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Locking out smart jobs

By Nicholas Gruen - posted Thursday, 16 April 2009

Beggars can't be choosers. Any job we can create right now is welcome, but the greater skill it involves and the less it costs government, the more value it will generate and more secure it will be. And, to get on top of our ballooning current account deficit and resulting rising debt we need to put less effort into consumption and more into exporting. Enter US based pharmaceutical firm Hospira which has its second largest manufacturing and R&D investments in Australia. It doesn't want handouts. It wants to manufacture new generation "biologic" generic drugs for export markets where drug patents have expired. What's there not to like?

Hospira asked that a few years ago. It turned out there was a catch.

The major pharmaceutical companies had persuaded Australia's government to extend patent protection beyond the standard 20 years - to make up for the time taken for clinical trials and regulatory approvals before new drugs can reach market.  But partly because drug companies typically seek Australian approvals after they apply in really big markets, most Australian patent extensions lapse after similar extensions in the US and Europe. They certainly expire after patents expire in countries like New Zealand, South Africa, India and Canada, where they don't offer patent extensions at all.


Now, given that virtually all the commercial benefit to patent holders arises from their exclusive right to sell into a market, it's silly also to give them exclusive rights to manufacture, and thus the right to prevent other firms manufacturing for export. After all, generic drugs would be produced for those markets anyway, so the seller of the patented drug had virtually nothing to gain from preventing their supply from Australia.

Still, Hospira could have lived with that - providing that the patent extensions mentioned above didn't prohibit manufacturing for export. There was a further complication. We'd been negotiating a free-trade agreement with America. An overarching American objective was to modify our intellectual property laws to their own advantage (the US is a net exporter of intellectual property to every other country in the world).

In this environment, Australian officials and politicians patiently explained how sympathetic they were to Hospira's intentions. But, really - Hospira had shown such inconvenient timing! But don't feel sorry for Hospira. They're happily manufacturing all those drugs they wanted to make here ... from the new facilities they were forced to build in India. India has no patent extensions. (So much for Big Pharma's argument that ramping up IP extensions beyond international requirements encourages increased domestic investment. Generics manufacture is surging in countries like India and Canada who stood up for their own interests.)

And now it's all happening again. To manufacture the next batch of generics - high tech biologics - for export, Hospira wants to further invest in their high tech Australian facilities. But officials have seemed almost as sheepish as they were when they last wrung their hands in 2004.

Big Pharma argues that manufacture for export is incompatible with the US Free Trade Agreement. But, having seen Hospira's legal advice, while it's no certainty, I'd say Australia is within its rights and we'd win if it were formally arbitrated.

But, for it to come to that, Big Pharma would have to cut off its nose to spite its face. It gains nothing from preventing us exporting, and indeed one Big Pharma firm is keen to supply inputs to those exports. In addition, frustrating our exports would show other countries that co-operating with Big Pharma's IP agenda can be a mug's game. However, the real obstacle for Big Pharma in stopping our exports is that it would also need to convince the new US Administration to make a similar spoilsport of itself against one of its closest allies.


But even if you're still not convinced, here's the thing. Even in the unlikely event that the Americans behave badly, and that the resulting arbitration goes against us, our government could simply change the law back to comply with the ruling. So the real risk taker in all this is the company that's putting down its money and could get some of it stranded: Hospira.

This being so, and given that other generics producers will follow in Hospira's wake, we should be pretty disappointed if timidity and inertia are, yet again, the order of the day.

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First published in the Australian Financial Review on April 8, 2009.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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