October 28, 2004 · William Fisher
The previous post provided a few facts suggesting the character and seriousness of the current situation involving access to life-saving medicines in developing countries. This post will sketch, just as briefly, some possible solutions to the crisis. Most of these ideas are not my own; they�ve been outlined elsewhere, often in quite detailed form, by other academics, activists, and politicians. Along with Talha Syed, I�m currently working on an article in which we try to evaluate all of the major pending proposals and suggest a few additional ones of our own. We�d be grateful for reactions to the menu of options set forth below as we hone our essay.
Background. To understand the various reform proposals, it is crucial to keep in mind both the strengths and the weaknesses of the patent system when applied to drugs. Here are the key points: The argument that patent protection is essential to stimulate research and development, although quite shaky with respect to many fields of technology, is very strong with respect to pharmaceutical products. Why? Because (a) developing and securing approval for new drugs is extremely expensive and risky; (b) once produced, drugs can be reverse-engineered easily; and (c) the marginal cost of manufacturing them is very low. This combination of circumstances means that, if the companies that developed new drugs were not protected by the patent system against competition from generic manufacturers, they would be unable to make a profit and thus would soon stop producing the vaccines, treatments, and cures from which we all benefit. Unfortunately, the high prices that the pharmaceutical companies, armed with patents, charge for their products has the effect of denying access to crucial drugs many poor, uninsured people who could have afforded them had they been sold at or near their marginal cost. (The companies could if they wanted make the drugs available at reduced prices to poor patients, but they are reluctant to do so, primarily because they fear that the drugs would be resold in other markets, thereby eroding the companies� primary sources of revenue.) Bottom line: patents are especially socially valuable in the context of medicines, but they also have especially severe social side-effects.
Against this backdrop, how might we get adjust the legal system to more life-saving drugs into the hands of residents of developing countries? Nine options:
(1) Reduce the levels of patent protection for drugs in developing countries, allowing for the production or importation of inexpensive generic versions. To be sure, adoption of this approach would diminish the profits of the pharmaceutical companies. But remember, from the preceding post, that the developing-markets provide the companies only a tiny proportion of their overall revenues. Forcing them to forfeit that source of revenue, so the argument goes, would not materially impair incentives for innovation � and would save millions of lives. The principal impediment to this approach is the TRIPS Agreement, � a treaty binding on all of the member countries of the World Trade Organization � which, even as clarified by the recent �Doha Declaration,� sets sharp limits on the ability of developing countries to either deny or limit patent rights. Some commentators urge that the TRIPS treaty be modified to provide developing countries more flexibility in suspending patents rights so as to facilitate distribution of cheap drugs to their citizens � for example by liberalizing the currently cumbersome requirements that countries must satisfy before imposing compulsory licenses. An especially sweeping recommendation of this general sort is Tim Hubbard�s and Jamie Love�s proposal for an alternative treaty that, in brief, would give developing countries (indeed, all countries) the option of supporting pharmaceutical research either by establishing and enforcing patent protections for drugs or through some other mechanism (several of which are discussed below) that would be more efficient and thus less costly to administer. The adoption of such a treaty would give developing countries a way of providing their citizens access to cheap generic drugs (by eliminating or curtailing patent protection for pharmaceutical products) without shirking their responsibility to help finance R&D. However, persuading the United States or many other developed countries to acquiesce in such a substantial modification of the TRIPS Agreement would be very difficult.
(2) Facilitate Differential Pricing of Drugs. The basic idea here is that the drug companies would be much more likely to make cheap versions of their products available to poor patients if they were confident that those versions would not be resold to rich patients who otherwise could and would purchase the drugs at market (i.e., monopoly) rates. At the international level, the simplest way of providing the companies that assurance would be to strengthen the already substantial impediments to the resale of drugs first distributed in a poor country to consumers in a wealthy country. (Notice that such a ban on �parallel imports� runs counter to the dominant rhetoric of both of the two major political parties in the U.S. today � a rhetoric that depicts any differences in the prices at which drugs are sold in different countries as at least presumptively unfair.)
(3) Regulate the Pharmaceutical Companies. European countries have long regulated drug prices. The United States has traditionally been loathe to do so. Developing countries could force drug prices down simply by limiting what the drug companies could charge for them. The obvious hazard of this strategy is that it might prompt the drug companies to pull out of the developing-country markets altogether. A much more complex approach that Talha Syed and I are just beginning to explore would regulate the drug companies in a fashion analogous to the way we regulate car manufacturers. The so-called CAFE (Corporate Average Fuel Economy) standards oblige carmakers to ensure that the average fuel economy of the fleets of automobiles and light trucks they produce exceed specified levels. This system, in force since 1976, has been credited with inducing carmakers both to invest billions of dollars into research on mechanisms for improving fuel efficiency and to sell more small, high-mileage cars. Both of these effects have been beneficial to the environment. Suppose we imposed an analogous regime on drug manufacturers � specifically, by requiring them to ensure that the average ratio of health benefits to prices of all of the drugs they sell worldwide exceeds a specified level. (The health benefits of a particular drug would be measured by the Disability Adjusted Life Years � another index developed by the World Health Organization � it saved.) Under such a regime, if a pharmaceutical firm sold many high-priced �lifestyle� drugs in developed countries, it would be obliged, in order to meet its statutory obligations, to sell many lifesaving drugs cheaply somewhere � presumably in developing countries. A system of transferable credits might enable companies with low ratios to pay other companies to distribute more cheap drugs or vaccines. One of the advantages of such a system is that it would not attempt to micromanage the R&D or sales decisions of the drug companies (always a hazardous undertaking) but would let them figure out how most efficiently to meet the overall standards.
(4) Donor Leverage. Much of the research that ultimately enables pharmaceutical companies to develop new drugs is done in either government labs or university labs funded by the government. In exchange for making their research results available to the companies, the government or the universities might insist that any products produced in part through the use thereof be provided (either by the pharmaceutical companies themselves or by generic manufacturers) at low prices to the residents of developing countries. Statutory authority for the imposition of such conditions already exists in the United States, in the form of Bayh-Dole �march-in� rights, but that authority has almost never been exercised. Efforts to persuade the universities to exercise their powerful leverage in this fashion are currently being made by Yochai Benkler at Yale Law School. (See his recent essay in Science Magazine.)
(5) Tax Incentives. Developed-country governments might offer tax breaks to pharmaceutical companies that distribute drugs at low prices in developing countries.
(6) Governmental �Push� Progams. Governments in developed countries might conduct or fund research into tropical diseases as a form of foreign aid. If a treaty of the sort advocated by Hubbard and Love were in place, governments in developing countries might conduct or fund such research as a way of fulfilling their treaty obligations to contribute a certain percentage of their GNP to health-related research.
(7) Governmental �Pull� Programs Alternatively, governments (for either of the two reasons just suggested) might offer prizes (like those now being contemplated by NASA as a way of stimulating space research) to pharmaceutical firms that succeeded in producing vaccines or cures for specified, currently neglected diseases. A variation on the same theme: governments (perhaps with the assistance of private foundations and NGOs) might make advance commitments to purchase specified amounts at specified prices of newly developed vaccines or drugs that address particular health needs. (Kremer; Sachs)
(8) An Alternative Compensation System. In the same general vein, some economists (e.g., Calandrillo; Shavell & Ypersele; Kremer) have proposed that governments might substitute a �reward� system for the current patent regime as the primary mechanism by which we stimulate the development of new pharmaceutical products. Such a system would resemble the ACS we discussed earlier this week as a possible solution to the current crisis in the entertainment industry. A pharmaceutical company that created a therapeutically useful drug would be paid by the government. Thereafter, anyone (not just the company that created it) would be free to manufacture the drug and sell it at any price. Competition would soon drive the price down close to the marginal cost of production (just what we want). A few details: Where would the money necessary to pay such rewards come from? Probably from an income tax. Would the rewards be paid all at once or periodically, over time? Probably the latter. How would the magnitude of the rewards be determined? By a government agency, using a combination of sales figures (i.e., the total number of pills or injections sold during the relevant time period by all manufacturers of the drug in question, not just the original developer) plus a measure of the drug�s therapeutic value to estimate its total social value. Would all drugs be covered? Perhaps, but a less controversial (and expensive) variant of the idea would encompass only drugs that addressed currently neglected diseases.
(9) Harness �Traditional Knowledge.� The members of groups indigenous to tropical countries often are aware of the medicinal powers of the plants that grow in the region. Pharmaceutical companies sometimes use that knowledge to identify materials from which they might develop drugs � typically, by employing �ethnobotanists� to interview the members of such groups and then, relying on the information they provide, to collect plant samples, sometimes in violation of local �natural resources� laws. This system is not used as often or as effectively as it might be, in part because the members of the indigenous group ordinarily receive little or no compensation. (Most importantly, they do not share in the patent rights in the drugs that are developed in this way.) More effective (and fair) use of this research technique might be fostered if the TRIPS Agreement (mentioned above) were modified to require all member countries of the World Trade Organization to recognize as a form a �inequitable conduct� under their patent laws the fact that either materials or knowledge used to develop a patented pharmaceutical product was extracted from a country in violation of its laws. Such a reform would dramatically strengthen the hands of developing countries in negotiating deals with drug companies � and might ultimately lead to development of more drugs in this fashion.
I have surely not done justice to the complexity of most of these proposals. But I hope to have provided enough information in these quick sketches to foster a discussion.