Pharmaceutical patents and medical supplies for epidemical diseases: The struggle in less developed countries

Table of Contents

  Abbreviations  1

  Figures and Tables  2

1.  Introduction  3

2.  Pharmaceutical Patents and the Poor The Point of Departure  5

2.1.  Public Health and the Economy in LDCs  5

2.1.1.  The Burden of Disease  5

2.1.2.  The Economic Consequences of Poor Health  8

2.2.  Intellectual Property Rights in Developing Countries  10

2.2.1  The TRIPS Agreement  12

2.2.2.  Bilateral Trade Agreements  14

3.  Patents and the Pharmaceutical Industry  15

3.1.  The Economics of Pharmaceuticals  16

3.2.  The Economics of Patents  19

3.3.  Diffusion vs Creation of Knowledge  21

4.  Pharmaceutical Patents in LDCs  23

4.1.  Static Effects  23

4.1.1.  The Comparative Position of LDCs  24

4.1.2.  Extent of Effects  25

4.2.  Dynamic Effects  28

4.2.1.  Domestic R D Potential  28

4.2.2.  Market Size  29

4.2.2.1.  Global Diseases  32

4.2.2.2.  Diseases of the Poor  32

4.2.2.3.  Tropical Diseases  33

4.3.  The curse of poverty  34

5.  The Road Ahead  37

5.1.  Price Discrimination  39

5.1.1.  The Theoretical Framework  40

5.1.2.  The Political Dimension of Differential Pricing  42

5.2.  Public Intervention and the Role of Rich Countries  43

5.2.1.  Modified Orphan Drug Acts  44

5.2.2.  The Purchase Fund  45

5.2.3.  Public-Private Partnerships (PPPs)  46

5.3.  The Politics of Pharmaceutical Development Aid  47

5.4.  Compulsory Licenses: The Option of Last Resort  48

6.  Conclusion  51

  Literature  54

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Abbreviations

  ARIPO - African Regional Industrial Property Organization  

  ARVs - Antiretrovirals  

  CIPR - Commission on Intellectual Property Rights  

  DALY - Disease Adjusted Life Year  

  EU - European Union  

  FDI - Foreign Direct Investment  

  GDP - Gross Domestic Product  

  GNP - Gross National Product  

  IPRs - Intellectual Property Rights  

  IT - Information Technology  

  LDCs - Less Developed Countries  

  MNC - Multinational Corporation  

  NAFTA - North American Free Trade Agreement  

  NGO - Non Governmental Organization  

  OAPI - Organisation Africaine de la Propriété Intellectuelle  

  OECD - Organization for Economic Co-operation and Development  

  PCT - Patent Cooperation Treaty  

  PhRMA - Pharmaceutical Research and Manufacturers of America  

  PPP - Public Private Partnership  

  R&D - Research and Development  

  TB - Tuberculosis  

  TRIPS - Trade-related Aspects of Intellectual Property Rights  

  UN - United Nations  

  UNCTAD - United Nations Conference on Trade and Development  

  UNDP - United Nations Development Program  

  USA - United States of America  

  WHO - World Health Organization  

  WIPO - World Intellectual Property Organization  

  WTO - World Trade Organization  

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Figures and Tables

  Figure 1 Patents as Temporary Monopolies  19

  Figure 2 The Welfare Effects of Intellectual Property Rights  22

  Figure 3 Price Discrimination Between Rich and Poor Countries  40

Table 1  Life Expectancy and Mortality Rates for Selected Regions (2000)  6

Table 2  Selected Less Developed Countries Membership in Multilateral Regional  

  and Bilateral IPR Treaties (2001)  15

Table 3  R D Expenditures as Percentage of Revenues for Selected Pharmaceutical  

  Companies  17

Table 4  Patent Applications in Selected Countries (2000)  24

Table 5  The World Pharmaceutical Market  31

Table 6  Diseases for which 99 or more of the Global Burden falls on Low and  

  Middle-Income Countries (2000)  34

Table 7  Health Expenditures for Selected Regions and Prevalence of HIV AIDS  35

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1. Introduction

The last century has been characterized by great advancements of pharmaceuticals and a worldwide rise of life expectancy. Improvements in medical research have yielded significant progress in treating diseases that only recently were incurable. This is most obvious in the case of HIV/AIDS where considerable public and private investments have converted this killer into a manageable chronic disorder for many in the developed world. Still, the developing world has suffered an exponentially growing rate of HIV infection and treatment is out of reach for almost 90 percent of the infected population. Tragically, AIDS is not the only pandemic 1 threatening the developing world. Malaria and Tuberculosis are only the most prominent of a large number of epidemical diseases affecting the world’s poor. Overall, about ten million people die through infectious diseases each year, more than 90 percent of whom in the developing world. These people do not receive treatment for their diseases – either because they cannot afford treatment or because treatment for their diseases does not exist.

Major multilateral organizations, such as the World Health Organization (WHO), have devoted substantial expertise and financial means to the development and distribution of medicines. These medicines were targeted specifically at the needs of less developed countries (LDCs). Publicly, however, the issue only gained significant momentum with the establishment of the World Trade Organization (WTO) in 1995. Indeed, the inclusion of intellectual property rights (IPRs) in form of the Agreement on Trade Related aspects of Intellectual Property Rights (TRIPS) and the simultaneous spread of the HIV/AIDS pandemic became one of the major fields of discussion and public outrage at the WTO Ministerial Conference in Seattle in 1999. On the one side, governments and industries from developed countries, argued that the introduction of patent systems in LDCs would result in a considerable flowering of innovation and growth, with significant spillovers to poor countries. In fact, concerning pharmaceuticals, they claimed that the introduction of patents could help in accelerating the process of finding treatments for currently incurable diseases such as malaria and leprosies. On the other side,

1 Pandemics refer to diseases, mostly of infectious nature, that travel across borders.

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developing countries and many non governmental organizations (NGOs) feared that the introduction of IPR systems in developing countries would result in higher prices for pharmaceuticals (and other goods incorporating intellectual property). Considering the low purchasing power and the high incidence of diseases, it was feared that this would worsen the already disastrous situation of public health in LDCs. This conflict is at the center of the harsh debate about institutional reform in the WTO and is the subject to be discussed in this study. The aim of this paper is to clarify the interrelation between patents and access to pharmaceuticals in developing countries and to describe possible solutions to this public health dilemma. Actually, the improvement of health standards in developing countries cannot be achieved solely by the provision of pharmaceuticals in terms of vaccines and medical treatment. Other factors, such as prophylactic measures including hygiene, education and better medical infrastructure are all important factors and, complementary to the provision of medicines. However, these measures are not discussed in this paper as their relation with patents is rather marginal.

Regarding the provision of pharmaceuticals to people in developing countries, there are two distinct issues which need separate consideration though they are related. One is the issue of medical research, and the extent to which current mechanisms for stimulating and funding medical research are appropriate to spur the development of new medicines. The other is the issue of access to the products of medical research. As will be seen, these two crucial aspects have important implications for any policy approaches dealing with the health situation in LDCs.

In order to put the discussion into perspective, the following chapter discusses the current situation of public health in LDCs and its problematic economic and social consequences. The situation is then confronted with the current state of intellectual property rights in international law. In this regard the TRIPS Agreement and its various provisions regarding developing countries are of central importance. Chapter 3 introduces the functioning and the theoretical justification of patents. For this purpose the economics of the production of pharmaceuticals are analyzed. It will be shown how certain characteristics of pharmaceuticals and their production process make a political intervention necessary. The granting of patents proves to be crucial for a sufficient provision of pharmaceuticals to society. As this policy

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instrument also causes social costs, the trade off between these costs and benefits is analyzed. Building on this framework, chapter 4 examines the potential effects of an international adoption of (TRIPS like) patents on the availability of drugs in LDCs. This analysis leads to certain conclusions, which form the foundation of the possible solutions to the dilemma presented in chapter 5. Chapter 6 concludes this study.

2. Pharmaceutical Patents and the Poor – The Point

of Departure

The question of whether the introduction of pharmaceutical patents in developing countries represents a necessary instrument to foster innovation or rather a “heartless exploitation of the poor and suffering” (Lanjouw 1998) has been discussed quite emotionally in the public. In order not to be mislead by any of these emotional and eloquent arguments this chapter introduces the facts on which the rest of this study builds upon. Firstly, an overview of the situation of public health in LDCs is provided. After a description of the situation and a brief discussion about the economic consequences of poor public health, the situation will be confronted with the “legal globalization” of intellectual property rights.

2.1. Public Health and the Economy in LDCs

2.1.1. The Burden of Disease

The last century has been characterized by worldwide improvements in public health and life expectancy. Through the increase of daily calorie intake, advances in medical technology, and especially targeted immunization campaigns 2 less developed countries have been able to actively be part of this development. This is most evident considering the impressive improvements in life expectancy in developing countries, which has increased by 22 years between 1960 and 1995 (WHO 2001, p. 40). Still, enormous differences in health status and life expectancy between rich and poor countries prevail, with sub-Saharan Africa and South Asia

2 It is estimated that through the joint efforts of the WHO and various other donor agencies for the

first time in history 70 percent of infants worldwide received the three-dose DTP (diphtheria,

tetanus and pertussis) vaccine in 1999. This alone is estimated to save three million lives a year

(Kremer 2002, p. 68).

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Table 1 Life Expectancy and Mortality Rates for Selected Regions (2000)

(current US$)

Health

Expenditure p.c. 70.9 29.1 21.4 2,734.7

(current US$)

Health

Expenditure 6.1 6.3 4.7 10.3

(% of GDP)

Mortality rate,

under-5 (per 89.3 171.2 100.6 7.1 1,000 live

births)

Doctors per 0.6 0.4 0.4 3.0

Sources: World Bank 2003, World Health Organization 2002. suffering under the highest burden of disease. In fact, as shown in Table 1, life expectancy in sub-Saharan Africa is merely 46 years, compared to 78 years in developed countries. Also, under-five mortality rate is more than ten times higher in developing countries than in high-income countries.

It is apparent that the peoples of Africa by far suffer under the worst health conditions in the world. Indeed, in 1998 the peoples of Africa, accounting for 10 percent of the world’s population, suffered a disproportionately high disease burden of 25 percent of the world’s total, measured in terms of disease-adjusted life years 3 (DALYs) lost (Kettler and Collins 2002, p. 17). 68 percent of the DALYs lost were caused by communicable diseases, such as HIV/AIDS, malaria, tuberculosis (TB) and childhood infectious diseases. Though health conditions, independently of the measure used, are worst in sub-Saharan Africa the situation is quite dramatic also in the rest of the developing world. Overall, the WHO (2001, p. 40) estimates that 13.3 million people died of infectious diseases in 1998 – the great majority of them in LDCs. Tragically, the WHO further reckons that many of these deaths could have been prevented if necessary treatment was available.

Technical progress in the medical and pharmaceutical sector plays a major role in alleviating this tragic situation. Jamison, Sandbu and Wang (2001) attribute 74

3 DALY is the standard measure used by the WHO for comparing health risks. One DALY equals to

the loss of one healthy life year.

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percent of the worldwide decline in infant mortality rates over the period from 1962 to 1987 to technical progress. Other factors such as better education and increased income are also important, though they are thought to play a minor role. Technical progress in the pharmaceutical sector means, for the most part, the development of new and the improvement of existing medicines.

However, the benefits of drugs can only arise if patients are actually provided with access to appropriate drugs. As the numbers above indicate, in many countries this is not the case. The reasons for this can be divided into two distinctly different categories. In the first case, diseases would actually be treatable by technical means. But, the necessary money to establish effective health services and purchase the medicines is not available to the country or patient. In the second case, no effective treatment has yet been developed and thus, in the short run, money alone would not be sufficient to alleviate the situation. This, however, is rather different in the long run. As will become clear in chapter 3, the distinction between these two categories is very important for understanding the relationship between patents and access to pharmaceuticals.

A third of all deaths due to epidemical diseases in LDCs are thought to belong to

the first category of diseases, i.e. the condition could actually be prevented or treated by the current standard of technology but a lack of financial means and/or medical infrastructure prevents effective treatment (WHO 2002, p. 17). The most prominent example for such “preventable deaths” is the case of HIV/AIDS, which has been responsible for an estimated 3 million deaths in 2001, 2.3 million of which occurring in sub-Saharan Africa (WHO 2001, p.47). Although treatment with antiretrovirals (ARVs) has turned HIV/AIDS into a manageable chronic disease in most western countries, the great majority of infected people lives in developing countries and lacks access to such treatment 4 . Similarly, though on a smaller scale, measles are a major killer in developing countries, causing 800,000 victims in 1998 (WHO 2001, p. 44), while vaccines and effective treatment are almost ubiquitous in developed countries.

4 It is important to note that the HI virus mutates constantly and develops resistance against certain

treatments. Although many infected people in developing countries could be treated with existing

ARVs some strains of the virus, which are prominent in the developing world, are currently not

curable with existing ARVs. These strains rather belong to the second category of diseases.

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The second category of diseases comprises conditions deemed untreatable with currently available medicines. Also, diseases for which treatment is available in developed countries, but is inadequate to the conditions in LDCs 5 are included in this category. In most cases such diseases are confined to developing countries, mostly in tropical regions. In fact, as a consequence of their geographic and climatic characteristics tropical regions are especially affected by diseases (see Landes 1998, pp. 23-31). The most prominent of these diseases is malaria 6 , causing between one and two million deaths annually (CIPR 2002, p. 13). Also, tuberculosis (TB), affecting predominantly AIDS patients whose immune system is not able to resist the disease, causes nearly 1.7 million deaths a year worldwide. It is expected to cause 10.2 million victims by 2005. Although some treatment for TB exists in rich countries most strains affecting developing countries have acquired drug resistance and are therefore practically incurable until new drugs are developed (WHO 2002, p. 163). Also, for the African sleeping sickness (trypanosomiasis) with 66,000 and leishmaniasis with about 57,000 victims a year, treatment has yet to be developed (WHO 2001, p.80). Mostly, the main constraint to the development of new medicines tackling the diseases of this category is not of technical nature but a consequence of the low investments in research and development (R&D) for drugs curing such diseases. Indeed, Médecins Sans Frontières (2001) estimate that in 2000 research expenditures on drugs against malaria, TB, African trypanosomiasis and leishmaniasis combined was less that US$ 100 million. In contrast, in the same year public expenditure for cancer research was US$ 3.1 billion in the USA alone. The reasons for such enormous differences in research expenditures will be discussed in more detail in chapter 4.

2.1.2. The Economic Consequences of Poor Health

Overall, it is obvious that the precarious situation of public health in developing countries described above is not only an issue of concern for ethical and moral reasons. Poor public health is associated with poverty and weak prospects for

5 For example highly perishable drugs can be a problem in developing countries due to a lack of continuous cold chains and cooling facilities.

6 Apart from the treatment with medicines it should be noted that prophylaxis, such as the provision of clean water and the use of bednets and insect repellents, play an important role in fighting malaria.

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economic growth. Poverty and disease thus mutually reinforce a situation, which is extremely difficult to escape.

On the one hand, health is at the basis for long term economic growth. The Nobel Laureate Amartya Sen (1999, chapter 1) has worked extensively on the role of health, not only as a basic human right, but as a fundamental contributor to economic growth 7 . He notes that health is the basis for job productivity and the capacity to learn. Therefore it has strong implications on the formation of human capital – a major contributor to economic growth. Additionally, diseases significantly affect other economic variables such as labor supply and the savings rate (Eberstadt 2002, p.38). Apart from this direct influence on economic variables, public health has also more subtle implications for the long term growth prospects of afflicted countries through the effects on social structures. For example, recent studies about the AIDS pandemic stress the social problems arising from the extremely high share of AIDS orphans in many African societies. Zambia, where almost 12 percent of children are AIDS orphans, is a case in point. Violent crimes and prostitution are often associated with these orphans, contributing to the instability in the country and depressing growth prospects (The Economist 2003a, p.89).

On the other hand, low economic growth and low income are among the main causes of a high burden of disease. Poverty is associated with low standards of infrastructure to deliver basic health care, poor standards of education and hygiene and, most importantly in the context of this paper, low purchasing power to obtain medicines.

Hence, poor countries are victims of a vicious circle between poverty, disastrous public health and, therefore, bleak prospects for economic growth. This relationship is affirmed by several empirical studies, which find a strong mutually reinforcing correlation between public health and economic growth (see e.g. Barro 1997 and Bloom, Canning and Sevilla 2001). As expected, the relationship between health and economic performance has been found to be especially strong

7 Also see Landes (1998) and Diamond (1996) for more comprehensive discussions on the role of

health in the process of economic development.

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in tropical regions, where diseases such as malaria have exceptionally strong adverse effects on economic performance (Gallup and Sachs 1999 and 2000). Independently of whether one sees poor public health as consequence or cause of poverty, it is obvious that poor health and poverty are strongly related. It is a fact that developing countries spend the least on health in absolute (though not necessarily relative) terms and thus are seriously constrained in buying pharmaceuticals. This seriously worsens their overall health status measured in terms of life expectancy and burden of disease.

2.2. Intellectual Property Rights in Developing Countries

Intellectual property rights legislations are not new in developing countries. National IPR legislation and, specifically, patent laws for pharmaceuticals have been in force in many countries worldwide (including LDCs) for over a century. Such laws were anchored in international IPR treaties, most of them administered by the World Intellectual Property Organization (WIPO) 8 . Also, many developing countries had founded their own regional IPR agreements such as the Organisation Africaine de la Propriété Intellectuelle (OAPI) instituted by 15 members of Francophone West Africa in 1977 and the African Regional Industrial Property Organization (ARIPO) established by the 15 Anglophone African countries in 1984. Both permitted the patenting of pharmaceutical products (Attaran and Gillespie-White 2001, p. 1889). Still, none of these international agreements had a binding set of standards and effective enforcing mechanisms. As a consequence, while in the early 1990’s the great majority of developed economies allowed and enforced the patenting of pharmaceutical products and production processes, almost 50 developing countries did not allow the patenting of pharmaceuticals in their legislation (Lanjouw 1998, p. 1). These differences in patent legislation and enforcement, not only for pharmaceuticals but for a wide range of other products, became a source of growing tensions in international economic relations while the importance of intellectual property (IP) in international trade grew steadily.

8 The major treaties governed by the WIPO are the Paris Convention (1883) for the protection of

industrial property and the Berne Convention (1886) for the protection of artistic and literary

property.