Patent Wrongs

What precisely do the activists mean when they contend that the intellectual property regime overseen by the WTO is disadvantaging underdeveloped nations? Do they mean that the arbitrarily determined 20-year exclusive patent monopoly granted to pharmaceutical companies is just dandy when implemented in rich countries, but that it suddenly sours when applied to the Third World? Is a change of geography and demographics enough to turn ostensibly legitimate property rights—for that is what patents are—into coercive tools? This seems unlikely, unless, of course, the rights in question are not legitimate rights.

Consider South Africa, the scene of the latest patent imbroglio. Why is it that if a pharmaceutical company purchases a share in a condo in South Africa, its title in the land does not imperil the locals, not unless it incinerates toxic waste into the air, or causes some doyen of wealth-distribution a fit of envy. Yet with a property title in a brand-name AIDS drug the company effectively acquires a lien on the rightful property of others, in this case, South Africans. The company can prohibit South African manufacturers from using their legitimately owned laboratories and wherewithal to make a replica of the drug.

Which is what has transpired: The government of South Africa enacted legislation to help deal with the AIDS crisis. The amendment, which was to allow parallel importing of and domestic production of generic AIDS drugs, was greeted with fury by the pharmaceutical kingpins. A court interdict initiated by the Pharmaceutical Manufacturers Association, which represents largely North American and West European pharmaceutical multinationals, soon stumped the legislation. The country was thrust into in legal battle with 39 drug companies.

South African firms, presumably, have not stolen their equipment. Neither have they trespassed or broken an entry to obtain the molecular combinations for AZT, 3TC or ddI. These are in the public domain (and most probably available on the Internet, where Prime Minister Thabo Mbeki apparently gets his conspiracy theories about AIDS). So why should South Africans be prohibited from making these drugs?

My friends at the Fraser Institute, a Canadian supposedly free market think tank, have adopted all manner of tautology in proclaiming patents unequivocally deserving of a property title. Such a title, which gives the owner “the exclusive right to control an invention or a productive process,” also allows the patent holder to prohibit someone else from implementing an invention he may have arrived at quite independently.

According to the Institute, patents share with tangible property “the mutual quality of exclusivity in the eyes of the law” (see “Competitive Strategies for the Protection of IP,” 1999). Whether the institute’s scholars appeal to convention or to the “evolutionary nature of rights,” the argument amounts invariably to legal positivism: If the state evolved these rights—then they must be property rights. Or as Dr. Owen Lippert puts it, if they make all the right duck sounds, then patents—like tangible property—are property.

It is equally questionable to make appeals to the common law tradition in justifying patent rights. Patent is a creature of statute. Having derived its authority from the will of the legislature rather than judicial precedent, exclusive patent rights are not grounded in the common law. Rather, patent law is an excrescence of it; a lingering privilege given to Friends of the Crown, so to speak.

The Washington Post came closer to the truth when it surmised in an editorial that rich nations can simply afford to grant pharmaceutical companies near 20-year patents, even if lengthy patent-rights mean high prices, because their citizens are able to afford the drugs they need.

Not so the 20 percent of adults in South Africa that are infected with HIV, of whom most live in poverty. For them, the patent protection conferred on the AIDS antiretroviral drugs, and produced by the likes of Merck and GlaxoSmithKline, Bristol-Myers Squibb, Boehringer-Ingelheim, and F. Hoffmann-La Roche, has grave repercussions.

Naturally, the lawyers for the drug companies deny that the case has anything to do with access to AIDS treatments. It centers, they claim, on bringing South Africa into compliance with international law and treaties regarding intellectual property rights. A tack to which the Fraser Institute is partial. In a recent issue of the Fraser Forum, Lee Gillespie-White sets out to demonstrate that less patent protection will not make AIDS drugs more available to Africans. Her information tells her that in other sub-Saharan countries where patent protection is absent, drug availability has not increased.

She has a point: removing patent protection may not always be a sufficient condition to alleviate the shortage of drugs in Africa. The blight of poverty, lack of infrastructure, despotic governments, and activist pressure hamper overall investment in the continent. The well-studied case of Brazil does, however, indicate that a lesser reverence for patents is probably a necessary condition for increasing the availability of antiretrovirals.

A 1996 bill giving Brazilian generic manufacturers the go ahead has seen them marketing a combination of AZT and 3TC that sells for only $1.50 a day, compared to $18 a day in the US. A study by Medecins Sans Frontieres found that the introduction of generic AIDS drugs in Brazil has meant that it now costs the same to treat 1000 patients there as it does to treat 552 in Thailand, where generic drugs are less available. Since 1996 mortality from AIDS in Brazil has dropped by 50 percent.

The Fraser Institute’s Gillespie-White, hardly occupies solid logical or moral grounds: Giving generic producers the go ahead may not be a sufficient condition for increased availability, but it is probably a very necessary one.

The generic jolt orchestrated by two leading Indian generic manufacturers in Africa (India does not recognize international patent laws) is certainly not part of the plan set out by central planners such as Gillespie-White who prefer more western aid to Africa. First Cipla Ltd. of Bombay offe
red to sell to Africa a combination of three AIDS drugs for about 40 percent below the discounted price offered by the brand-name drug companies. Another Indian generic company, Hetero Drugs Ltd., jumped in, beating Cipla’s discount with an unheard of $347 a year per patient. Aspen Pharmaceuticals, a local South African company moved in, ready to begin distributing Hetero’s drugs once the legalities were dispensed off.

The real free market cat was loose among the pigeons.

Merck responded hastily by committing to supply AIDS drugs to the developing world at cost; its new price on Crixivan, one of its powerful brand name protease-inhibitors, undercuts Hetero’s considerably. So too has Bristol-Myers disavowed profits in Africa. Brand name companies are strategically choosing the battles they lose. They know that what governments give they can take away, and the pharmaceuticals would sooner sell at cost in Africa than risk their long-term patent privileges. If this strategy wins out over the right of the generic manufacturer, the market will have been shackled rather than freed; welfare will have displaced agency.

Following the slashing of drug prices in Africa by Merck and now Bristol-Myers, predictions of doom concerning a global price war among drug companies abounded in the financial press. Fearing, no doubt, that the loss of a captive market for patented drugs might deflate the stock value of brand name companies, this press argued that a dangerous precedent was being set for the drug industry. Soon developing countries with only a small AIDS problem will demand the same prices, then other worthy afflictions will be added to the entitlement inventory, to be followed by the demand for equal treatment—and cheap drugs—for the well-off. The fear being that by capitulating to pressure, the price slashing pharmaceutical companies will be writing off the entire developing world as a profitable market for AIDS and other research.

Slashing prices in Africa, however, is a response by the pharmaceutical industry not so much to market forces, but to the vilification of the industry by activists and the fear that governments (and the WTO) will lessen their commitment to enforcing patents. Remember that global government is also beholden to—and infiltrated by—powerful activists and NGOs. These interests mistakenly conflate the regime of patents with an unfettered pharmaceutical market. They blame the lack of access to AIDS medications in poor countries on market failure, when nothing could be further from the truth: patents, of course, are inimical to the free market.

The meddling in the market by global governments like the UN and the EU and their malignant offshoots, the WTO included, certainly does nothing to ease the situation. Not content with striving to “harmonize” labor, health and environmental laws the world over, the WTO, together with the World Intellectual Property Organization, has set its sights on homogenizing intellectual property regimes. Developing countries have been gulled into signing on and can face trade sanctions if they violate these agreements.

By enforcing the exclusivity of patents in international treaties under the guise of upholding a free market order, these centrist establishments are sustaining distorted, inflated drug prices. Patent policies seem especially incoherent in light of the fact that governments, in their drug benefit plans, are strong supporters of the cheaper generics, yet it is they who drive drug prices up by conferring patent monopolies in the first place.

In Article 31, the WTO’s “Agreement on Trade-Related Aspects of Intellectual Property Rights” does devolve some power to signatory states by allowing the use of compulsory licenses of patents. Accordingly, the state may allow the use of patented material “without the authorization of the right holder.” Compulsory licenses can help economically underdeveloped countries ward off the perils of patents, although they still require that the party practicing the patented method or product pay reasonable royalties. Bear in mind though that compulsory licenses are granted by governments as a contra-indication to their own meddling in the market, and are not a principled long-tern solution to patent monopoly or to the proliferation of mercantilist World Planners.

How long before compulsory licenses are attenuated is anyone’s guess. The Pharmaceutical Research and Manufacturers Association and the International Federation of Pharmaceutical Manufacturers Associations have been actively lobbying the United States and the European Union trade officials to ban or restrict the use of compulsory licensing for medicines. An enthusiastic user of compulsory licensing domestically through eminent domain and anti-trust assaults, the United States government has been using considerable pressure to stop poorer countries—of late South Africa, Brazil and Thailand—from deploying this tool for pharmaceuticals.

Local initiatives like parallel imports, unless thwarted by our hegemonies, remain good free market tools. After all, a free market means that entrepreneurs can shop around internationally for the best-priced drugs without checking with the patent holder first or capitulating to the WTO. If the US gets its way, however, South Africa will be forced to repeal legislation allowing parallel imports, leaving her at the mercy of prices dictated by patent exclusivity rights.

Removing government granted patent rights ought to go a long way toward defusing competing interests. At the very least, pharmaceutical companies may have to stop bedding down with governments—local and global—and, instead, seek their fortunes on the free market. Utopia aside, there is life after patent. Eli Lilly has emerged from a stock depression, and is doing well after being stripped of 3 years worth of patent protection for Prozac. As is wont when patents are hard to protect, the company intensified its R&D efforts. The confidence it is generating is mirrored in a climbing share price.

Absent patent protection, companies can feasibly protect their investment and potential profits for a good number of years through trade secret and licensing arrangements. Profits generated by initial sales and other support services may still be very lucrative. Economist Fritz Machlup (in Moore, 1997) pointed out that “patent protection is unnecessary as an incentive for corporations in a competitive market to invest in the development of products and processes. The short-term advantage a company derives from developing a new product
and being the first to put it on the market may be incentive enough.”

Free market profits may not quite compare with the yield a 20-year patent monopoly nets. But, as the Financial Times pointed out, the reality is that rapid “technological and scientific breakthroughs mean drugs have less time on their own in the market before competitors arrive to take market share.”

©By Ilana Mercer
Ludwig von Mises Institute March 29, 2001
(A version of the column appeared in the Colorado Gazette)