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May 19, 2002
David Warsh, Proprietor


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Discriminating Wisely

Of the many economic policy misjudgments in the ’90s, one of the worst had to do with the treaty establishing the World Trade Organization, specifically the component of it known as TRIPs, for Trade Related aspects of Intellectual Property.

Before TRIPs, many Third World countries afforded no patent protection to new medicines, and proprietary manufacturing processes only a little. The drug companies were furious. Countries like India were reverse-engineering their medicines and then paying no royalties, while Indian companies sold them to consumers at competitive prices — often as little as a tenth of US prices.

So at the end of negotiations that created the WTO out of the General Agreement on Tariffs and Trade in 1994, the pharmaceutical industry rammed through provisions requiring developing countries to play by the rules of intellectual property law in the United States and Europe as price of membership in the WTO.

One result of the new rules was the appearance of the best-selling novel “The Constant Gardner,” by John le Carre, perhaps the most scathing indictment of capitalism in practice in developing countries since Joseph Conrad’s “Nostromo.” Its hero describes the pharmaceutical executives he meets in Africa as “the most secretive, duplicitous, mendacious, hypocritical bunch of corporate wideboys it’s been my dubious pleasure to encounter.”

Another result has been a continuous stream of newspaper headlines about high prices and medicines withheld for lack of sufficient profitability. Nowhere has this been more apparent than in the battle over the terms for drugs for the treatment of AIDS. Last year the sixty-nation coalition known as the Africa Group aggressively pressed for looser licensing agreements. They finally did a deal with the WTO. But just as with the Catholic Church and its errant priests, settling one case at a time just sets you up for a harder fall when the next abuse is alleged.

The global patent framework established by TRIPs needs to be revised. The message it sends to the developing world is simply too heartless to stand.

For a couple of years, Yale University economist Jean O. Lanjouw has been pushing a remedy that would provide relief. It would clearly differentiate the protection given to medicines for different diseases to take account of their extremely different markets, and then let pharmaceutical companies choose to hold one kind of patent or the other, but not both.

When she published her plan as a Brookings Institution Policy Brief last year (http://www.brook.edu/dybdocroot/comm/policybriefs/pb84.htm), it generated a US Treasury Department seminar, wide attention within the industry and a fistful of newspaper clips — but no action.

 

So she has prepared a “second pulse” of the plan, in the form of a pair of articles describing it in some detail — one for the journal Innovation Policy and the Economy and the other for the Harvard Journal of Law and Technology. After two years visiting Brookings, she has taken a job at the University of California at Berkeley. “I hope it doesn’t take six pulses,” she says.

Any system of intellectual property rights involves a trade-off between guaranteeing widespread access to successful innovations and the maintenance of incentives to invent new ones. Drug companies say today’s high prices finance tomorrow’s discoveries. Poor countries say that many of tomorrow’s discoveries will be made whether or not they are compelled to pay the full rate.

Students of innovation have learned to distinguish between “push” and “pull” mechanisms. Push mechanisms subsidize the research process up front. Pull mechanisms promise to pay for a certain innovation once it is achieved: a big prize for a highly accurate clock, for example.

 

Moreover, it is widely recognized that two quite different markets for pharmaceutical products exist. Global diseases are those that afflict people pretty much around the world: cancer, heart disease, diabetes, and glaucoma. Many problems, however, are highly specific to particular regions, especially poor tropical countries.

For example, there are twenty diseases, including malaria and certain strains of HIV/AIDS, whose aggregate burden is borne 99 percent in low- and middle-income countries. Pull mechanisms — guaranteeing a sure-fire royalty stream to the first company to produce a cure — may work better with these.

 

The essence of Lanjouw’s idea is simple. Encourage differential pricing. Be clear about it, legally speaking. Different people should pay different prices for the same pill.

Differential pricing is at least as old as the railroads. Freight carriers learned early on to charge full fare to those who had no choice but to use the rails, and to provide deep discounts to all those who might go elsewhere. Airlines have become expert at the same thing in the present day, thanks to deregulation.

Pharmaceutical companies routinely practiced differential pricing until the early 1980s. Then Congress accused a couple of vaccine makers of price gouging, because they were selling their product cheaper abroad then at home. Not surprisingly, discounts to the poorer nations were discontinued. And by the early ’90s, the companies themselves were lobbying for the TRIPS agreement, in keeping with the spirit of the times.

Lanjouw’s idea is to require manufacturers to choose protection for their individual products in the rich countries or in the poor countries, but not both. A company possessing a malaria vaccine would elect strong patent protection in poor countries, because that’s where there is demand for the cure. A company with an effective cholesterol — buster would prefer rich-country protection and sell the drug for much less to the poor, in competition with other vendors of the generic drug.

An act of Congress would be required. So would be a compulsory new licensing mechanism in which companies winning rich-country patents would promise in advance to permit generic competition in poor nations (or, if they reneged, forfeit their rich-country claim). But otherwise the legal details would be relatively simple to arrange. No amendment to TRIPS would be required.

What does Big Pharma think of Lanjouw’s proposal? Companies fear that big differentials in global prices will lead to large-scale drug smuggling and other forms of cross-border traffic — witness the difficulty of keeping US consumers from traveling to Canada, where many medicines sell at a considerable discount, thanks to Canadian price controls. But the discussion is continuing.

The populist anger that boiled up in the US in the early ’80s hasn’t gone away. But one way or another, more market segmentation is required. Statutory changes in the scope of medical patents would give both Congress and the pharmaceutical firms the legitimacy they require to pursue more generous policies towards developing countries. The political animosities that exist in the US are small stuff compared to the inequalities among nations.

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