Why Are Drugs So Expensive?

Who wouldn’t sympathize? According to WorldVision Canada, 14,000 people die from treatable infectious diseases every day. 5 million people with HIV/AIDS in developing countries need antiretroviral drugs, but only 300,000 people can access them.

Whilst poor countries and non-government organizations (NGOs) demand the right to produce cheaper generic versions of patented pharmaceuticals, the big pharmaceutical companies and the US cry foul and insist that international patent law be enforced.

Why can’t the poor get access to the drugs they need? The legal aspect of this plight is grounded in international patent law. Patent law is the incentive for individuals and corporations to design, implement and share inventions, such as new drugs.

The first recorded use of patents occurs in Venice in the 15th Century, a period when Venice was anxious to cultivate new industries and innovation to compensate for their shrinking trade influence. The first English patent laws were introduced in the 17th Century; the United States has administered patents since its formation in 1792 and France passed comprehensive patent laws in 1844.

The common thread of these patent laws (and those that have evolved from them) is their intent to solve the conundrum pertaining to new technology that applies to all intellectual property: the creation of new technology is useful to society, but it can be easily copied, so an inventor may find the results of their hard work copied by others.

The patent system creates a contract between an inventor and society: the inventor creates new and useful technology, and society rewards the inventor with a monopoly use of the invention for a set time period. After this time period, of course, society is left in possession of a new technology, which it can use and develop further as it wishes.

International patent law is essentially the agreement between various nations in the world to respect each others’ patents: I won’t steal your intellectual property if you won’t steal mine. Domestic laws have been passed by most nations recognizing foreign patents as binding within their own borders. In this way, patents granted by one country become binding on most of the rest of the world.

Every western nation is part of the international patent system, and most countries have joined since the collapse of the USSR. The international standard for the period of monopoly exploitation of a new invention has been set at 20 years from the patent application.

Pharmaceuticals are an extremely important form of invention worth hundreds of billions of dollars. Since they represent an innovation which is both new and not obvious, pharmaceuticals are eligible for patent grants, allowing their inventors monopoly use for 20 years.

These grants are the basis of the considerable profitability of the highly consolidated pharmaceutical industry. Without patents, competition between manufacturers would quickly force the price of pharmaceuticals down to the fraction of a cent per pill most pharmaceuticals cost to produce.

With patents, the pharmaceutical firm that invents a drug can sell it for whatever price it likes for a period of twenty years, allowing massive profits above the costs of manufacture. But before you go and invest all your money in a pharmaceutical firm, remember: the research costs of a novel and successful drug are astronomical. The drug discovery process is incredibly difficult, complex and expensive.

New compounds must be created, analysed, enhanced and modeled. Successful candidate compounds are then put through rigorous testing in multi-stage clinical trials. All stages require expensive technology and highly skilled workers.

By the time a molecule passes regulatory approval (so it can legally be sold to treat illness) it has cost its parent company an average of $300 million, and for every molecule that makes it to the shelf, thousands have been lost on the way.

This is part of what makes patent law so important for the pharmaceutical industry. With a combination of extremely high research costs and extremely low manufacturing costs, patent law is all the only thing which makes the invention of new pharmaceuticals lucrative enough to be viable.

Universal acceptance of pharmaceutical patents has never existed. For many years, India has refused to acknowledge foreign patents and churned out generic versions of these drugs by the thousands for domestic use.

These drugs were identical to the drugs patented and marketed by Big Pharma (a term used to describe the major pharmaceutical companies), sold at a fraction of the price. This policy brought India into direct conflict with both the companies and their political allies.

Over the late 1990’s, other poor nations have entered the fracas, with Brazil demanding the right to manufacture generic drugs and many other developing nations demanding the right to import them. Many NGOs have also sided with these poorer nations, demanding that pharmaceutical companies do more to increase access life saving treatments for such diseases as HIV/ AIDS and tuberculosis.

But Big Pharma isn’t happy about making their product widely available in the Third World. To begin with, there is no profit motive: the Third World just doesn’t have enough health spending to even register on the radar of companies used to selling drugs to the West.

Also, to make these drugs available, they are forced to deal with two unpalatable alternatives: the first is to incur the expense of exporting drugs to foreign countries at cut prices, often to immature markets with poor distribution networks.

The reduced prices involved generally mean there is no hope of making a real profit and the poor state of the foreign markets mean there is even the chance of losing money. Their other option is to watch as generic providers ramp up production and make an alternative version of their product which can then be siphoned off and smuggled into their primary markets.

This is the major concern of Big Pharma — once their patented drugs (either generic versions or cut price brand names) can be obtained for next to nothing, there is a good chance that they will be smuggled back into the First World where they could undermine the market that makes them money. It is already common for older Americans in southern states to drive to Mexico to shop for cheaper pharmaceuticals, and for spammers to aggressively market mail-order generic pills over the Internet

Perhaps that’s why every year Big Pharma spends $240 million lobbying the US government to enforce international patent laws. The US government has driven hard bargains, and successfully pushed to make some level of patent enforcement a prerequisite for trade with the US.

The NGOs, and the poor countries they champion, claim that Big Pharma doesn’t do enough for the world’s poor, developing drugs for First World diseases and pricing them out of the reach of the developing world. On this they have a point: the antiretroviral cocktail that can treat HIV and significantly prolong the lives of AIDS sufferers costs over $30,000 a year per patient — well out of the reach of most people in the world.

They have called for a variety of measures, all centered on lowering drug prices in the Third World by cutting the profit margin that Big Pharma receives on those drugs. They reason that because no one in the Third World can afford the premium prices Big Pharma asks for, Big Pharma is not foregoing market share or profits by allowing generic drugs or significant discounting.

It’s an argument they’ve had some success promoting. Large scale campaigns in Western nations have portrayed Big Pharma as indifferent to the plight of those suffering diseases in the Third World. Organizations like Oxfam have opposed attempts by the US government to get tough on patents and have proclaimed the universal right of all to have access to essential medicine.

Despite strong support from the US government, Big Pharma have been forced to negotiate cut-price deals with countries like South Africa, who threatened to licence generic manufacturers to make antiretroviral drugs. Big Pharma has also been forced to allow some generic manufacturing in countries like India and Brazil.

In August 2003, a deal was struck that allows countries like Brazil and India not only to produce their own generic drugs, but to export these drugs to a limited number of poor nations in order to treat a limited set of diseases.

This compromise position has allowed the poorest nations access to cut price drugs until at least 2018, with a middle-tier of nations agreeing to only access generic drugs in the case of a national health crisis. This is a massive change to the regulatory framework surrounding pharmaceutical patents.

Already we have seen poor country governments and NGOs move to exploit these changes in order to increase the availability of life saving drugs, particularly the antiretroviral drugs used to treat HIV/ AIDS. For instance, the Clinton Foundation brokered an agreement to supply antiretrovirals for $0.38 per person per day, halving the price for this treatment. An NGO, Medecins Sans Frontieres, has begun distributing free antiretrovirals in parts of Africa.

It isn’t known just how many people will get access to these cheap drugs, but if the example of India’s generic drug market is anything to go by, access will be vastly improved over the next few years. The pharmaceutical companies are holding their breath and hoping that smuggling is kept to a minimum so that their lucrative Western markets are not undermined.

Big Pharma shouldn’t be expected to suffer losses exporting their drugs — it would be a punishment for inventing drugs that help the Third World — and equally they need to have their traditional markets protected from cheap generics, otherwise the incentive to produce new drugs would disappear overnight.

The bottom line is that developing new and useful pharmaceuticals costs billions of dollars. During the 20th Century, the patent system successfully provides a mechanism for those costs to be covered through expensive sales during the patent period.

The August 2003 agreement changed those rules for the Third World. Without an effective system that prevents generic drugs from leaking into First World markets, the damage done to Big Pharma may prevent it from being able to provide any assistance to the Third World at all.

After all, why spend millions on inventing an unprofitable new malaria treatment, when the NGOs won’t get worked up about your next blockbuster anti-impotence drug?

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