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Do Property Rights And Human Rights Conflict?

The past few weeks have witnessed yet another breakdown in the voluntary markets for AIDS drugs, as both Thailand and Brazil continue to invoke Article 31 of the TRIPS (Trade-Related Aspects of Intellectual Property) treaty to authorise the generic reproduction of Merck’s Efavirenz and Abbott Labs’ Kaletra. Both countries have demanded a reduction in the prices charged for AIDS drugs, claiming that they cannot afford their cost. Abbot mounted some initial resistance, but faced with pressures from the World Health Organisation and from healthcare activists have, at least for the moment, yielded to these demands.

The current political strife shows the weakness of the TRIPS agreement, which in the event of an impasse allows a TRIPS member to use the patented product without authorisation if, after a “reasonable time”, it has been unable to negotiate patent use on “reasonable commercial terms and conditions”. The member state must then pay “adequate remuneration” for the duration of the license. In effect, TRIPS allows a state to impose a compulsory licensing regime in order to combat bargaining breakdown.

Without question, these state initiatives have put the pharmaceutical companies on the defensive. AIDS activists have had a field day in denouncing profitable companies for putting patents and profits ahead of patients. The struggle has become all the more intense in Thailand, where Abbott initially refused to register any new drugs, including its new heat-resistant form of Kaletra, which is of immense value in tropical countries. Abbot later buckled under external pressures.

Many groups have celebrated the success of Thailand’s strongarm manoeuvres. Unfortunately, their victory is likely to prove short-sighted, because the overall situation is far more complex than the heated attacks on Abbott suggest. The root difficulty is inherent in pricing new medications, the first pill of which costs tens or hundreds of millions of dollars, even though all subsequent pills are cheap to make. Who will pay for those high initial fixed costs? “Not I” is a universal, but unsustainable response.

In the United States, the war cry is that American consumers must unfairly subsidise the rest of the world by paying far higher drug prices than anywhere else in the developed and developing world. Simultaneously, poorer and impoverished nations demand still greater discounts, especially for their own domestic “public noncommercial” health programs, which frequently distribute anti-HIV drugs without charge to end users.

The TRIPS agreement does not tell us how to resolve these pricing struggles. Nonetheless some signposts can help place the dispute over anti-HIV drugs in perspective.

First, the TRIPS treaty does not privilege developing nations in patent disputes solely because of their humanitarian motives. If a nation wants to supply cost-free medicines to its citizens, the first place it should look is to its own general revenues. Its own internal generosity does not lower the commercially reasonable price it should pay.

Second, any stated price does not look commercially unreasonable if it is similar to offers made to other nations, all of whom act as sole purchasers within their own countries. No nation should be able to circumvent the voluntary market solely because it doesn’t get the best deal possible.

Third, no drug company looks like an unreasonable hold-out when it has already made significant price concessions, such as those made to Thailand, where the price of an annual course of treatment for Kaletra has dropped from $2,200 to $1,000, even before the recent showdown. Bargaining abuse is not the unique preserve of companies. It can also originate in nations whose own economic houses may not be in order.

Fourth, nothing stops AIDS organisations or foreign governments from buying these products at a negotiated price, which can then be given out free of charge. Charity can come from anywhere, not just drug companies.

Fifth, Brazil and Thailand stand to reap enormous domestic benefits even if they pay negotiated prices. Recent studies put the gains from an additional year of life at well in excess of $100,000, dwarfing the cost of drugs, which in any event constitute only a small part of total treatment costs. Likewise, the price for the unrefrigerated Kaletra should rise, without increasing total costs, given its greater effectiveness and lower costs of storage and administration.

Sixth, the aggressive stance in Brazil and Thailand hurts AIDS patients worldwide. To be sure, price reductions in Thailand and Brazil will not lead to price increases elsewhere, since presumably Merck and Abbott already charge whatever price they think maximises the uneasy mixture between profits and good will. But if compulsory licensing schemes are proper in Brazil and Thailand, then why should everyone else not just follow suit, given the insatiable demand for lower prices?

Seventh, decisions like those in Brazil and Thailand cripple incentives to invest in new drugs, particularly for AIDS, for which sick people worldwide will pay the price tomorrow. What drug company will invest in new and useful products when the ensuing harsh publicity will damage its global brand? Better to stand aside and let someone else take the heat. But who will step forward?

In the end, the AIDS imbroglio replays a familiar morality tale: disregarding property rights in the name of human rights reduces human welfare around the globe. Even strong claims for distributional equity always come at the price of technological innovation.

Richard A. Epstein is a professor of law at the University of Chicago and a senior fellow at the Hoover Institution. He is the author of Overdose: How Excessive Regulation Stifles Pharmaceutical Innovation. He frequently consults for pharmaceutical companies.


Thailand’s case for the compulsory licensing of HIV/Aids medicines
Letter from Mr Songphol Sukchan.

Sir, Richard A. Epstein’s article ”Aids drugs: Are property rights and human rights in conflict?” (FT.com, May 7) has underscored the need to set straight the facts about Thailand’s use of compulsory licensing on three life-saving drugs.

First, the use of compulsory licensing is permissible under the trade-related aspects of intellectual properties (Trips) agreement. So, our action is World Trade Organisation-consistent. Even the US trade representative has not disputed this. Second, we recognise the importance of balancing the protection of innovation and the access to medicine to protect public health. The decision to use compulsory licensing on the three drugs as made by the Ministry of Public Health did not come lightly. So, it is presumptuous to speculate that compulsory licensing will be used on other medicines.

Third, public health is a top priority of the government. We have been making vigorous efforts to provide people with universal access to healthcare. Currently, more than 80 per cent of Thailand’s population is covered by the government’s healthcare programme. For many years, the budget for health and healthcare has ranked second only to education. In the current fiscal year, health accounts for 9.5 per cent of the total expenditure, or over US$100m (4,373m baht). However, the prices of certain life-saving drugs preclude many people in need from getting treatment. The use of compulsory licensing will increase the number of people who can have access to treatment, including more than 500,000 people estimated to be living with HIV. The number of those in need is climbing.

Fourth, the use of compulsory licensing will be for public non-commercial use only. It will cover only the patients under the government healthcare programs. Those not covered will continue to purchase the medicines at market prices. Fifth, while Thailand is not a poor country, we are a developing country. The gap in income disparity and distribution of wealth remains wide. The poorest 20 per cent of the population owns less than 5 per cent of national income, while the richest 20 per cent owns more than 50 per cent of national income. Many of the less well-off people cannot afford necessary treatment, particularly when it comes to HIV/Aids medicines, which patients have to take all their lives. The government needs to increase access to these medicines.

Sixth, it took the Ministry of Public Health more than two years - during which time it was in discussion with pharmaceutical companies - before finally deciding on compulsory licensing. Since it was announced, dialogue has been ongoing with all stakeholders to find mutually acceptable solutions.

Seventh, the manufacture of generic drugs by the government pharmaceutical organisation is but one source of affordable medicines. Importing generic versions from other countries is another option. The first batch of 66,000 bottles of generic Efavirenz imported from India has resulted in a price reduction of more than half, and allowed an additional 20,000 Aids patients to get the medicine. Certainly, negotiations with pharmaceutical companies to lower their drug prices will continue to increase the accessibility of necessary drugs for people in need.

Finally, the use of compulsory licensing has no link with the current political situation in Thailand. Nor does it have any connection with other economic or financial measures. Unfortunately, one foreign non-governmental organisation has ignorantly attempted to make such a connection. Compulsory licensing is used to protect public health and save lives; it should not be politicised.

Songphol Sukchan,
Director of Press Division,
Department of Information,
Ministry of Foreign Affairs,
Bangkok 10400,
Thailand


Thailand’s actions have long-term consequences
By Richard Epstein

Mr. Songphol Sukchan’s thoughtful letter response to my article “Aids drugs: Are property rights and human rights in conflict” deserves an answer on each of its main points.

First, Mr. Sukchan is surely correct in saying that “the use of compulsory licensing is permissible under the trade-related aspects of intellectual properties (TRIPS) agreement.” But his evasive argument also contains an undefended leap, for he must show that compulsory licenses are permissible not just on some occasions, but on this one. On that question, the TRIPS agreement in Article 31, in speaking of the unauthorized use of a patent, provides

“such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstacnes of extreme urgency. . .”

Let the reader be the judge whether these conditions have been satisfied in this case of AIDS. Most assuredly, there can be no argument that the negotiations for these drugs have broken down because of the unreasonable behavior of the pharmaceutical companies who had already made price concessions to the Thai government. The entire matter therefore turns on the question of whether massive outbreaks of AIDS justifies breaking the patents in these circumstances, when there is no dispute that adequate supplies are available at the prices that have been offered for these drugs.

If that condition holds in this particular case, then all nations with similar exposure to AIDS are entitled to take the same step. The issue here is not whether the Thai ministry took its actions “lightly.” It is whether they are correct. Nor is it “presumptuous” to ask just how far compulsory licensing (at bargain rates, to be sure) can go. Mr. Sukchan offers no limiting principle which explains why every drug that is used, for example, to treat tropical diseases cannot be subject to the same compulsory licensing system.

Similarly, Mr. Sukchan’s protestation that health care is a “top priority” of the government does little to justify a compulsory licensing scheme, even in political terms. If Thailand is willing to pay market rates for all the other inputs to its programme, then why this one notable exception? No one doubts that health expenditures on AIDS may have a high rate of return for Thailand, but that rate of return is still high even if it pays for the drugs that it uses, especially when supplied in a refrigerated form that reduces its other costs of administration.

Nothing in Mr. Sukchan’s letter explains why the money to fund these drugs should come out of the pharmaceutical firms who supply them rather than from other internal programmes in Thailand which by his own account should have lower priority. If generic drugs from India can save additional lives, then so too can those drugs when purchased through normal channels. And if Thailand has serious problems with its own internal distribution of wealth, it should address those questions internally instead of forcing them.

Finally, I agree with Mr. Sukchan that the issue here should not be politicised by anyone, but that also includes the Thai government. It is, however, important to stress the long term implications of Thailand’s actions for the treatment of AIDS and similar diseases throughout the world. There are only two alternatives. If other nations in similar positions do not follow Thailand’s lead, then they will be put in the uncomfortable position of having to subsdise its actions.

Make no mistake about it. The decision to cut off revenues for drugs will–Mr. Sukchan’s protestations to the contrary notwithstanding–reduce the incentive to innovate by reducing the returns from innovation. Other nations will therefore have to wait longer to get new AIDS drugs so that Thailand can have them today. Or alternatively, other nations can follow Thailand’s lead at which point there is serious risk that major pharmaceutical houses will leave the field altogether. Yet at no point in his letter does Mr. Sukchan even discuss the untenable position that other nations find themselves in as a result of Thailand’s calculated decision to flout the requirements of the patent system.

The problem is one of great seriousness, but it has been for years, and only at the eleventh hour did the Thai government think it appropriate to invoke these powers.

Copyright The Financial Times Limited 2017. All rights reserved.
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