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An Economic Justification for Open Access to Essential Medicine Patents in Developing Countries

Published online by Cambridge University Press:  01 January 2021


Not all intellectual property rights grant the right to exclude that is indicative of “property rules,” as that term was used by Guido Calabresi and A. Douglas Melamed in their seminal article. Some intellectual property rights are “liability rules,” in which the right holder has an entitlement to compensation for use of the protected invention, not a right to preclude the use. Although patent laws normally grant a right to exclude others from use of the protected invention as a default, most countries’ laws allow the government to convert the patent property rule into a liability rule through a compulsory license. It has been noted, for example, that by the end of the 1950s, the U.S. had issued compulsory licenses covering 40 to 50 thousand patents, including substantial portions of the patent portfolios of AT&T, General Electric, IBM, and Xerox. The U.S. Supreme Court recently expressed a willingness to accept liability rules over injunctions in some patent infringement cases.

Copyright © American Society of Law, Medicine and Ethics 2009

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Calabresi, G. and Melamed, A. D., “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral,” Harvard Law Review 85, no. 6 (1972): 10891128, at 1092; see also Merges, R. P., “Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,” California Law Review 84, no. 5 (1996): 1293-1393; Reichman, J. H., “Of Green Tulips and Legal Kudzu: Repackaging Rights in Subpatentable Innovation,” Vanderbuilt Law Review 53, no. 6 (2000): 1743-1798.CrossRefGoogle Scholar
Liability rules are the default form of protection for digital broadcasting of copyrighted music in the U.S., for example, where “certain non-interactive digital audio services [may] transmit sound recordings under a compulsory license, provided that the services pay a reasonable royalty fee and comply with the terms of the license.” Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings, 37 C.F.R. §260 (2007); see 17 U.S.C. 106(6) & 114(d) (2001). Liability rules are also used to compensate American agricultural chemical companies when competitors use their test data submitted to the FDA for regulatory approval under the Federal Insecticide, Fungicide, and Rodenticide Act. See Basheer, S., “Protection of Regulatory Data Under Article 39.3 of TRIPS: A Compensatory Liability Model?” (Intellectual Property Institute, forthcoming 2008).Google Scholar
See Scherer, F. M. and Watal, J., “Post-TRIPS Options for Access to Patented Medicines in Developing Nations,” Journal of International Economic Law 5, no. 4 (2002): 913939 [hereinafter Scherer and Watal].CrossRefGoogle Scholar
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Agreement on Trade Related Aspects of Intellectual Property Rights, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, art. 31, Legal Instruments-Results of the Uruguay Round vol. 31, 33 I.L.M. 81 (1994) [hereinafter TRIPS] Article 31(h) of the TRIPS agreement requires that “the right holder shall be paid adequate remuneration in the circumstances of each case [of compulsory licensing], taking into account the economic value of the authorization”. Article 31(k) adds that “[t]he need to correct anticompetitive practices may be taken into account in determining the amount of remuneration”, allowing for zero royalty licenses in appropriate cases.Google Scholar
TRIPS art. 31(h).Google Scholar
World Trade Organization, Ministerial Declaration of 14 November 2001, paragraph 3 WT/MIN(01)/DEC/2, 41 I.L.M. 755 (20 02) [hereinafter Doha Declaration] (stating: “Each Member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted”). The Doha Declaration called specific attention to the appropriateness of special measures, including compulsory licenses, to respond to “the gravity of public health problems afflicting many developing and least developed countries, especially those resulting from HIV/AIDS, tuberculosis, malaria and other epidemics.” Doha Declaration on TRIPS, paragraph 1. The Declaration recognised, and sought to address, “concerns about effects [of patents] on prices” of medicines. Doha Declaration on TRIPS, at paragraph 3. Further, the Doha Declaration records the agreement of all members that:Google Scholar
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See generally Outterson, K., A Request for Clarification Concerning the Proper Scope of the IGWG's Work to Improve Access to Patented Medicines, September 30, 2007, available at <> (last visited February 17, 2009).+(last+visited+February+17,+2009).>Google Scholar
In a perfectly competitive market, each firm is a price “taker,” and must accept the market price, which competitors drive down until it is approximately equal to the firm's marginal cost. Patented items in an imperfect, but still competitive, market will be restrained by the same market forces to a greater or lesser extent depending on the degree to which substitutes are functionally equivalent.Google Scholar
Cf. Parkin, M., Microeconomics, 7th ed. (Boston: Addison-Wesley, 2005): at 262267 (explaining basic monopoly economics).Google Scholar
Normally, a diagram of monopoly pricing would include a marginal cost curve. The equation of marginal cost to zero approximates a simplified pharmaceutical market characterized by high fixed costs of R&D, but relatively small production costs (including the active pharmaceutical ingredients used to manufacture medicines). The marginal cost of production in the pharmaceutical industry is typically close to constant, since for most drugs inputs are available in competitive global markets. This is not true of all drugs. For example, Taxol originally used a natural ingredient derived from the yew tree and so there were biological limits to the amount that could be harvested, but for most other drugs, the costs of manufacturing are more or less constant, and therefore the incorporation of a marginal cost curve would not change the basic economic analysis.Google Scholar
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See Hughes, J. W., Moore, M. J. and Snyder, E. A., ‘Napsterizing’ Pharmaceuticals: Access Innovation and Consumer Welfare, Nationall Bureau of Economic Research, Working Paper No. 9229, 2002; Duffy, J., “A Minimum Optimal Patent Term,” 2003, unpublished manuscript, available at <> (last visited February 17, 2009).Google Scholar
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See 't Hoen, E., “TRIPS, Pharmaceutical Patents, and Access to Essential Medicines: A Long Way From Seattle to Doha,” Chicago Journal of International Law 3, no. 1 (2002): 2746, at 34 (explaining that health activists opposed proposals limiting use of compulsory licenses to drugs on the WHO Model List of Essential Drugs because only 11 of the 306 products on the list are patented).Google Scholar
Generally, the exclusive marketing right to which we refer would be granted by a patent. But other such rights, for example those created by “data exclusivity” protections that prevent generic products from being registered for sale for a period of time based on the safety and efficacy data submitted by the innovator firm, may cause similar access problems.Google Scholar
See Watal, , supra note 9.Google Scholar
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See Wong, E. V., Inequality and Pharmaceutical Drug Pricing: An Empirical Exercise, Center. for Economic Analysis, Economic Department, University of Colorado at Boulder, Working Paper No. 02–19, 2002. In the case that the drug is government-provided, the financial capabilities of the state and its willingness to pay for a given therapy become the relevant constraints.Google Scholar
In principle, sick individuals could borrow against expected future earnings to finance purchasing the drug today. But banks will not in general lend on that kind of basis, and so no such borrowing is possible.Google Scholar
Data from Statistics South Africa's 2000 Income and Expenditure Survey, as reported by the South African Regional Poverty Network, available at <> (last visited February 17, 2009). A more complete analysis would include examination of the distribution of wealth as well. But we do not know of an available estimate of the true distribution of wealth in South Africa. Typically wealth distribution is more unequal than income distribution. Poor households with a survival income typically have virtually no accumulated wealth.+(last+visited+February+17,+2009).+A+more+complete+analysis+would+include+examination+of+the+distribution+of+wealth+as+well.+But+we+do+not+know+of+an+available+estimate+of+the+true+distribution+of+wealth+in+South+Africa.+Typically+wealth+distribution+is+more+unequal+than+income+distribution.+Poor+households+with+a+survival+income+typically+have+virtually+no+accumulated+wealth.>Google Scholar
Our assumptions understate the steepness of the demand curve for the higher income segments since, in fact, wealthier segments of the population are likely to be willing and able to spend a greater share of their income on a needed good. AIDS is also not evenly distributed, but rather is concentrated among urban populations with somewhat higher incomes and mobility. See Piot, P., Greener, R. and Russell, S., “Squaring the Circle: AIDS, Poverty and Human Development,” PLOS Medicine 4, no. 10 (2007) (noting that AIDS is “more concentrated among the urban employed and more mobile members of society, and consequently the more wealthy groups”).CrossRefGoogle Scholar
Figure 2 is indeed exactly based on this income distribution.Google Scholar
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As noted above, the prevalence of HIV/AIDS is not uniform across deciles, but higher among South Africans with higher incomes. We assume uniformity in order to simplify our demonstration that a firm will maximize sales by selling exclusively to the elite. If we were to weigh demand at each income decile to account for differences in prevalence of HIV/AIDS, it would lead to an even greater difference between demand and sales at the upper and lower income deciles (firms would be less likely to sell to the middle and lower classes).Google Scholar
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Since the marginal cost of production is usually very low and nearly constant across production levels, we are showing total revenue instead of marginal revenue and marginal cost. See Parkin, , supra note 14.Google Scholar
In fact, the profit maximizing price may serve a much smaller segment of the population, as world prices of over $10,000 annually for AIDS medicines in the pre-2000 period suggests. Unfortunately, accurate data for segments of the population smaller than a decile are not readily available.Google Scholar
Norway also has an excellent health insurance system so that in principle income need not be a barrier for anyone to obtain needed drugs there. Also, we are once again assuming uniformity in HIV/AIDS prevalence across income deciles.Google Scholar
Data on income distribution in Norway for 2000 was taken from Statistics Norway, which is under the Norwegian Ministry of Finance ( Statistics Norway, Norwegian Ministry of Finance, Income Distribution: More Equal Income Distribution (March 7, 2008), available at <> (last visited February 17, 2009). GDP data from the World Bank, supra note 32. According to UNAIDS data, there are 2500 people with HIV/AIDS in Norway, far less than South Africa. Figures 5.1 and 5.2 still assume that HIV is distributed evenly across income deciles, so each 10th of the HIV+ population represented in the graphs represents 250 potential consumers. Joint United Nations Programme on HIV/AIDS, Epidemiological Fact Sheets on HIV/AIDS and Sexually Transmitted Infections: Norway, December 2006, available at <> (last visited February 17, 2009).+(last+visited+February+17,+2009).+GDP+data+from+the+World+Bank,+supra+note+32.+According+to+UNAIDS+data,+there+are+2500+people+with+HIV/AIDS+in+Norway,+far+less+than+South+Africa.+Figures+5.1+and+5.2+still+assume+that+HIV+is+distributed+evenly+across+income+deciles,+so+each+10th+of+the+HIV++population+represented+in+the+graphs+represents+250+potential+consumers.+Joint+United+Nations+Programme+on+HIV/AIDS,+Epidemiological+Fact+Sheets+on+HIV/AIDS+and+Sexually+Transmitted+Infections:+Norway,+December+2006,+available+at++(last+visited+February+17,+2009).>Google Scholar
Indeed, because of universal drug insurance, the monopolist will be able to sell to all consumers.Google Scholar
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Other tools may include prize-type mechanisms, price controls, use of formularies, reference pricing, and mandatory rebates. For a discussion of cost control measures used by OECD countries, see International Trade Administration, Pharmaceutical Price Controls in OECD Countries (Washington, D.C.: U.S. Department of Commerce, 2004); Outterson, K. U.S. Senate Testimony on the Dept. of Commerce OECD Drug Pricing Report, U.S. Senate, Health Education, Labor and Pension Committee Hearings, February 2005. We believe that compulsory licenses to create competitive market in developing countries is a preferable tool for a host of reasons that we will not canvass here. See Watal, , supra note 9 (preferring compulsory licenses to price controls for administrative efficiency reasons).Google Scholar
Section 41(4) of Canada's 1969 Patent Act (in place until 1992) created a presumptive right to a compulsory license for any medicine and instructed that “in settling the terms of the license and fixing the amount of royalty or other consideration payable, the Commissioner shall have regard to the desirability of making the medicine available to the public at the lowest possible price consistent with giving to the patentee due reward for the research leading to the invention and for such other factors as may be described.” Under this law, royalties of 4% of the generic sales price were customarily awarded. See Reichman, J. and Hasenzahl, C., Nonvoluntary Licensing of Patented Inventions: The Canadian Experience (United Nations Conf. on Trade and Development/International Center. for Trade and Sustainable Development Issue Paper No. 5: 2002). Section 41 of the UK Patent Act of 1949 created a rebuttable presumption in favor of compulsory licensing to ensure that food, medicine and surgical devices were “available to the public at the lowest prices consistent with the patentees' deriving reasonable advantage from their patent rights.”Google Scholar
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