Trade Laws and Pharmaceuticals

By Moran, Alan | Review - Institute of Public Affairs, December 2001 | Go to article overview

Trade Laws and Pharmaceuticals

Moran, Alan, Review - Institute of Public Affairs


While 11 September generally marked a loss of innocence of the Elysian Western world, one threatening upshot has had little recognition. This was the US Government's forcing down the price of Cipro, Bayer's anti-anthrax drug. The pressure placed on Bayer to reduce its already highly discounted price to the US government included the threat of patent termination. For its part, `the Peoples' Republic of Canada actually rescinded the company's patent, before recanting.

The green light offered by the US and Canada to emasculating these property rights was not lost on other nations. The quasi-expropriation greatly strengthened the case that Brazil and other countries had been making in campaigns to have the patents on AIDS and other lifesaving drugs suspended. Those campaigns have been strongly supported by anti-business NonGovernmental Organizations, led by the Catholic Aid Agency CAFOD and Medecins Sans Frontieres.

The property rights to patented goods are recognized under a specific TRIPS agreement of the World Trade Organization and were an important feature at the November 2001 meeting in Doha, Qatar. The Doha Declaration, which launched a new round of trade negotiations, recognized the value of patents to the development of medical innovations. However CAFOD maintains that developing countries `faced down the US and big pharmaceutical corporations to ensure that public health needs come before patent protection'. This is code for the existence of provisions that may allow patents to be more readily overruled.


Ever since the city of Florence granted Filippo Brunelleschi the first-ever patent in 1421, innovation has been a prime source of increasing income levels. The far-sighted act by the Florentine authorities was quickly followed by those in all jurisdictions seeking increased wealth through commerce. It recruited property rights, the rock on which a nascent capitalism was being built, to a whole new theatre of growth propulsion.

It takes patience and deep insight to recognize the penalties to a nation's well-being when it overrides property rights. A strong, if superficial, case can be made for seizing property rights of assets, intellectual or otherwise, that already exist. Lowcost redistributional benefits are seemingly freely available where assets' production costs are 'sunk'.

As a result, individually owned property rights have, through the centuries, proved enticing targets for forced acquisition-both to political entrepreneurs and to well-meaning social activists. Developments in North America and pressures elsewhere in response to the AIDS pandemic and other medical crises show that patent rights are no less vulnerable.

Patented pharmaceuticals are characterized by considerable `sunk costs'. According to McKinsey,1 actual manufacturing and administrative costs (for a vaccine) are less than 10 per cent of the total price. The other costs include R&D and trials at 30 per cent; sales, taxes and royalties 24 per cent; and distribution at 15 per cent.

Hence, ostensibly, an average vaccine could be sold at 10-20 per cent of its present price without the owner being out of pocket. Marginal costs would be covered. But the initial benefits of cheaper access would be engulfed in a subsequent reduction in the availability of new innovations. Expropriating property rights to innovations is no less corrosive to income levels and general welfare than expropriating shares or bank balances. The damage to incentives to save and invest overwhelm the benefits from the original redistribution no less slowly than do the benefits of nationalizing other property.

This makes the reaction of the US to the anthrax scare particularly worrying, given that it is the world's leading exponent of the sanctity of property rights.


Two features of modem commerce and law operate to prevent goods being supplied more cheaply to developing countries. …

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