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Intl HIV Drug Pricing & Kaletra
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"NGOs on Drugs"
Wall St Journal
By ALEC VAN GELDER
October 5, 2005
It is in the nature of governments to overreach themselves without considering the consequences of their actions. And, as philosopher Edmund Burke observed back in the 18th century, "the greater the power, the more dangerous the abuse." True to form, some governments and NGOs are using supranational bureaucracies to undermine private property rights, one of the pillars of the free society, global growth and prosperity.
One such campaign goes as follows: Millions of people throughout poor countries suffer and die from preventable or easily treated diseases; some of the medicines needed to treat those diseases are expensive; because medicines are essential, they should be sold at cost; if patentees will not lower their prices, governments should use "compulsory licenses" to break patents and authorize local production as "generics." Such a chain of reasoning would surely have Burke spinning in his grave.
The latest battle concerns an antiretroviral (ARV) drug called Kaletra, produced by U.S.-based Abbott Laboratories, used to inhibit the spread of HIV. Although the highest price in the U.S. of around $4 per pill is more than three times the price in Brazil, the Brazilian government claims it is still too expensive. Egged on by activists and supported by the Pan American Health Organization and other U.N. agencies, Brasília has threatened to produce the drug locally while circumventing the patent, claiming it can do so for $0.41 (with the rights-holder receiving a nominal royalty at most). Like many firms, Abbott uses price differentiation to sell its products more cheaply in poor countries than in rich ones. And while Brazil is a lot richer than the poorest countries in Africa, it pays only slightly more for this important ARV component.
Circumventing the patent would indeed provide even cheaper Kaletra in Brazil now -- though it would have a very limited impact on the overall cost of treating HIV/AIDS, since drugs account for only a quarter of those costs. But HIV quickly develops resistance to existing therapies, so where will the next line of ARVs come from? If companies are unable to reap some profits on new ARVs in countries outside Africa, where they are sold at cost or below, they will have no incentive to undertake risky research to develop new AIDS drugs, especially if those are likely to be appropriated. Pharmaceutical companies spend an average of $800 million to develop a new drug, take it through trials and gain regulatory approval for it. For every success, however, 12 candidates fall by the wayside.
Moreover, if patents should be breached when medicines are deemed essential to human life, why stop there? Food and shelter are essential too -- why should anyone turn a profit on these basics? And given the current high prices of oil, the same logic would suggest that governments should slap a compulsory license on, say, Venezuelan or Norwegian oil -- paying only the extraction costs, not additional royalties or the amortized investments that are also factored in.
While this may seem absurd, it is the model proposed by Venezuela, Brazil, Argentina and 11 other nations with regard to intellectual property. These governments are attempting to use the World Intellectual Property Organization to weaken the rights of IP holders globally. The Kaletra saga is just the tip of the iceberg.
Ironically, the countries seeking to destroy this fundamental institution of the free society style themselves "Friends of Development." Yet their actions would directly harm development by weakening the ability of entrepreneurs to profit from their investments in innovative and creative products. In a world where lifesaving medicines are expensive to develop and launch, but cheap to copy, these entrepreneurs need the protection of intellectual property rights to cover their large and risky investments.
India has learned from past mistakes and just this year implemented product patents for, among other things, pharmaceuticals. After 30 years in which practically no new drugs were developed in India, local drug companies are now receiving unprecedented levels of foreign direct investments and transfer of technology.
The tide will turn in the battle against the global AIDS pandemic and other diseases of poverty only when the poor enjoy the fruits of sustainable economic development. But for that development to take place, the poor must be empowered through private property rights, free trade and equality before the law -- institutions that are anathema to the "Friends of Development."
In 1949, Venezuela was among the richest countries in the world. The wealth was in part the result of vast oil reserves. But from the 1950s onward, the government went on a spree of intervention, imposing arbitrary taxes on business and then, in many cases, nationalizing them. As a direct result, the average Venezuelan is now 30% poorer in real terms than 50 years ago.
By contrast South Korea, which was poorer than Venezuela or Ghana after World War II, now stands as one of the world's wealthiest countries. There, a strong commitment to market institutions -- including intellectual property rights -- has fostered a climate where innovative and creative industries can flourish.
The "Friends of Development" do seem to realize that removing intellectual property rights will reduce the incentive to develop medicines. Their solution is a "new business model," a vague proposal in which governments and NGOs somehow whip up useful innovations. Perhaps their model is the Soviet Union, which had no intellectual property rights but also very few new drugs -- or any other innovations for that matter.
The profit motive, combined with a competitive market underpinned by the institutions of the free society -- property rights, contracts and the rule of law -- is the best driver of innovation. It has emancipated billions from poverty and servitude. The true friends of development acknowledge this and support the spread of these free institutions, not their abrogation.
Mr. van Gelder is a research fellow at the London-based International Policy Network.
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