By Kevin E. Noonan --
The crisis in global drug pricing that has arisen since the institution of the World Trade Organization (WTO), and in particular with regard to the Doha Declaration (see "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries"), is well-recognized. While the international community has not been able to address the resulting disruptions in expectations, for both innovator drug companies and citizens of the developing world, proposals are beginning to emanate from academic commentators.
One of these, Professor Daniel R. Cahoy (at right) from the Pennsylvania State University, set forth his schema for an international drug pricing regime in a forthcoming edition of the Georgia Law Review (see "Confronting Myths and Myopia on the Road from Doha"). In his article, Professor Cahoy evaluates the bases for patent protection for pharmaceuticals, and how the WTO/Doha regime has (or hasn't) lived up to the expectations of various constituencies. Professor Cahoy recognizes the problems, both economic and political, behind the current situation, and he advocates abandonment of the "unitary" system that treats patent rights and royalty/lost profit rates equally in developed and developing countries. His proposal for remedying the current problems maintains but modifies the compulsory licensing practices sanctioned by TRIPS.
Professor Cahoy proposes a "three-tier" compensation model. The default provision would be "full compensation," which would apply outside the public health arena and to instances where the patent holder refused to enter the market and would be based on traditional compensatory royalty considerations (although the burden of proving the quantum of damages required for adequate compensation would fall on the patent holder). Under this regime, licensing negotiations between a patent-holder and an individual government prior to grant of a compulsory license would not be required; Professor Cahoy characterizes this requirement as a "complex and ambiguous conditional" aspect of TRIPS as it now stands. However, there would be no cost savings associated with this type of license either.
These considerations change in the case of a public health emergency, such as AIDS in Africa and elsewhere in the developing world, and globally if a bird flu pandemic occurs. Then the "three tiered" model would come into play, where there is: (1) a high compensation level for industrialized nations (substantially the same as the default "full compensation" situation), (2) a development-factored royalty rate for developing countries, and (3) a zero-royalty state for least-developed countries, with disputes as to whether a particular country belongs to one or the other of the categories being mediated by the WTO. Professor Cahoy envisions the consequences of this system to be that industrialized nations pay the majority of the "compensation burden" to the patent holder, while countries less able to pay the full compensation burden would contribute commensurate with their economic development status, thus increasing access to needed drugs.
The operability of this system depends on a prohibition on parallel imports of patented drugs into industrialized countries, along the lines of proposed and actual legislation in the U.S. restricting importation of lower-priced drugs from Canada. Professor Cahoy also envisions a degree of "discount royalty pricing" to extend to even developed countries under limited conditions of a public health crisis (such as a flu pandemic or a bioterrorist attack). And although he considers it controversial, perhaps one of the strongest features of his proposal politically is that least developed countries would pay no royalty to the patent holder for a patented drug (although the proposal is limited to patent rights and not trade secret or other intellectual property). This is not very different from the types of programs some pharmaceutical companies have instituted themselves in the world's poorest countries facing public health disasters such as AIDS (see "Not Getting It about Patented Drug Prices at The Wall Street Journal").
Professor Cahoy advocates integrating into TRIPS his proposed compensation scheme for compulsory licensing of pharmaceuticals, because only in that way can the required level of global uniformity be achieved. His scheme would result in "preferential" treatment for developing countries, which appeals to his perception of "fairness" in the international community. Of course, it also smacks of philanthropy and paternalism, which have their own costs (see "Africa (Still) Depending on the Kindness of Strangers in Anti-AIDS Drug Pricing"). However, it would also foreclose access to the Doha compulsory licensing provisions for developed nations, which at present rest merely on a "pledge" by countries like those of the EU, the U.S., Canada, and Japan not to exploit those provisions. Professor Cahoy questions the strength and enforceability of such pledges in view of the U.S. government threats to compulsorily license the antibiotic Cipro® during the anthrax scare after the September 11, 2001 attacks, and in the face of a possible "bird flu" pandemic.
The benefits to patent-holding pharmaceutical companies include the certainty of being able to project the expected profits from a given R&D investment in a particular drug. Placing the compensation burden where it can best be carried - industrialized nations - will ensure innovation incentives for future drug development and investment. Professor Cahoy posits that the more efficient resource allocation stemming from negotiated pricing even in "single-payer" regimes will reduce the propensity for some industrialized nations to attempt to "free ride" and thus avoid their responsibilities in this scheme. Another advantage of the proposed system is to limit parallel importing of patented drugs, one of the most powerful weapons developing nations obtained under the Doha declaration. The availability of parallel importing created incentives for countries without the industrial capacity to make a patented drug, such as Thailand, to compulsorily license, and an incentive for a developing country such as India to supply a generic equivalent of the drug.
The benefits of this proposal seem less certain than others that tie drug prices to, for example, per capita income. First, the sorting of countries into the three categories is arbitrary under the self-selecting WTO formula. Unlike a scheme based on objective criteria, a country's changing circumstances will be inefficiently addressed, requiring WTO involvement and leading to "micro" free-riding during the interval after a change in status has been achieved. There are also incentives to avoid changing categories, particularly a change into the "full compensation" industrialized category, which will be most valuable to countries such as Brasil, China, and India that can be expected to resist the costs attendant upon the status change. The benefits of a more objective system than the one proposed by Professor Cahoy are apparently appreciated by Canada, which has tied its compensation scheme for generic copies of patented drugs to the United Nation's Human Development Index; however, royalties are capped at 4%, which may not be realistic.
The need for a solution to the problem of global drug pricing is pressing. Although Professor Cahoy's proposed solution has some shortcomings, its strength lies in the attempt to provide a stable economic and political framework for addressing a heretofore intractable, and growing problem. For that we should be grateful.
"Developing countries" are defined (actually, self-defined) under TRIPS. They include: Antigua and Barbuda, Argentina, Bahrain, Barbados, Belize, Bolivia, Botswana, Brazil, Brunei Darussalam, Cameroon, Chile, Colombia, Congo, Costa Rica, Côte d'Ivoire, Cuba, Cyprus, Dominica, Dominican Republic, Egypt, El Salvador, Estonia, Fiji, Gabon, Ghana, Grenada, Guatemala, Guyana, Honduras, Hong Kong, China, India, Indonesia, Israel, Jamaica, Kenya, Korea, Kuwait, Macau, Malaysia, Malta, Mauritius, Mexico, Morocco, Namibia, Nicaragua, Nigeria, Pakistan, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Qatar, Saint Lucia, Singapore, Sri Lanka, St. Kitts and Nevis, St. Vincent and Grenadines, Suriname, Swaziland, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Arab Emirates, Uruguay, Venezuela, and Zimbabwe.
"Least-developed countries" include: Angola, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Congo, Democratic Republic of the, Djibouti, Gambia, Guinea, Guinea Bissau, Haiti, Lesotho, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Senegal, Sierra Leone, Solomon Islands, Tanzania, Togo, Uganda, and Zambia.
For additional information regarding this and other related topics, please see:
- "Pharma Sanity Lacks Global Reach," July 13, 2007
- "Brasil Prevails in Dispute with Abbott over AIDS Drug Pricing," July 9, 2007
- "Africa (Still) Depending on the Kindness of Strangers in Anti-AIDS Drug Pricing," May 29, 2007
- "U.S. Trade Policy Becoming Less Pharma-Friendly," May 18, 2007
- "The "Unfairness" of World Intellectual Property Protection According to The New Yorker," May 17, 2007
- "Worldwide Drug Pricing Regime in Chaos," May 9, 2007
- "Not Getting It about Patented Drug Prices at The Wall Street Journal," May 6, 2007
- "A Modest Proposal Regarding Drug Pricing in Developing Countries," May 2, 2007
- "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries," May 1, 2007
- "Abbott Agrees to Offer AIDS Drug at Reduced Price," April 12, 2007
- "No New Abbott Medicines for Thailand," March 14, 2007
- "More Compulsory Licensing in Thailand," February 1, 2007
- "Thailand Compulsory License Still in the News," December 18, 2006
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