Pricing Medicines to Benefit Poor Countries

What are appropriate ways of pricing drugs for disease, such as malaria, which mainly exist in the poor countries, and for those diseases, such as AIDS, which afflict rich and poor countries alike? In the latter case, it is in the interests of poor countries to segment the market so as to assure them of lower prices. This is the argument made by Jagadish Bhagwati, a University Professor at Columbia University, whose latest book is Free Trade Today (Princeton).

THE DEBATE on intellectual property protection and medicines for the poor countries is part of a general debate on how much intellectual protection there should be and whether it should have been built into the World Trade Organization. But, of course, it also raises some issues specific to medicines.
The argument for intellectual property protection (IPP) is that, since it costs money to invent knowledge and the widespread diffusion of knowledge once secured is desirable, we have here the economist's trade-off: more IPP means more knowledge, but it also reduces diffusion. The social optimum lies somewhere in the middle, as often. Few economists believe that the 20-year patent length agreed upon at the conclusion of the Uruguary Round at Mar-rakesh in 1995 is anything but excessive from this viewpoint. Yet the pro-IPP lobbies, among whom the drug companies were vociferous, used their political muscle to have this agreement.
Most poor countries were not enthusiastic about IPP, just as the United States had been historically when it was a user rather than a producer of know-how. Poor countries objected to intellectual property protection being provided as part of a trade package - the Trade-related Intellectual Property (TRIPs) agreement in the WTO. IPP is not a trade issue; and the WTO ought to be about lowering trade barriers and tackling market access problems that will often go beyond border measures to internal regulations: a thorny issue. Trade-related Investment Measures (TRIMs) is by contrast only about royalty collection. It was put into the WTO by considerable lobbying pressure, in the United States in particular, so as to provide for the use of trade sanctions against user countries who used knowledge without paying royalty. It turned the WTO, therefore, into a royalty-collection agency! To the chagrin of the poor countries today, the result has been the proliferation of yet other lobbies, such as labour unions, which would like to have their own agendas built into the WTO, to follow in the path of The IPP lobbies. The poor countries therefore see the WTO as increasingly the target of Western lobbies that would capture the WTO to their own advantage, using he specious arguments that their causes have to do with trade in some intrinsic way - all courtesy of the IPP lobbies, drug companies included.
But one must say that the very premise that drug companies are seriously handicapped in their R&D by the lack of IPP in the poor countries is flawed. Poor countries have need, but no effective demand. There is little money to be made to recover normal profits on your invented drugs, if you think of poor country markets. To see why the drug companies nonetheless see IPP in the poor countries as a money-spinner, it is necessary to distinguish between two types of diseases: those, such as malaria, which are primarily in the poor countries, and those, such as AIDS, which afflict rich and poor countries alike.
For the former, evidently IPP cannot assure any decent return because the poor countries cannot pay. So, we have several ways of getting drugs invented for them by using public and quasi-public moneys to mobilize scientists (and firms) to address the task. In the old days, you had institutions like the Institute for Tropical Medicine in England. The Nobel laureate Norman Borlaug was financed by Foundation moneys to help invent the new seeds that made the Green Revolution. Michael Kramer of Harvard University has proposed the setting up of guaranteed remunerative prices for invented vaccines. All of these are variations on the use of public moneys; IPP has no useful role to play in the provision of drugs specific to poor countries.
But everything changes when drugs to fight diseases that cut across the rich and poor nations are at stake. Here, the drug companies make money in the rich country markets; IPP there is clearly some-thing they value. But then they see piffling effective demand for those drugs in the poor countries. So, their strategy is to sell there, producing at very low marginal costs and then charging the little that these poor markets will bear.
But they would like to raise that return as much as they can. The way is to increase effective demand by using aid moneys addressed to health programs, so that the excess of what they will charge over their marginal cost is increased, raisng profitability in the poor country markets. Medical economists have known for years that medical groups, for instance, favour insurance schemes that improve the patients' ability to pay (such as Blue Cross and Blue Shield insurance programs in the US), but oppose insurance schemes like the National Health Service of England, which instead reduce the returns to doctors.
IPP in the poor countries comes into play when they want to shut off the more advanced of the poor countries, such as India and Brazil, from coming into Botswana and Gabon and providing, with their generic copies, the same drugs at low prices that effectively put a cap on how far the drug companies can raise their prices. So, they would like to stop Indias and Brazils through IPP applied there; and they prefer also restrictions on whether the Indias and Brazils can export to the poor countries.
What about parallel imports? Should the drug companies be allowed to segment rich and poor country markets for such drugs, preventing the importation into rich countries of drugs they sell at lower prices in the poor countries? The answer has to be a resounding yes. If there were no such segmentation, the poor and the rich countries would be a single market, and the prices charged to the poor countries would rise. The segmentation enables poor countries instead to secure low prices from the drug companies. This is something that the rich-country non-governmental organizations concerned about poor countries must understand. There are often paradoxical ways to effectively help the poor; this is one of them.