OF ALL the goods and services traded in the market economy, pharmaceuticals are perhaps the most contentious. Though produced by private companies, they constitute a public good, both because they can prevent epidemics and because healthy people function better as members of society than sick ones do. They carry a moral weight that most privately traded goods do not, for there is a widespread belief that people have a right to health care that they do not have to smartphones or trainers. Innovation accounts for most of the cost of production, so the price of drugs is much higher than their cost of manufacture, making them unaffordable to many poor people. Firms protect the intellectual property (IP) that drugs represent and sue those who try to manufacture and sell patented drugs cheaply. For all these reasons, pharmaceutical companies are widely regarded as vampires who exploit the sick and ignore the sufferings of the poor.
These criticisms reached a crescendo more than a decade ago at the peak of the HIV plague. When South Africa’s government sought to legalise the import of cheap generic copies of patented AIDS drugs, pharmaceutical companies took it to court. The case earned the nickname “Big Pharma v Nelson Mandela”. It was a low point for the industry, which wisely backed down.
Now arguments over drugs pricing are rising again. Activists are suing to block the patenting in India of a new Hepatitis C drug that has just been approved by American regulators. Other skirmishes are breaking out, in countries from Brazil to Britain (see article). But the main battlefield is the Trans-Pacific Partnership (TPP), a proposed trade deal between countries in Asia and the Americas. The parties have yet to reach agreement, partly because of the drug-pricing question.
Under the Trade Related Aspects of Intellectual Property Rights, a deal signed in 1994, governments can allow a generic drugmaker to produce a patented medicine. America—home of most of the world’s big pharma, whose consumers pay the world’s highest prices for drugs and thus keep down prices for others—wants to use the TPP to restrict such compulsory licences to infectious epidemics, while emerging-market countries want to make it harder for drug firms to win patents.
The resurgence of conflict over drug pricing is the result not of a sudden emergency, but of broad, long-term changes. Rich countries want to slash health costs. In emerging markets, people are living longer and getting rich-country diseases. This is boosting demand for drugs for cancer, diabetes and other chronic ailments. In emerging markets, governments want to expand access to treatment, but drugs already account for a large share of health-care spending—44% and 43% in India and China respectively, compared with 12% in Britain and America. Meanwhile, a wave of innovation is producing expensive new treatments. In 2012 American regulators approved 39 drugs, the largest number since 1996. Cancer treatment, especially, is entering a new era (see article).
Blurred lines
During the peak of HIV, the arguments for compulsory licensing were strong, for drugs should be made as widely available as possible during an epidemic to prevent it from spreading. But compulsory licensing also discourages innovation, and will do so increasingly as emerging markets make a bigger contribution to pharmaceutical company revenues. What is more, as such countries get more prosperous, so their elites get richer; and it is not obvious that poor Americans should subsidise drugs for rich Indians.
Today’s problem is different—a steady wave of the diseases that come with age, not an out-of-control virus. It requires a tailored economic medicine. By varying their prices more—charging Americans and Britons more than Africans—firms can pep up their profits at the same time as expanding their markets, making both shareholders and the sick better off. Some companies are trying this. Roche, a Swiss company, has created new brands and packaging for lower-priced drugs in India and Egypt.
But there are risks to so-called “tiered pricing”. People may buy drugs in low-price countries and sell them at a profit in high-price ones. Finer pricing therefore needs to be helped by stronger rules to prevent IP being removed by law, or undermined by illegal trade. That is why, although America leans too far towards the drug companies, it is pushing in the right direction in the TPP. More compulsory licensing is not in the interests of the world’s sick; protection for drugs patents is.
