Newspapers around the world announced a few weeks ago that the US government had struck a deal to procure 90% of the global supply of remdesivir, one of the few drugs which reduce the time spent in hospitals for moderately ill patients infected with Covid-19. This action will severely impact the availability of this vital drug in most developed countries for at least the next few months.
Surprisingly, this action generated less international condemnation than was expected, perhaps because President Donald Trump’s ‘America First’ policy has often in practice turned into one which is more a myopic and selfish ‘America only’ dogma. However, this incident – occurring during a global pandemic – has once again focussed attention on the issue of the equitable distribution of critical drugs widely and at reasonable prices.
Of course, the principal stumbling block in achieving this has been the patent system. Pharmaceutical companies spend huge sums developing new drugs, and bear considerable risk associated with their initial investments in R&D since only a miniscule few lines of research actually hit the jackpot, the rest proving to be failures. For instance, the probability that a vaccine will succeed at the pre-clinical stage is only 7%.
The pharma companies, like all entrepreneurs, want to be able to make sufficient profits from their few success stories in order to compensate for the losses incurred on their many failures. The only way they can achieve this is if they are able to reap monopoly profits for some period of time. Since “reverse engineering” in order to produce generic drugs is not hard, a patent system is the only way to ensure that a successful company reaps monopoly profits.
It was recognised that monopoly pricing would drive essential drugs out of the reach of millions of citizens in the less developed countries. This is why the WTO’s TRIPS agreement on intellectual property rights included a provision allowing the system of compulsory licensing for developing countries. Under this provision, the government of a developing country can issue a compulsory licence to a company to produce a patented drug or process without the consent of the patent holder.
The generic drug produced was meant primarily for the domestic market and for export to other developing countries that do not have production capacities. The patent owner continues to hold the rights to the patent, including the right to be paid “adequate” compensation. However, this was a bit of a red herring since the “adequate” level of compensation was left unspecified. The Indian pharmaceutical industry, in particular, has benefited tremendously from the system of compulsory licensing and has become the largest producer of a wide range of generic drugs.
While the system of patenting preserves the incentives of pharma companies to invest in R&D expenditure, it is an inefficient way of doing so because of the resultant monopoly pricing. The incremental cost of producing an extra strip of tablets is typically a fraction of the price at which it sells on the market – this is after all the source of the monopoly profit.
Nobel Laureate Joseph Stiglitz suggested a partial alternative to the patent system that would both incentivise research but avoid monopoly pricing. This involved a government creating a “Prize Fund”. The Fund would then award prizes to those companies that successfully develop preventions or treatments of diseases affecting large numbers of people. The basic idea is that the sum of money received as a prize would be a substitute for monopoly profits. In particular, no patent would be awarded to the successful company and so competition amongst pharma companies would restrict prices to reasonable levels.
The search for a vaccine to stop the spread of Covid-19 has resulted in the implementation of variants of the Prize Fund. For instance, the US government has instituted a programme called Operation Warp Speed, to develop measures for the treatment as well as prevention of Covid-19. One objective is to have ready 300 million doses of a safe vaccine against the virus by January 2021. The government has already awarded huge sums of money to a few companies to produce the vaccine.
Being a US government initiative, the fruits of Operation Warp Speed will naturally accrue at least initially to residents of the US. The GAVI alliance is a partnership between the WHO, the World Bank, Unicef and the Gates Foundation. A primary goal is to make available new vaccines to children in poorer countries.
As part of its response to stop the spread of the virus, its Vaccine Alliance has provided upfront capital to the Serum Institute of India – the world’s leading vaccine producer – to produce 100 million doses of a Covid vaccine for low and middle income countries by early 2021. Notice that in the Prize Fund, developers are rewarded only after successful discovery. Operation Warp Speed and the GAVI effort provide financial support even in the case of failure. However, the objectives remain the same – the final product should be made available at affordable prices.
The constant flow of important breakthroughs in modern medicine has produced radical advances in the treatment of a wide range of diseases. Unfortunately, treatment has also become progressively costlier and unaffordable to vast sections of people in developing countries – which also happen to be countries with virtually no publicly funded health insurance schemes. That is why it is essential to strengthen global cooperative activities of the kind embodied in GAVI.
The writer is professor of economics, Ashoka University.