Novartis sought to avoid by keeping the issue local. Nevertheless,\ndrug-focused nongovernmental organizations, including Doctors without\nBorders, hailed the court's decision as a victory for essential drugs in the\ndeveloping world. Novartis is trying to overturn the original patent refusal\nthrough other means, but the company's problems in India likely foreshadow\ngrowing battles in the developing world that could make it harder for major\npharmaceuticals to obtain patents.”,1]
);
//–>

This conversation has altered the pharmaceutical
companies’ leverage in certain places, most visibly in two developing
countries that have an increasingly large middle class but a large poor
population as well: Thailand and India.

In Thailand, the government
and the U.S.-based pharmaceutical lobby PhRMA have launched a public war of
words. The Thai government says that, under the compulsory license clause of
TRIPS, it should be allowed to break the patent on "essential" AIDS-related
drugs and have its government-backed pharmaceutical agency produce generic
versions of them. PhRMA said the compulsory licensing step was unwarranted
because it already has been providing low-cost drugs to Thailand voluntarily.
The most controversial case involved Abbot Laboratories, which ended up
pulling its top AIDS and heart-related drugs from the Thai market after
Bangkok, enacting a compulsory license law, began production on generic
versions. Even the U.S. government became involved, adding Thailand to its
list of countries that do not abide by the intellectual property rights of
U.S. companies.

In India, Swiss-based Novartis lost a patent suit
over what constituted a new or improved drug under Indian patent law.
Novartis said that an update to its leukemia drug Gleevec (also called
Glivec) regarding how the drug is absorbed into the body represented a major
improvement of the drug and that the drug therefore should be subject to
patent in India (earlier versions of the drug, which were not subject to
patent in India, are now made generically in India). An Indian court in
Chennai ruled against Novartis’ claim that Indian patent law, which disallows
patents to be placed on drugs on which only minor modifications have been
made, did not comply with TRIPS requirements. The Indian court instead
referred the issue back to the WTO — a time-consuming and costly maneuver
that Novartis sought to avoid by keeping the issue local. Nevertheless,
drug-focused nongovernmental organizations, including Doctors without
Borders, hailed the court’s decision as a victory for essential drugs in the
developing world. Novartis is trying to overturn the original patent refusal
through other means, but the company’s problems in India likely foreshadow
growing battles in the developing world that could make it harder for major
pharmaceuticals to obtain patents. \u003cbr\>The Indian court decision and the\nactivities of the Thai government show that the essential drugs argument is\ngaining traction, and that developing countries are becoming critical players\nin shaping how the pharmaceutical companies will conduct business in the\nfuture.\u003cbr\> \u003cbr\>\u003cb\>IPR Going Forward\u003c/b\>\u003cbr\> \u003cbr\>The WIPO Development\nInitiative was born in 2005 with an eye toward addressing problems such as\nthose raised by the patenting of drugs or living things. Most of the ideas\nexpressed in the initiative were unobjectionable to IPR-dependent\nindustrialized countries — but some were very much objectionable. The plan,\ntherefore, was twice scuttled by industrialized countries. Partly as a result\nof the recent spate of controversies surrounding pharmaceuticals, however,\nvarious industries dependent on IPR have come to see intellectual property in\na different light.\u003cbr\>\u003cbr\>WIPO's decision to give the new ideas a second\nlook, then, reinforces a lesson the pharmaceutical companies learned in the\nAIDS-drug debate: maintaining the status quo will not work. The high cost of\nintellectual property is encouraging piracy and spurring resentment. The\nremaining question is how to find an intellectual property protection regime\nthat will continue to add "the fuel of interest to the fire of genius," but\nremain flexible enough to restrain poorer countries from explicitly breaking\nit.\u003cbr\> \u003cbr\>The corporations could have the answer, or at least part of it.\nThe risk to a corporate brand from being seen as a bully or even a greedy\nkiller is enormous. As the world increasingly demands that corporations be\nsocially responsible, companies are under pressure to look at the social\naspects of their businesses, including their patents. With this, they appear\nwilling to endorse a WIPO initiative — at least as a first step in exploring\nways to protect IPR and avoid resentment. \u003cbr\> \u003cbr\>The change that this\nportends is far more significant than the WIPO agenda suggests, however. The\ndifficulty with IPR is that, for any system to work it must be absolute.\nEither an invention is property (and therefore patentable) or it is not. Once\nthe ability to patent an invention becomes situational, the business models\nthat depend on absolute protection of intellectual property rights are\nchallenged. “,1]
);
//–>

The Indian court decision and the
activities of the Thai government show that the essential drugs argument is
gaining traction, and that developing countries are becoming critical players
in shaping how the pharmaceutical companies will conduct business in the
future.

IPR Going Forward

The WIPO Development
Initiative was born in 2005 with an eye toward addressing problems such as
those raised by the patenting of drugs or living things. Most of the ideas
expressed in the initiative were unobjectionable to IPR-dependent
industrialized countries — but some were very much objectionable. The plan,
therefore, was twice scuttled by industrialized countries. Partly as a result
of the recent spate of controversies surrounding pharmaceuticals, however,
various industries dependent on IPR have come to see intellectual property in
a different light.

WIPO’s decision to give the new ideas a second
look, then, reinforces a lesson the pharmaceutical companies learned in the
AIDS-drug debate: maintaining the status quo will not work. The high cost of
intellectual property is encouraging piracy and spurring resentment. The
remaining question is how to find an intellectual property protection regime
that will continue to add "the fuel of interest to the fire of genius," but
remain flexible enough to restrain poorer countries from explicitly breaking
it.

The corporations could have the answer, or at least part of it.
The risk to a corporate brand from being seen as a bully or even a greedy
killer is enormous. As the world increasingly demands that corporations be
socially responsible, companies are under pressure to look at the social
aspects of their businesses, including their patents. With this, they appear
willing to endorse a WIPO initiative — at least as a first step in exploring
ways to protect IPR and avoid resentment.

The change that this
portends is far more significant than the WIPO agenda suggests, however. The
difficulty with IPR is that, for any system to work it must be absolute.
Either an invention is property (and therefore patentable) or it is not. Once
the ability to patent an invention becomes situational, the business models
that depend on absolute protection of intellectual property rights are
challenged. \u003cbr\>This scenario could lead to dramatic changes in\nIPR-dependent industries, such as pharmaceuticals. Already the industry is\nfinding ways to increase production in Asian countries, where costs are\nlower, and is developing the generic arms of their businesses so they can\ndominate the generics market once the drug is off patent. In the United\nStates, the issue of universal health care coverage is gaining traction and\ninsurance companies are successfully demanding that doctors prescribe cheaper\ngenerics rather than name brand drugs. Factor in the growing pressure from\ndeveloping countries that have strengthening economies, and the playing field\nis ripe for change in how modern business deals with intellectual property\nrights on a global scale. The ideas behind the WIPO Development Agenda signal\nthe changes to come.\u003cbr\>\u003cbr\>\u003cb\>Editor's Note:\u003c/b\> \u003ci\>Author Bart Mongoven is\ntaking a sabbatical from his weekly Public Policy Intelligence Report while\nhe refines his focus on global business issues. Public policy will continue\nto be covered in regular Stratfor analyses.\u003c/i\>\u003cbr\>\u003cbr\>\u003cbr\>\u003ctable width\u003d\”100%\” border\u003d\”0\” cellpadding\u003d\”0\” cellspacing\u003d\”0\”\>\u003ctr\>\u003ctd\>\u003ca href\u003d\”mailto:analysis@stratfor.com\” target\u003d\”_blank\” onclick\u003d\”return top.js.OpenExtLink(window,event,this)\”\>Tell Bart what you\nthink\u003c/a\>\u003c/td\>\u003c/tr\>\u003ctr\>\u003ctd\>\u003cimg src\u003d\”http://www.stratfor.com/images/1x1trans.gif\” border\u003d\”0\” height\u003d\”15\”\>\u003c/td\>\u003c/tr\>\u003ctr\>\u003ctd\>\u003ca href\u003d\”https://www.stratfor.com/services/freesignup.php?utm_source\u003dPPI&utm_medium\u003demail-strat-html&utm_content\u003dPPI-link-footer-subscribe&utm_campaign\u003dPPI\” target\u003d\”_blank\” onclick\u003d\”return top.js.OpenExtLink(window,event,this)\”\>Get\nyour own copy\u003c/a\>\u003c/td\>\u003c/tr\>\u003c/table\>\u003c/div\>\u003cdiv\>\u003cdiv\>\n\u003ch3\>Distribution and Reprints\u003c/h3\>\n\u003cp\>This report may be distributed or republished with attribution to Strategic Forecasting, Inc. at \u003ca href\u003d\”http://www.stratfor.com/\” target\u003d\”_blank\” onclick\u003d\”return top.js.OpenExtLink(window,event,this)\”\>www.stratfor.com\u003c/a\>. For media requests, partnership opportunities, or commercial distribution or republication, please contact “,1]
);
//–>

This scenario could lead to dramatic changes in
IPR-dependent industries, such as pharmaceuticals. Already the industry is
finding ways to increase production in Asian countries, where costs are
lower, and is developing the generic arms of their businesses so they can
dominate the generics market once the drug is off patent. In the United
States, the issue of universal health care coverage is gaining traction and
insurance companies are successfully demanding that doctors prescribe cheaper
generics rather than name brand drugs. Factor in the growing pressure from
developing countries that have strengthening economies, and the playing field
is ripe for change in how modern business deals with intellectual property
rights on a global scale. The ideas behind the WIPO Development Agenda signal
the changes to come.