TCS Daily


An IP Regime Change

By John E. Calfee - January 24, 2003 12:00 AM

A fusillade of criticism has fallen upon the United States for being the lone holdout in a World Trade Organization proposal to encourage poor nations to import generic versions of patented drugs. This dispute originally focused on drugs to fight diseases like malaria, TB, and AIDS, which are felt mainly in sub-Sahara Africa and other islands of persistent poverty. Having won that battle, generic drug advocates now want to sacrifice patent rights to drugs for all conditions, including cancer, heart disease, and depression.

This is one of those times when the minority of one, the United States, is right, while our usual allies in Europe and elsewhere are wrong. But opposition to the U.S. position is widespread, even at home, because a lot of people have fallen for a simplistic argument that goes like this. Drugs are developed by and for the populations of wealthy nations, who provide virtually all the profits from new drugs. Hence letting poor countries buy on the cheap from generic manufacturers would help the poor without undermining research incentives to develop new drugs. And if that hurts the bottom line for rich pharmaceutical firms, so what? Better to sacrifice a little profit and help the sick poor.

If only it were so simple. Here are some points that argument leaves out.

First, yes, drugs are not always cheap in poor countries. But the problem is not greed. Manufacturers have found that when they sell at bargain prices just above production costs, they invite trouble. Cheaper drugs tend to get trans-shipped to destinations where prices are higher. That happens all the time in the European Union and recently happened to AIDS drugs that were intended for Africans but ended up on a dock in Brussels.

Worse, cheap drugs arouse envy. Why not cheap prices for us, too? The German health authority expects pharmacies to obtain drugs from poorer countries like Greece, so Germans can save money. Greeks would no doubt like to get even cheaper drugs from, say, Egypt. That kind of thinking has generated price controls around the world, usually linking domestic prices to lower prices elsewhere. The WTO negotiations over drug prices for the poor have become a stalking horse for getting lower prices for everyone.

Second, patents and prices are usually not even the main problem. The World Health Organization maintains a list of hundreds of "essential drugs." Less than one percent are patented in poor countries. Nonetheless, one-third of patients or more (often far more) do not even have access to cheap off-patent vaccines and antibiotics. Until these nations get rudimentary health care markets, rule of law, and honest governments, drug prices will remain largely irrelevant.

Finally, poor people in sub-Sahara Africa and elsewhere need new vaccines and drugs for malaria, AIDS, TB and other diseases. But the regime that so many advocates like - no drug patents, no drug profits, lots of well-intentioned research by international agencies - has failed to create a malaria vaccine or even one good new treatment for TB in the last thirty years.

What is needed is an intellectual property regime change. If pharmaceuticals for the world's poor had more patent protection, not less, the world would be very different and much healthier. The World Health Organization, the United Nations, the World Bank, and the Gates Foundation would have the delightful option of purchasing some of the most cost-effective economic development tools ever conceived: a malaria vaccine, for example, or a simple, fool-proof TB cure.

Today, hundreds of biotech firms, many of them in India and other developing nations, are taking financial risks trying to solve difficult problems. But they are aiming at the U.S. market, not their own. They know that if they find, say, a malaria vaccine, the new WTO rules will be used to declare a national health emergency and invite generic manufacturers to steal all possible profits. The international organizations should get together and find a way to turn that situation around. That means facing the fact that the anti-patent approach to improving public health has failed and needs to be replaced with patent protection and a willingness to buy the cures that research creates. Given the right incentives, the talent that creates drugs for rich people will also create drugs for the poor.

The author is a Resident Scholar at the American Enterprise Institute in Washington, D.C., and the author of Prices, Markets, and the Pharmaceutical Revolution (AEI Press, 2000).
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