16 Pages Posted: 3 Jan 2006
Drug prices are uniquely susceptible to radical price reductions through generic competition. Patented pharmaceuticals may be priced at more than 30 times the marginal cost of production; the excess is the patent rent collected by the drug company while the patent and exclusive marketing periods remain. Patent rents are significant. AIDS drugs which sell for US$10,000 per person per year in the US are sold generically for less than US$200. If patented drugs could be sold at the marginal cost of production, cost effective treatments would become even more attractive, and other interventions would become affordable.
This Article proposes marginal cost (generic) pricing for most essential medicines used in the developing world. Global collection of patent rents must be relaxed in order to achieve this objective. Some damage to the profits of pharmaceutical companies would ordinarily be expected, but a properly designed buy-out mechanism can ensure adequate incentives for pharmaceutical innovation.
Two case studies are examined to illustrate the proposal: the recently-developed Human Papillomavirus (HPV) vaccines for cervical cancer and second-line antiretroviral (ARV) treatments for AIDS.
Global pharmaceutical markets and global disease burdens are mismatched, making this proposal uniquely attractive. Some 80% to 90% of the global sales of patented pharmaceuticals occur in the 30 wealthy countries which are members of the Organization for Economic Cooperation and Development (OECD), roughly similar to the World Bank's definition of 29 high-income countries. Pharmaceutical markets for patented products largely follow the money.
But the vast majority of patients needing treatment for global chronic and infectious diseases reside in non-OECD (middle- and low-income) countries. These countries include more than 84% of the world's people, and they are disproportionately sick. The global burden of disease falls most heavily where the market is least attractive.
This mismatch between global pharmaceutical markets and global disease burdens leads to an interesting opportunity. Patented pharmaceuticals could be offered to more than 84% of the world's population at generic prices. (Only high-income country patients would bear pharmaceutical patent rents). The gain in health from increasingly affordable pharmaceuticals would be considerable. The primary disadvantage of this plan would be a quite small reduction in global R&D cost recovery; but even this small deficit could be restored to the companies through a carefully designed patent buy-out mechanism.
Keywords: patent, global disease, innovation, orphan disease, intellectual property
JEL Classification: H41, H51, I18, K11, K19, K32, K33
Suggested Citation: Suggested Citation
Outterson, Kevin, Patent Buy-Outs for Global Disease Innovations for Low- and Middle-Income Countries. American Journal of Law and Medicine, Vol. 32, 2006. Available at SSRN: https://ssrn.com/abstract=873402