Patents, Essential Medicines, and the Innovation Game

Summary

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Current international patent rules strike an uneasy balance between conflicting views about patents. The precarious nature of this balancing act is illustrated by the recent heated debate about the conditions under which compulsory licenses will be available for certain essential medicines under the Trade Related Aspects of Intellectual Property agreement. This article argues that the recent debate was misplaced because it ignored differing elasticities of demand between developed and developing country markets. Demand elasticity is a primary driver of the utility of the patent rules. If demand is inelastic, strong patent protection allows the patent owner to charge a price premium and the social cost of the patent monopoly is minimized. If demand is elastic, however, the justification for strong patent protection evaporates. This paper shows that, at least with respect to essential medicines for which there is strong demand in developed countries, the level of patent protection in developing countries makes no difference. The international patent system governing such products should allow greater flexibility for generic imitator competition in developing country markets.

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Patents, Essential Medicines, and the Innovation Game

I. INTRODUCTION

The once dusty arena of international patent law now hosts a life and death contest. Human rights activists claim patents restrict access to essential technologies in the developing world and skew research and development away from global health and welfare problems. Industrialized countries argue that innovation and development require strong patent protection. Both sides agree that much of the world lacks meaningful access to technologies that are basic to a healthy standard of living.

Current international patent rules strike an uneasy balance between these conflicting views about patents. The precarious nature of this balancing act is illustrated by the recent heated debate about compulsory licenses for certain "essential medicines" under the Trade Related Aspects of Intellectual Property ("TRIPS") agreement. Developing countries and activists argued that TRIPS should be liberally interpreted to facilitate compulsory licenses for the production and exportation of generic medicines by developing countries. Developed countries argued that any exceptions to TRIPS should be limited to a narrow list of diseases. The debate produced a procedurally complex compromise that will do little to ameliorate the essential medicines problem.

This Article argues that the recent debate was misplaced because it ignored differing price elasticities of demand in developed and developing country markets. In connection with price, demand elasticity refers to the relationship between changes in demand and changes in price. Demand is considered "elastic" if a change in price produces a relatively large change in demand and "inelastic" if a change in price has relatively little effect on demand.1 Demand elasticity is a primary driver of the utility of patent rules. If demand is inelastic, strong patent protection allows the patent owner to charge a price premium, which minimalizes the social cost2 of the patent monopoly. If demand is elastic, however, the justification for strong patent protection evaporates.3 In a demand elastic market, the patent owner cannot sustain supercompetitive pricing.4

Demand elasticities differ significantly in developed and developing country markets for many essential technologies. The essential medicines problem is an excellent illustration of this point. Demand for pharmaceutical products generally is inelastic in developed countries when the condition the product treats is prevalent in such countries. Treatments for HIV/AIDS, for example, can be priced well above marginal cost in developed countries, because the market for such drugs is relatively inelastic and the price increase will not significantly affect demand.5 However, when the product treats conditions endemic primarily to developing countries, such as malaria or river blindness, demand generally is elastic in developed countries, or the market in developed countries is so small that there effectively is no demand.6 In contrast, demand for pharmaceutical products is nearly always elastic in developing countries, where only the wealthy elite can afford brand name drugs, regardless of the condition the product treats.7

These differences in demand elasticity in developed and developing country markets create two problems. First, treatments that are priced at above-market levels are not available to most of the affected population in developing countries. The social cost of the patent monopoly, therefore, is measured in human lives. Second, when demand is elastic or the market is very small in developed countries, as it is for treatments for tropical diseases, a firm that is focused on a "blockbuster" economic model, such as a multinational pharmaceutical company,8 will not be spurred to innovate regardless of the level of patent protection in any market.

We might reluctantly accept these costs if they were essential to the development of at least one category of new drugs. At the very least, a system of strong patent protection in both developed and developing countries might encourage the creation of some drugs that benefit consumers in developed countries. Eventually, cheaper versions would become available...

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