What LDC graduation will mean for Bangladesh’s drugs industry

Daniel Gay, Inter-regional adviser, Committee for Development Policy Secretariat (2017)

Bangladesh’s pharmaceutical industry is unique among least developed countries (LDCs). Driven by active government policies, output has grown a thousand times since 1982, to US$2 billion, or around 1% of gross domestic product, making it the biggest white collar employer in the country. The industry supplies almost the entire domestic market and more than 100 other countries including the United States.

It’s of some concern, then, that if Bangladesh potentially leaves the LDC category in 2024 it’ll no longer have access to a special World Trade Organisation (WTO) waiver which exempts the industry from the Agreement on Trade-Related Aspects of International Property Rights (TRIPS). The exemption has allowed government to pursue a dedicated industrial policy that’s spurred growth until now.

Most of the hundred or more pharma companies operating in Bangladesh make so-called generics, or non-branded medicines, the patents of which have often expired. Around a fifth of drugs produced in the country are patented in other countries, something which is made possible by the waiver which until 2033 allows LDCs to produce patented drugs without first asking patent holders.

The most obvious benefit of the waiver is that companies can make whatever drug they want, drastically cutting costs and improving availability. Bangladesh’s 1911 Patent Law would contravene the TRIPS agreement in a number of ways, among other things because it only provides patent protection for 16 years, not the required 20. No patent protection exists for plant and animal varieties; compulsory licences can be introduced by entities other than government; and foreign patents can be cancelled after four years if the product is not also manufactured domestically.

The Drugs Act allows government to regulate how imported drugs are labelled, requiring complete formulaic information to be visible. The Drugs Control Ordinance of 1982 lets the authorities fix prices and restrict the imports of any medicine if it or a substitute is produced in the country.

Under the waiver Bangladesh as an LDC can export generic versions of patented drugs to any country where those drugs aren’t covered by patents or where compulsory licences are issued to treat diseases like cancer or HIV/AIDS. Vietnam, Myanmar and Kenya are currently key markets.

Perhaps most importantly, weak intellectual property protection has also allowed Bangladeshi firms to build their technological base by imitating or reverse engineering foreign technologies. Copying and reverse engineering is critical to economic catch-up in a range of industries, not just pharmaceuticals. Rather than start from scratch, developing-country firms can take advantage of what others have learned.

The end of access to the waiver after graduation means several things.¹

First, Bangladesh would have to update its patent law, increasing patent terms to 20 years, extending patents to pharmaceutical products and processes, and allowing patent protections on animal and plant varieties. Patents could no longer be cancelled simply because they are foreign-registered, and compulsory licenses could only be issued by the government.

Bangladesh would have to let foreign companies file for an injunction if a patent was infringed so that the authorities could seize those goods. The government could no longer insist that the ingredients of imported drugs were displayed on packaging for fear of revealing trade secrets and interfering with manufacturers’ marketing strategies.

After graduation Bangladesh would also probably have to abandon the import restriction strategy pursued under the 1982 drugs control ordinance, again because it would conflict with WTO rules.

Irrespective of the loss of the pharmaceutical waiver, it’s unlikely that the general TRIPS exemption for LDCs will be renewed after its expiry in 2021. Although this is before Bangladesh’s potential graduation date and would therefore have an impact irrespective of graduation, complying with TRIPS would be expensive. The government has already said that it will upgrade its intellectual property system in accordance with TRIPS, earmarking projects worth US$71.04 million.² Among other things this includes an overhaul of the Patent Act. A 2014 draft law is still under review by the Ministry of Industry.

Some commentators argue that strong protection of intellectual property under TRIPS will stimulate innovation, attract foreign direct investment and foster technology transfer, promoting development.³ Bangladesh would compete on a level playing field, with private companies confident that their intellectual property wouldn’t be stolen. On this line of argument, intellectual property rights are said to incentivise innovation by preventing free-riding and increasing the rewards from investment.

The evidence in LDCs, however, doesn’t support this view. According to the Intergovernmental Panel on Climate Change (2014), the argument that strong intellectual property protection stimulates domestic technological innovation is “almost entirely limited to specific sectors in the developed world”.⁴ Strong intellectual property protection can raise prices -- by up to 40 percentage points according to some estimates -- restricting imitation and follow-on innovation⁶ as well as limiting access to important technological inputs into research and development.⁷

Bangladesh would also have to bring its laws into line with WTO agreements other than TRIPS, such as the WTO Agreement on Subsidies and Countervailing Measures. This may bring into question the services and facilities given to local drug manufacturers under the National Drug Policy of 2005. Full compliance with WTO rules would require that infant pharmaceutical corporations compete in the global market with little financial support from government.

Ultimately LDC graduation risks derailing the process of technological learning that has spurred growth until now. The industry body expects recent annual compound growth rate of 15% to continue into the medium term. Without mitigating measures, this growth may slow, with broad-based economic, employment and public health implications. As a potential middle-income country, Bangladesh’s main challenge is to keep moving up the technological ladder, adding value and moving away from low-cost production.

More importantly, limiting the activities of pharmaceuticals producers could raise prices for Bangladeshis who couldn’t otherwise afford vital drugs – as well as buyers around the world. Life-saving medicines would no longer be available for poor people in Bangladesh, LDCs and other developing countries.

What appears likely in the event of graduation, and without any new measures to mitigate the impact on graduating countries, is that the industry will undergo consolidation, with established international players buying up smaller local companies. The possible new foreign investment may bring new technologies and working practices, with a knock-on impact on production – although nothing is certain. Whether the industry is robust enough to withstand and adapt to this consolidation remains to be seen.

^{1. Fukuda-Parr and Treanor (2017) ‘Trade agreements and policy space for achieving universal health coverage (SDG target 3.8)’, draft Committee for Development Policy Working Paper↩}

^{2. World Trade Organization: Trade Policy Review Body, Trade Policy Review Report by Bangladesh, WTO Doc. WT/TPR/G/270, 10 September 2012, para. 37.↩}

^{3. See, e.g., Laurence R. Helfer (2004), Regime Shifting: The TRIPS Agreement and New Dynamics of International Intellectual Property Law-making, Yale Journal of International Law, vol.29, pp. 1-83, at p. 2.↩}

^{4. IPCC (2014), Climate Change 2014: Mitigation of Climate Change, Working Group III Contribution to the IPCC 5th Assessment Report, Cambridge University Press, p. 1175.↩}

^{5. Richard C. Levin et al. (1987), Appropriating the Returns from Industrial Research and Development, Brookings Papers on Economic Activity, pp. 783-820, p. 811↩}

^{6. See, e.g., Walker Simon (2001), The TRIPS Agreement, Sustainable Development and the Public Interest, Discussion Paper, IUCN, Gland, at p. x; Commission on Intellectual Property Rights (2002), Integrating Intellectual Property Rights and Development Policy, Report of the Commission on Intellectual Property Rights, London, p. 1; and OECD (2004), Patents and Innovation: Trends and Policy Challenges, OECD, Paris, at p. 9.↩}

^{7. Yee Kyoung Kim et al. (2012), Appropriate intellectual property protection and economic growth in countries at different levels of development, Research Policy, Volume 41, Issue 2, March 2012, pp. 358-375.↩}