A new research paper published in the international journal Health Affairs greatly undermines the argument that patents on lifesaving medicines enrich pharmaceutical companies at the expense of lives in poor countries. For many years, activists have claimed that for HIV/AIDS treatment programmes and various other healthcare interventions to thrive, we need to produce medicines locally and do away with vast swathes of the drug patent and intellectual property regime. This new research supports what those of us who defend property rights and the patent system have long known: negotiation and collaboration on mutually beneficial terms beats taking someone’s property.
In the article, Canadian and U.S. researchers, Read Beall, Randall Kuhn and Amir Attaran construct a database of compulsory licensing activity for anti-retrovirals and then compare the prices attained through compulsory licensing against those in the WHOs Global Price Reporting Mechanism and the Global Fund’s Price and Quality Reporting Tool. The authors find that, “Compulsory license prices exceeded the median international procurement prices in nineteen of the thirty case studies, often with a price gap of more than 25 per cent”. In other words, if developing countries want to obtain cheaper drugs, especially for HIV/AIDS drugs, circumventing patents by issuing a compulsory license is not a good strategy for securing the best price. Rather the best price is more likely to be obtained through voluntary negotiations.
In his State of the Nation Address, South African President Jacob Zuma, said, “In fighting the scourge of HIV and AIDS, the state-owned pharmaceutical company, Ketlaphela, has been established and will participate in the supply of anti-retrovirals to the Department of Health”. Presumably, the President’s proposal to establish a state-run company to locally manufacture HIV/AIDS drugs is based on the premise that a state-run manufacturer will be able to produce drugs of the same quality as existing manufacturers and at lower prices. However, it should be noted that Beall et al also demonstrate that “…countries who use compulsory licenses for local production overpaid for medicines relative to peer countries in the same Human Development Index category using international procurement”.
Given the South African government’s aspirations to weaken property rights by making it easier for the government to issue compulsory licenses, and establish a state-owned pharmaceutical company, the findings of this peer-reviewed journal article should give it pause to rethink its strategies. Indeed, Beall et al state, “Countries may desire a compulsory licensing strategy as a possible way to build local industry, even if it means overpaying for drugs. However, the ethics of this kind of policy are thorny, since this means that, given a fixed budget fewer antiretrovirals will be bought and fewer HIV/AIDS patients will be treated”.
The economic consequences of local production are obvious. Like our other state-owned enterprises, such a company will have no economic incentive to operate efficiently or profitably like a privately owned company and become a drain on the economy. Taxpayers will yet again be expected to provide whatever cash injections may be required to bail it out of financial difficulties. Predictably, it lobby for protection from more efficient foreign producers and increased trade barriers. This will create uncertainty among investors. Companies that we desperately need to create jobs and for the transfer of knowledge and skills will think twice about investing here.
Instead of trying to produce the drugs, the South African government should rather create a better economic and business environment for existing local manufacturers and one that will attract more international companies, both generic and originator, to invest in this country. Attempting to establish its own manufacturing plant displays a lack of understanding of the principles of efficient government. An efficient government does not invest in the production of goods and services of any kind, but leaves that terrain to competitive private enterprises. If a government wishes to dispense welfare to the indigent, it can better achieve that goal by purchasing the best quality goods and services at the lowest prices from privately competing providers.
With this new information, it will be interesting to see whether the anti-patent lobby, and government in particularly, change their policy stance. If they do not – and unless they have data to disprove this Heath Affairs paper – are we then to conclude that they are more interested in attacking patents and fighting ideological battles rather than the delivery of medicines to those in need?
Author: Jasson Urbach is an Economist and director of the Free Market Foundation.
This article was first published in the May edition of ENT News.