Epstein: Property and Human Rights in AIDS Drugs

Richard A. Epstein

May 7, 2007

The past few weeks have witnessed yet another breakdown in the voluntary markets for AIDS drugs, as both Thailand and Brazil continue to invoke Article 31 of the TRIPS (Trade-Related Aspects of Intellectual Property) treaty to authorise the generic reproduction of Merck's Efavirenz and Abbott Labs' Kaletra. Both countries have demanded a reduction in the prices charged for AIDS drugs, claiming that they cannot afford their cost. Abbot mounted some initial resistance, but faced with pressures from the World Health Organisation and from healthcare activists have, at least for the moment, yielded to these demands.

The current political strife shows the weakness of the TRIPS agreement, which in the event of an impasse allows a TRIPS member to use the patented product without authorisation if, after a "reasonable time", it has been unable to negotiate patent use on "reasonable commercial terms and conditions". The member state must then pay "adequate remuneration" for the duration of the license. In effect, TRIPS allows a state to impose a compulsory licensing regime in order to combat bargaining breakdown.

Without question, these state initiatives have put the pharmaceutical companies on the defensive. AIDS activists have had a field day in denouncing profitable companies for putting patents and profits ahead of patients. The struggle has become all the more intense in Thailand, where Abbott initially refused to register any new drugs, including its new heat-resistant form of Kaletra, which is of immense value in tropical countries. Abbot later buckled under external pressures.

Many groups have celebrated the success of Thailand's strongarm manoeuvres. Unfortunately, their victory is likely to prove short-sighted, because the overall situation is far more complex than the heated attacks on Abbott suggest. The root difficulty is inherent in pricing new medications, the first pill of which costs tens or hundreds of millions of dollars, even though all subsequent pills are cheap to make. Who will pay for those high initial fixed costs? "Not I" is a universal, but unsustainable response.

In the United States, the war cry is that American consumers must unfairly subsidise the rest of the world by paying far higher drug prices than anywhere else in the developed and developing world. Simultaneously, poorer and impoverished nations demand still greater discounts, especially for their own domestic "public noncommercial" health programs, which frequently distribute anti-HIV drugs without charge to end users.

The TRIPS agreement does not tell us how to resolve these pricing struggles. Nonetheless some signposts can help place the dispute over anti-HIV drugs in perspective.

First, the TRIPS treaty does not privilege developing nations in patent disputes solely because of their humanitarian motives. If a nation wants to supply cost-free medicines to its citizens, the first place it should look is to its own general revenues. Its own internal generosity does not lower the commercially reasonable price it should pay.

Second, any stated price does not look commercially unreasonable if it is similar to offers made to other nations, all of whom act as sole purchasers within their own countries. No nation should be able to circumvent the voluntary market solely because it doesn't get the best deal possible.

Third, no drug company looks like an unreasonable hold-out when it has already made significant price concessions, such as those made to Thailand, where the price of an annual course of treatment for Kaletra has dropped from $2,200 to $1,000, even before the recent showdown. Bargaining abuse is not the unique preserve of nations. It can also originate in nations whose own economic houses may not be in order.

Fourth, nothing stops AIDS organisations or foreign governments from buying these products at a negotiated price, which can then be given out free of charge. Charity can come from anywhere, not just drug companies.

Fifth, Brazil and Thailand stand to reap enormous domestic benefits even if they pay negotiated prices. Recent studies put the gains from an additional year of life at well in excess of $100,000, dwarfing the cost of drugs, which in any event constitute only a small part of total treatment costs. Likewise, the price for the unrefrigerated Kaletra should rise, without increasing total costs, given its greater effectiveness and lower costs of storage and administration.

Sixth, the aggressive stance in Brazil and Thailand hurts AIDS patients worldwide. To be sure, price reductions in Thailand and Brazil will not lead to price increases elsewhere, since presumably Merck and Abbott already charge whatever price they think maximises the uneasy mixture between profits and good will. But if compulsory licensing schemes are proper in Brazil and Thailand, then why should everyone else not just follow suit, given the insatiable demand for lower prices?

Seventh, decisions like those in Brazil and Thailand cripple incentives to invest in new drugs, particularly for AIDS, for which sick people worldwide will pay the price tomorrow. What drug company will invest in new and useful products when the ensuing harsh publicity will damage its global brand? Better to stand aside and let someone else take the heat. But who will step forward?

In the end, the AIDS imbroglio replays a familiar morality tale: disregarding property rights in the name of human rights reduces human welfare around the globe. Even strong claims for distributional equity always come at the price of technological innovation.

Richard A. Epstein is a professor of law at the University of Chicago and a senior fellow at the Hoover Institution. He is the author of Overdose: How Excessive Regulation Stifles Pharmaceutical Innovation. He frequently consults for pharmaceutical companies.