Research on Protection of the Interests of Generic Drug Companies in the Drug-Patent Linkage System Based on Cournot Model

Ding Wenqing, Luo Suping, Yuan Hongmei＊, Zhang Dawei＊

(School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China)

Abstract Objective To establish a system conducive to generic drug companies based on the facts that although China has promised to implement the data monopoly system and patent term extension system for pharmaceutical companies that hold the patents, yet China is a country that manufactures a large number of generic drugs each year which are closely related to citizens' healthcare. Methods The US drug patent linkage system was studied through literature review methods and then the protection of the interests of generic drug companies in the drug-patent linkage system was explored based on the Cournot model. Results and Conclusion The policy of improving the quality of generic drugs and increasing the spillover effect of technology is more bene fi cial to generic drug companies.Based on the results, some policy suggestions are put forward, such as the implementation of the simplified application system for generic drugs and the consistency evaluation of generic drugs.

Keywords: drug-patent linkage system; game theory; cournot model; policy suggestion

1 Introduction

With the implementation of the US drug patent link system in international bilateral and regional trade agreements, many countries have gradually introduced this system as well. At the same time, following the international trend, China put forward a proposal of establishing drug patent link system in the Opinion on deepening the reform of review and approval system and encouraging the innovation of drug and medical devices.

On April 12, 2018, Premier Li Keqiang announced at the State Council Executive Meeting that “A maximum six-year data protection period for innovative chemical drugs and a maximum fi ve-year patent protection period for innovative drugs should apply for simultaneous listing in China and abroad”.This is also the data exclusivity system and patent extension system in the US drug patent link system.Based on the above background, under the national conditions that China's industrial structure is still dominated by generic drugs, it is worth considering how to construct a system that is conducive to generic drugs to protect citizens' health rights.

In the past, many scholars have studied the drug patent linking system of various countries, including the United States (2006, Yang Yue et al.[1]; 2010,Wang Hong et al.[2]; 2011, Kesselheim A S[3]; 2012,Herman[4], Zhang Xiaodong[5], Chen Jing et al.[6];2014, Liu Li-chun et al.[7]; 2016, Lin Taoyu et al.[8];2018, Hemphill C S et al.[9]), Canada (2010, Xiao Jianyu et al.[10]; 2011, Lexchin J[11], Bouchard R A[12];2014, Lexchin J et al.[13]), Korea (2012, Kim Jay J[14]; 2016, Shin Y S[15]et al). On the basis of drawing lessons from the drug patent link system of various countries, some scholars have also explored the establishment of this system in China (2007,Zhang Qingkui[16]; 2012, Liu B P[17], Yuan Hongmei et al.[18]; 2016, Yao Xuefang et al.[19]; 2017, Wang Meili et al.[20]). These studies are rigorous, clear,and of high academic value, but they are limited to qualitative research. On the basis of fully absorbing the research of the predecessors, this paper uses the game theory to quantitatively explore how to construct a system conducive to generic companies and protect citizens' health right.

2 The core concept of the drug patent link system

Drug Patent link system has both a narrow and broad definition. On the narrow level, it only refers to linking the drug listing approval and patent status.On a broad level, it refers to a system of institutions consisting of a series of systems. The drug patent link system studied in this paper refers to the institutional system on a broad level.

The United States, the first country to design a drug patent link system for pharmaceuticals, is the country with the most mature development of the system. The core concept of its system design is to achieve two seemingly contradictory goals by linking the drug registration system with the patent system.It is not only incentive to develop patented drugs but improve access to generic drugs as well[21]. The United States takes the patent declaration system and the Orange Book System as the basis for the “link”of drugs and patent information, realizing the explicit and shared patent information related to patent drugs.Based on this, the United States implements the data exclusivity system and patent extension system of patented pharmaceutical companies with the simplif i ed application system that are beneficial to generic pharmaceutical companies, forming a lever to balance the interests of patented pharmaceutical companies and generic pharmaceutical companies. This method is incentive to research patent drugs and it increases the accessibility of generic drugs.

The US system to balance the interests of patented pharmaceutical companies and generic pharmaceutical companies on the basis of “links” has important implications for China. China promised to implement a data exclusive system and a patent extension system that favor patented pharmaceutical companies. Considering that China is still a country with many generic drugs, it is necessary to supplement a system that is conducive to generic drugs to achieve the balance of the interests of generic companies and patented pharmaceutical companies. Based on this purpose, the Cournot model in classical game analysis is applied to explore how to construct a system that is beneficial to generic drug companies to improve the establishment of drug patent link system.

3 Model construction and analysis

3.1 Model design

Classical game analysis is a method to demonstrate the equilibrium mechanism of the system[22]. In the process of the equilibrium of the system, various stakeholders play the game for their own interests, and the game equilibrium achieved is the stakeholders' rational choice. Therefore, by analyzing the equilibrium of the game, we can explore the mechanism of the system to achieve equilibrium,thus providing enlightenment for institutional design.

Classical game analysis has two assumptions:one is to assume that the participants are completely rational, and the other is the game rules are exogenous and they are the common knowledge of the participants. Based on these two premises,two participants are drawn from the reality, namely,patented drug company A with strong research and development ability (hereinafter referred to as A)and generic drug company B with weak research and development ability (hereinafter referred to as B). A and B produce and sell the same drug, and the market demand they face is linear. Due to such factor as long drug development cycle, it can be regarded as a duopoly market of A and B in the short term, which is in line with the application conditions of the Cournot model in classical game analysis. This part is based on the Cournot model from the perspective of price and output. First, let's assume that the cost and output are fi xed to the price game to obtain the equilibrium price under the condition of maximum prof i t. Then we assume that the cost and price are fixed to the game to obtain the equilibrium output under the condition of maximizing profit. The model design is shown in Figure 1.

Figure 1 Model design

3.2 Model hypothesis

Hypothesis 1: A invests a large amount of research and development funds XAto develop a patented drug. Costs other than R&D funds are set to C0A. After a period of time, B has also developed a drug for the same indication. The invested R&D fund is XB. The remaining cost is C0B, there is a technology spillover effect between A and B, which is exogenous,and the technology overf l ow coeff i cient is β (inspired by Romer's knowledge spillover model). Then B will get a decrease in technology spillover effect cost due to A's R&D. The amount of change is βXA. Through the above description, the cost of the two companies is

Hypothesis 2: The market demand is fixed at a, which is the sum of the output of A and B, qAand qBrepresent the output of A and B, respectively. At the same time, the consumer has a preference ɵ, the preference ɵ is uniformly distributed, and the value ranges from 0 to 1[23]. 0 means that consumers only pay attention to eff i cacy, but side effects are neglected.1 means that consumers consider both side effects and eff i cacy. The consumer utility function is set to U[24]. U1is the utility of the drug that purchases B, and U2is the utility of the drug that purchases A. S is the retention utility of the consumer, k is the cost that consumers are willing to pay for each unit's satisfaction, P is the price,then the utility function is

There is a ɵ* that makes consumers have no preference for drug selection, which is

Then qAand qBare expressed as follows respectively

Hypothesis 3: The market demand is fi xed at a.A and B are homogeneous and completely replaceable drugs, and qAand qBrepresent the output of A and B, respectively. At this time, the prices of A and B are subject to the market clearing price P, and P is a function of total output as follow

3.3 Game based on price perspective

Considering the case of hypothesis 1 and hypothesis 2, the CA, CBof hypothesis 1 and qA, qBof hypothesis 2 are brought into the formula π = (P-C) q for calculating prof i t respectively. For the prof i t of A and B, the partial derivatives of PAand PBare obtained respectively. Finally, the equilibrium price is solved.When the partial derivative is 0, the two oligarchs respectively select the equilibrium price to achieve the maximum prof i t. The equilibrium price is as follows

According to (3.9) and (3.10), the equilibrium price is related to k, and the equilibrium price of A is more sensitive to the change of k. Considering the situation of k reduction, although the prices of patented drugs and generic drugs will decrease, the price of patented drugs will drop more obviously.This will have a greater impact on the profit space of patented pharmaceutical companies with higher costs, but a relatively little impact on prof i t margins to generic companies.

According to the above analysis, k is more advantageous for generic companies, and k means that consumers are willing to pay more for drugs with better quality (less side effects). The meaning of k reduction is that the motivation of consumers to pursue high-quality (small side effects) patented drugs is reduced, that is to say, the patented drugs and generic drugs are basically the same in quality.

3.4 Game based on output perspective

Considering the case of hypothesis 1 and hypothesis 3, the CA,CBof hypothesis 1 and PA,PBof hypothesis 3 are brought into the formula π= (P-C) q for calculating prof i t respectively. For the prof i t of A and B, the partial derivatives of qAand qBare obtained respectively. Finally, the equilibrium output is solved.When the partial derivative is 0, the two oligarchs respectively select the equilibrium output to achieve the maximum profit. The equilibrium output is as follows

(3.12) minus (3.11)

Bring (3.1) and (3.2) into (3.13)

According to the formula (3.13), the equilibrium output is inversely proportional to the cost.Substituting the cost formula in the hypothesis 1 gives the formula (3.14). At this point, it can be further seen that the equilibrium output is related to β. Considering the increase of β, the output of generic companies will increase relatively, which is conducive to the maintenance of high market coverage of generic companies.

According to the above analysis, the increase of β is more advantageous for generic companies, while β means technology spillover effect, and the increase of β refers to an increase in technology spillover effect.

Based on the results of the comprehensive analysis, it is concluded that the policy to increase the quality of generic drugs and the spillover effect of technology is more favorable to generic companies.

4 Protection of the interests of generic companies in the drug patent link system

China has promised to implement the data monopoly system and the patent period extension system that are favorable for patented pharmaceutical companies. Therefore, it is recommended to supplement the construction of a system that is beneficial to generic companies, and to combine the two on the basis of “link”. A lever should be formed for the interests of both patented companies and generic pharmaceutical companies in accordance to China's national conditions.

4.1 Implementing the simplified application system for generic drugs and the consistency evaluation of generic drugs

The big market coverage of generic drugs not only stabilizes the self-interest of generic companies,but also guarantees the accessibility of generic drugs.Reducing R&D funds can increase the output of generic drugs and ensure big market coverage. The simplified application system for generic drugs in the US patent link system can greatly reduce R&D funds. At the same time, the consistency evaluation of generic drugs in China can make the generic drugs meet the standards in terms of quality. If the generic drug-simplified application system is implemented in parallel with the consistency evaluation of generic drugs, the generic drug companies will only need to provide the same bioequivalence data as the reference formulation, and the quality of the generic drugs will also be guaranteed. According to the analysis of the game equilibrium results, such a policy is beneficial to generic companies and also guarantees the accessibility of generic drugs.

4.2 Promoting the disclosure of valuable information by patented drug companies through enhancing private protection

Increasing the technology spillover effect will increase the output of generic drugs companies,which will help maintain the big market coverage of generic drugs companies and ensure the accessibility of generic drugs. Therefore, the government needs to consider giving a limited monopoly of patented pharmaceutical companies in exchange for valuable information that can be used by generic companies,such as requiring patented pharmaceutical companies to disclose their core patents to form the “Chinese Orange Book” and make it public in the designated patent search system. It is required to stipulate the type of patents registered into the Orange Book and establish a group of experts to approve the relationship between patented drugs and patent claims[25]. This can prevent patented drug companies from focusing on the application of “evergreen” patents to obstructing the listing of generic drugs, and the experimental data must be disclosed in the patent specif i cation et al.

Based on the fact that data exclusive system and patent extension system should be set up in China in the future, this paper proposes the implementation of the parallel application of the simplified application system for generic drugs and the evaluation of generic drugs. At the same time, the disclosure of valuable information should be promoted by patented pharmaceutical companies through the protection of private rights. This will balance the interest of patented pharmaceutical companies and generic pharmaceutical companies on the basis of “links”to ensure the accessibility of generic drugs and the establishment of drug patent link system.