UN Panel on Access to Medicines Should Ensure Innovation by Preserving Market Incentives

By Dr. Kristina Lybecker
February 15, 2016

Ban Ki-moon, UN Secretary General

Ban Ki-moon, UN Secretary General

United Nations Secretary-General Ban Ki-moon is convening a High-Level Panel on Access to Medicines. As described, the overall proposed scope of the High-Level Panel will be “to review and assess proposals and recommend solutions for remedying the policy incoherence between the justifiable rights of inventors, international human rights law, trade rules and public health in the context of health technologies.”  The High-Level Panel is currently calling for contributions by interested stakeholders that address “the misalignment between the rights of inventors, international human rights law, trade rules and public health where it impedes the innovation of and access to health technologies”.[1]

The High-Level Panel seeks to improve the health and well-being of all, as envisaged by Sustainable Development Goal 3 (“Ensure healthy lives and promote well-being for all at all ages”), and the 2030 Agenda for Sustainable Development more broadly.[2] The High-Level Panel certainly addresses an import public health problem, and I fully support efforts aimed at both encouraging research and development and globally enhancing access to medicines and health technologies. However, the characterization of the issue as a “policy incoherence” and “misalignment” is worrisome. Although the objectives are laudable, the conceptualization of the problem is faulty. Specifically, the assumption that patients in developing nations do not have the drugs they need because of intellectual property rights fails to capture the nuance of the problem.

The dilemma for developing countries is primarily a function of two things: lack of access to existing medicines and absence of innovation on the treatments and cures that are needed. Admittedly each of these can be linked to intellectual property rights, but poverty is at the heart of both issues. Fundamentally, drugs are not available because there is no market for them and the necessary market incentives are absent.

From the supply perspective, pharmaceutical innovation is a difficult and expensive process to undertake, but one that is easy to replicate. The fixed costs of research and development are very high, requiring highly-skilled talent, decades of innovation and perhaps a billion dollars for a new compound[3], while the marginal costs of production are very low, perhaps pennies per dose. As a result, the pharmaceutical industry relies on patents to protect their IP and innovations more than any other industry. They also extensively utilize differential pricing across national markets (Ramsey Pricing[4]) to increase consumer access while ensuring that the tremendous investment of fixed costs is recovered.[5] Combined with an absence of competition, until patent expiry, the result is usually a price that exceeds marginal cost.

From the demand perspective, the lack of access to medicines occurs because developing nation patients do not have the income needed to create demand. In some cases, access may be possible through differential pricing, large price discounts for developing nations. However, even drugs that are sold at marginal cost are out of reach of the poorest patients. Poverty also keeps neglected diseases off the R&D agenda, resulting in an absence of innovation. Without financial rewards to incentivize innovation, the research may not take place. This primarily describes diseases that are endemic to developing countries.

Historically, innovation is best stimulated by market forces rather than under government direction or mandate. There is no reason to believe that drug discovery is any different. Accordingly, successful solutions must include market incentives to encourage innovation. Notably, a variety of alternative mechanisms have been proposed to accomplish this. Overcoming the lack of access and absence of innovation may be accomplished by efforts on either the demand side (creating a market through an advance purchase commitment) or on the supply side (stimulating research initiatives with a prize for drug development). ‘Push’ mechanism enhance funding along the way, while ‘pull’ mechanisms reward innovators with prizes upon completion. Economists and other scholars have developed a significant literature on complementary (and substitute) incentive mechanisms for drug development.[6] The success of complementary mechanisms is evidenced by the 1983 U.S. Orphan Drug Act (and similar 2001 European legislation). The Act incentivized the development of numerous drugs for such diseases, through a combination of both push (R&D tax credits) and pull (market exclusivity) mechanisms.

While improvements to the current system could yield great benefits, it is important to recognize that the drugs currently available to treat those diseases that disproportionally impact developing countries were almost exclusively developed by multinational pharmaceutical firms. A new generation of treatments is also in development.

Granting that the challenges of global healthcare are more complex than merely managing intellectual property rights and research and development, creating a future in which health for all is a reality necessitates a present in which innovation is encouraged and intellectual property is protected. To improve global health for all and access to medicines, it is imperative to provide:

  • strong market incentives for continued innovation, research and development
  • adequate incentives to encourage research into neglected diseases, tropical diseases and rare disorders
  • enhanced access to safe, effective treatments
  • increased prevention programs, focused on both vaccine development and behavioral change
  • improved patient education and access to information

To facilitate innovation, especially on ‘diseases of poverty’ the UN and member states need to commit to cultivating market incentives and removing obstacles. A combination of differential prices and creative ‘push’ and ‘pull’ mechanisms will stimulate R&D. These policies should be pursued in tandem with the removal of high import tariffs on medicines, the establishment of quality health infrastructure and reliable supply chains, and great restraint in the use of compulsory licensing and parallel trade.

From an R&D perspective, the ‘diseases of poverty’ remain a problem largely because of the absence of market incentives, not the presence of patents.[7] As the disease burden of developing nations increasingly mirrors that of developed nations, it is more important than ever to ensure that global healthcare resources are spent wisely and in the ways that will benefit patients in resource-poor nations. The High-Level Panel has a unique opportunity to contribute to this process and the careful consideration of what mechanisms will truly encourage innovation and simultaneously enhance access is a critical next step.

 

References

Danzon, Patricia. “At What Price?” Nature, vol.449, 13 September 2007, pp.176-179.

Dumoulin, Jerome. “Global pricing strategies for innovative essential drugs,” International Journal of Biotechnology, 2001, vol.3, no.3/4, pp.338-349.

Hollis, Aidan. “Optional Rewards for New Drugs for Developing Countries,” working paper, Department of Economics, University of Calgary, April 2005. [http://econ.ucalgary.ca/fac-files/ah/drugprizes.htm]

Hollis, Aidan. “An Efficient Reward System for Pharmaceutical Innovation,” working paper, Department of Economics, University of Calgary, June 2004. [http://econ.ucalgary.ca/hollis.htm]

Kremer, Michael. “Patent Buyouts: A Mechanism for Encouraging Innovation,” Quarterly Journal of Economics, vol.113, no.4, November 1998, pp.1137-67.

Lanjouw, Jean O. “Patents, Price Controls and Access to New Drugs: How Policy Affects Global Market Entry,” working paper, Agricultural and Resource Economics Department, U.C. Berkeley, April 2005.

Lybecker, Kristina M. and Robert A. Freeman. “Funding Pharmaceutical Innovation through Direct Tax Credits,” Health Economics, Policy and Law, vol.2, no.3, July 2007, pp 267-284.

Ridley, David B., Henry G. Grabowski, and Jeffrey L. Moe. “Developing Drugs for Developing Countries,” Health Affairs, vol.25, no.2, March/April 2006, pp.313-324.

 

Footnotes

[1] A full description of The High-Level Panel, its members, and their objectives may be found on the UN Secretary-General’s website, at: http://www.unsgaccessmeds.org/the-process/

[2] According to the UN website: “On 1 January 2016, the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development — adopted by world leaders in September 2015 at an historic UN Summit — officially came into force. Over the next fifteen years, with these new Goals that universally apply to all, countries will mobilize efforts to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind. The SDGs build on the success of the Millennium Development Goals (MDGs) and aim to go further to end all forms of poverty. The new Goals are unique in that they call for action by all countries, poor, rich and middle-income to promote prosperity while protecting the planet. They recognize that ending poverty must go hand-in-hand with strategies that build economic growth and addresses a range of social needs including education, health, social protection, and job opportunities, while tackling climate change and environmental protection. While the SDGs are not legally binding, governments are expected to take ownership and establish national frameworks for the achievement of the 17 Goals. Countries have the primary responsibility for follow-up and review of the progress made in implementing the Goals, which will require quality, accessible and timely data collection. Regional follow-up and review will be based on national-level analyses and contribute to follow-up and review at the global level.” (http://www.un.org/sustainabledevelopment/development-agenda/)

[3] Please see Danzon (2007).

[4] Differential prices across markets, a set of prices that varies inversely with a consumer’s price sensitivity (income and ability to pay).

[5] Dumoulin (2001) finds that differential pricing across countries enhances patient access to medicines by a factor of 4 to 7 when contrasted with uniform pricing.

[6] These proposals range from: dual patent systems for rich nations and poor nations (Lanjouw), patent buyouts and auctions (Kremer), tax credits (Lybecker & Freeman), reward based on therapeutic benefit (Hollis) and priority review vouchers as prizes (Ridley, Grabowski, & Moe).

[7] In a study of ARV drugs in Africa, Attaran and Gillespie-White (2001) find that even where intellectual property protection is available, many firms elect not to patent their drugs. [Attaran, Amir, & Lee Gillespie-White. “Do Patents for Antiretroviral Drugs Constrain Access to AIDS Treatment in Africa?” JAMA, vol.286, no.15, 17 October 2001, pp.1886-1892. Available at: http://jama.ama-assn.org/issues/v286n15/abs/jsc10222.html]

 

The Author

Dr. Kristina Lybecker

Dr. Kristina Lybecker is an Associate Professor of Economics at Colorado College in Colorado Springs. She earned a B.A. from Macalester College, with a double major in Economics and Latin American Studies, and received her Ph.D. in Economics in 2000 from the University of California, Berkeley.

Dr. Lybecker's research analyzes the challenges surrounding intellectual property rights protection in innovative industries: incentivizing pharmaceutical research and development especially on neglected diseases, addressing the difficulties of strengthening intellectual property rights protection in developing countries, battling the problems related to pharmaceutical counterfeiting and the unique nature of protection for biotech therapies. Recent publications have also addressed alternatives to the existing patent system, the balance between pharmaceutical patent protection and access to essential medicines, and the markets for jointly produced goods such as blood and blood products. Kristina has testified in more than a dozen states on the economics of pharmaceutical counterfeiting. She has also worked with US Food and Drug Administration, Reconnaissance International, PhRMA, the National Peace Foundation, the OECD, the Fraser Institute, the Macdonald Laurier Institute, and the World Bank, on issues of innovation, international trade, and corruption.

CLICK HERE to contact Dr. Lybecker.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently No Comments comments. Join the discussion.

Post a Comment

Respectfully add to the discussion.

Name *
Email *
Website