How can we make drugs cheaper?

WHO members and observers have currently gathered (Nov 26-28th) at WHO headquarters to discuss and try to implement an R&D treaty which would de-link R&D costs from drug prices. In simple terms, this means that if implemented, it would lead to a huge jump in affordability of medicines around the world, by diverting the massive costs from the consumers to a large global fund, externally managed. (presumably governments chip in). As to why they costs should be diverted... The simple one to me is that people do not (consciously) choose to be sick; so there is no reason for rich people to have cures while poor people can only watch. Of course, there needs to be a practical, 'fair' way to do this. That's what this current treaty is looking into.  

[I said 'consciously' in the above line, because it is true that issues of general health, hygiene, educated choices, etc all play a part in people falling sick; as does simple bad luck. While it definitely requires inter-disciplinary attention, I believe trying to solve health and education issues as primary ones is the most sensible approach] 

This treaty has been under negotiation for more than 2 years now and that in itself is a big step as, if implemented if would mark a big change in approach towards the current market based pharmaceutical innovation system. Why is this important? Because the current system comes with several problems that are caused directly by this linkage between R&D costs and drug prices. Let me lay some out: 

1. Drugs are not like other market goods where the market tells you which drugs are most appreciated. Rather, drugs are taken for combination of the following reasons: Disease + doctor's advice + insurance considerations. Thus the usual 'free market' considerations do not take place here. Diseases are something no one values; doctor's advice is somewhat trustworthy, but still not the person's own judgment; and insurance, when present, quite often determines what drugs people eventually go in for, if anything at all. 

2. Having innovation dependent on the market causes innovations to be directed towards the market. Simple basic logic. This means that drugs are not made for diseases or afflictions which affect poor people more than rich people. This is highlighted in the case of developing country diseases, which rarely, if at all, affect developed countries (i.e., Richer markets). With much of the current capital present in the developed countries, this leaves the poorer countries at the mercy of the pharmaceuticals present in the richer countries. 

3. Following on from the above point, if/when drugs are made for diseases that are present in poorer countries, they are generally priced at a very high rate as compared to the Purchasing Power Parity (PPP) of those in poorer countries. A lot of public backlash regarding pricing strategies have fortunately led to some drugs being differentially priced in different countries in recent times. There is still much to be done though. Similarly, even poor people in richer countries are priced out of these drugs. In fact, in some cases (insurance-less for instance), access to these medicines may be much harder for them as compared to people in poorer countries due to inflated insurance based prices. 

4. Aside from the above mentioned circumstances, having a health system where the incentives for pharmaceuticals are laid out based on purchasing rather than treating/curing, is somewhat counterintuitive. For instance, it may not make any good business sense for a pharmaceutical company to find a vaccine for a disease, since that would mean eating into their future customer base. Similarly, it also makes more business sense for pharma companies to find palliatives rather than actually curing a disease in a person, as it would mean they need to constantly buy more medicines. I have no idea about pharmaceutical processes, but I find it amazing that the common cold has not been cured, while baldness creams of all sorts have reached the market, not to mention that man has landed machinery on Mars. 

And the reasons go on.. But I think these are the main ones. 

So, while WHO members meet to discuss and try to come up with a treaty that would solve these issues... There is one notable organization that is protesting it - The Wellcome Trust. 

A statement from them as per KEI: 

It is essential to engage with industry effectively. We are concerned that the report's emphasis on the delinkage of R&D costs from the pricing of end-products may hamper this. The pharma industry are important partners and should be galvanised to develop business models that address the needs of the poorest consumers.

For an organization that has a statement of "Our funding supports the brightest minds in biomedical research and the medical humanities, with the aim of improving human and animal health." as the first line on their website ... This surely is a stupid way of telling the world that they care more about the welfare of existing institutional players, than the reason that those players and institutes exist - i.e., than for 'improving human and animal health'. Not to mention, that this treaty doesn't ask pharmaceuticals to do charity work, but wants to change the flow of funding as coming from a global fund, rather than the patients. 

IP as an innovation system

(For the meat of the post, you can scroll down to the 4th paragraph)

While there are many justifications and theories of intellectual property, I'll be approaching IPR from the perspective that regardless of the theories/justifications of IP, it is the primary method of incentivising innovation in our world today. (Having said that, this approach does more or less fall under the 'utilitarian theory'). I'll also be ignoring the politics of IP and the developed-developing country issues - the picture below pretty much sums that bit up. I've actually already done a bit of both of those approaches over here. I'm not even looking at the fallout effect of a badly managed but well intentioned patent regime such as excess litigation and overburdened patent offices. For the textual part of my post today, I'm simply looking at the basic concept of patents and copyrights today and explaining what I think their problems are. 

Personalized blog-art credit to Madiha Tallat 

Do feel free to stop and admire the cartoon above.

Ok, So moving on.
What are innovations? Simply put, they are gains in current information or knowledge which optimally can be implemented in products/processes and allow for the further production/discovery of more information or knowledge. Defined as such, innovations are naturally very valued in society and any reasonable society would try to formulate systems for improving the rate of innovative activity. Our society, reasonable or not, has also formulated some systems towards this goal and these are largely encompassed under the heading of 'Intellectual Property Rights'. 

It is obvious that the spread of information and knowledge is fundamental for society's growth and development, therefore any restriction placed on this spread should necessarily be a justified one. Conceptually, this is what patents and copyrights are. Temporary restrictions on the spread of information/knowledge present so as to provide the innovator a time period within which s/he can capture rents for the production of that information, thus serving as an incentive for innovators.

So on the one hand, these temporary restrictions price out one sector of consumers and restrict the flow of information while on the other hand, these restrictions may be the incentives required to quickly bring these innovations to light. The emphasised portions are the key trade-offs in this equation. It's clear what the negative is but on the benefit side, it may not be so clear as to why I'm emphasizing how 'quickly' the innovations are brought to light. The reason for this is that given a certain amount of information and knowledge, it is only a matter of time before an innovation is made from that information. There is no practical way of measuring how long/short this duration may be. Which means there is no practical way of knowing how much incentive is required to bring about an innovation earlier than it would have otherwise taken.

And this is what is causing many of the problems in the patent as well as copyright world today.

Even without actually examining why 20 years was eventually chosen as the standard patent term, it is clear that in the best case scenario it was a best-guess as to what the term ought to be. To add to that uncertainty, the advent of the internet has certainly made a tremendous impact on the spread and accessibility of knowledge and information. With the amount of information available to anyone who has access to a computer and internet connection, the spread of ideas is happening at a much quicker rate in nearly all fields, thus rendering the 'best-guess' of 20 years even more moot.

Unfortunately, discussion and debate in the actual policy setting has been far from transparent in the IP world, with normative solutions for society going lower and lower on the priority list.

Admittedly, patents and copyrights are two very different beasts and as such, I'll discuss them separately.
Copyrights tend to have a 'moral' edge to them, in that, they are more often the result of creative application of someone's mind. The idea remains free for others to use, while the person expressing the idea gets 'ownership' over his particular form of expressing that idea, so it's easy to see why people find it inherently easy to believe that copyrights are justified. This 'inherent justification' also partly explains how copyright terms have been pushed senselessly from 14 years to a currently possible 100+ years. Copyright mostly applies to 'culture' heavy sectors, so it's not very easy to even vaguely estimate if there has been any net benefit or loss due to copyright. However, the fact remains that copyrights can and have been exploited continuously. It's been a long while since our education has been through the means of stories passed on to us. The written word is how we learn and how we are taught now.  If knowledge is valued, then there must be more than a 'less than vague' estimate of net benefit to society by restricting it. Copious copyright term extensions also apply to academic publications. Recently the Spiegal wrote about a study by economic historian Eckhard Höffner, which says that Germany's current industrial might is a spillover effect of the proliferation of academic papers allowed by the absence of copyrights for about 130 years after the superpower of the time (Great Britain) instituted them. In pertinent part from the study:

"Publishers in England exploited their monopoly shamelessly. New discoveries were generally published in limited editions of at most 750 copies and sold at a price that often exceeded the weekly salary of an educated worker. London's most prominent publishers made very good money with this system, some driving around the city in gilt carriages. Their customers were the wealthy and the nobility, and their books regarded as pure luxury goods. In the few libraries that did exist, the valuable volumes were chained to the shelves to protect them from potential thieves.

In Germany during the same period, publishers had plagiarizers -- who could reprint each new publication and sell it cheaply without fear of punishment -- breathing down their necks. Successful publishers were the ones who took a sophisticated approach in reaction to these copycats and devised a form of publication still common today, issuing fancy editions for their wealthy customers and low-priced paperbacks for the masses."

"This created a book market very different from the one found in England. Bestsellers and academic works were introduced to the German public in large numbers and at extremely low prices. "So many thousands of people in the most hidden corners of Germany, who could not have thought of buying books due to the expensive prices, have put together, little by little, a small library of reprints," the historian Heinrich Bensen wrote enthusiastically at the time.

The prospect of a wide readership motivated scientists in particular to publish the results of their research. In Höffner's analysis, "a completely new form of imparting knowledge established itself."" 

Hoffner's is the first study to look at the effects of copyright over a long time and the fact the Britain and Germany existed with and without copyright respectively made it much easier to compare. This period free of copyright laid the foundation for Germany's rapid industrial expansion soon after. Certainly other factors were involved in their continued expansion but the industrial foundation as well as approach to scholarly literature was already set.

So coming back to my point - restricting the spread of knowledge certainly requires strong justifications and strengthening a system with weak foundations seems incongruent with that. I'm not quite advocating no copyright, but it does stand to reason that copyright restrictions should be as minimal as possible.


Products/processes which receive patents on the other hand are generally considered more 'hard' drivers of innovation. This is because they have more tangible benefits to society. Modern IP policy however, has curiously landed on 20 years as the duration of a patent for any and all sectors of technology. This implies that all sectors of technology require the same amount of incentives for innovation. This, however, is simply not true.

Common business sense and wanting first mover advantage is often a huge driver in innovation. Simply put, no one wants to be left behind. Sufficient competition will nearly always lead to innovation. The only normative reasons to give exclusion rights over products/processes are when (a) first mover advantage is likely or is viewed as likely to be insufficient to regain capital expenses and/or (b) when innovation is unlikely without extra incentive due to non-capital related reasons such as market stagnation or contradictory interests.

Pharmaceuticals are the best example of the first scenario where first mover advantage is insufficient to regain capital expenses due to the quick and cheaper reverse engineering that can be done to produce generic drugs. However, pharmaceutical patents come with a host of other problems, which require much explanation on their own and which I'm likely to be highlighting in future posts.
Battery technology is probably the best example of the sector specific innovation stagnation and this is probably due to the fact that improvement of battery capability leads to selling less batteries... But I really don't see how the patent system is helping this problem? If anything, it is part of the problem here. If the incentives to innovate it were tied to the social value of the better batteries rather than to it's sales revenues, there would likely be very quick development in the field.

Let's leave this reasoning aside and look at yet another problem. That of lack of contextualization. Different countries have different domestic strengths. International trade is based on comparative advantage, yet when it comes to patent rights, countries are not allowed to choose sectors for which they feel stronger or weaker patent protection is required.

In other words, despite different incentives required for innovation in different sectors, and despite different countries having different priorities and levels of development, patent policy is broadly the same world over.

The IP system can and will be argued over and teased and pulled in different directions by clashing interest groups... However in my eyes at least, it seems this is not a battle that can be won. Stakeholder interests by default will continue to clash with one another and often unfairly so, in each of their eyes. One way or another though, thanks to the WTO TRIPS Agreement, IP is here to stay. If alternative innovation systems do come up, they will have to somehow bypass the IP system and carve out their own niche.