March 26, 2016
According to a Foreign Affairs piece by Council on Foreign Relations Fellow Thomas Bollyky, the major pharmaceutical companies are being run by people who don’t know what they are doing. While they have devoted a large amount of time and resources to putting strong language on patent and related protections in U.S. trade agreements, including the recently concluded Trans-Pacific Partnership (TPP), Bollyky claims that these deals really don’t have much impact on drug prices in the partner countries. If Bollyky is right, the executives of Pfizer, Merck, and other major drug companies are just wasting energy that could be better devoted to other pursuits.
Unfortunately, Bollyky’s piece seems more designed to push the TPP than to seriously examine the extent to which drug prices in the member countries are likely to be affected by the deal. His main method for establishing his case is to look at past trade agreements that imposed tighter patent and related protections for prescription drugs and show that there was no sharp jump in drug prices immediately following the signing of an agreement. This is not a surprise.
In most cases, the rules in these agreements will only apply to new drugs, and even then to a subset of new drugs, for example patent protection for a drug that is a combination of already approved drugs. They may also allow for the extension of patent terms beyond the date where they would have expired under pre-trade deal rules, but here again the impact will only be felt gradually over time.
Furthermore, the date of a trade deal with the United States may not be the key factor in pushing up drug prices. The United States signed a deal with South Korea in 2012 that required stronger patent and related protections, but most of these conditions were already law as of 2009 due to a trade agreement Korea signed with the European Union. Apparently the executives of European drug companies also waste their time trying to impose these rules in trade deals.
If Bollyky was interested in actually examining evidence of the impact of trade deals on drug prices it is not hard to find. An analysis of the impact of the rules in the 2001 trade agreement between the United States and Jordan found that it had increased annual spending on drugs by $18 million by 2004. This is slightly less than 0.16 percent of Jordan’s GDP in that year, the equivalent of $28 billion annually in the U.S. economy today.
There is a similar story of sharply higher drug spending in Morocco, which signed a pact with the United States in 2006. In Morocco, spending on drugs went from $662 million in 2009 (0.7 percent of GDP) to $1.4 billion (1.4 percent of GDP) in 2015.
It’s true that there have not been notable price increases everywhere. For example, Australia has a well-developed public health system where they set reimbursement rates based on a drug’s effectiveness. Australia did its best to try to protect this system in negotiating its trade deal in 2004. There is a similar story with the Chile trade deal negotiated the same year. The country insisted on limiting the scope of the stronger rules on data exclusivity, so that the impact on drug prices would be limited.[1]
While there may be cases where a trade agreement quickly leads to a rapid increase in prices, as appears to have been the case with both Jordan and Morocco, this is more a story of gradually increasing protections both across and within countries. The drug companies want stronger and longer patent and related protections everywhere. Every victory is a stepping off point for further demands for even stronger protections. And every country that imposes stronger protections puts more pressure on the ones that have not.
To take the most basic case, the TRIPS agreement that was attached to the Uruguay Round of the WTO in 1994 required that developing countries adopt U.S. style patent protection. However, the deal also allowed fairly liberal terms for compulsory licensing, a government imposed requirement that drug companies license the use of a patented drug. Since that time, the United States government has worked hard to sharply limit the conditions under which countries could issue compulsory licenses through bilateral trade deals and other efforts at coercion.
The TPP is a major part of this process. It is about imposing tighter rules on the countries in the pact, and since it is quite explicitly designed to be expandable, the goal is to gradually have these rules apply to more countries over time. The pharmaceutical industry’s dream is to eventually include India in this pact, largely shutting down the world’s leading producer of generic drugs.
Bollyky does more or less get the story right near the end of his piece when he comments:
“For health activists who believe the patent-based model of drug development is unsustainable and inequitable, the use of trade agreements to spread and entrench that system internationally is deeply concerning.”
Except that it is not just “health activists” who have this view. There are also many economists who think that a 16th century system of patent monopolies derived from the feudal guild system is not an especially good way to finance the development of drugs in the 21st century. After all, most economists would agree that imposing a 10,000 percent tariff on a product is really bad policy. And having a drug patent that raises the price of a prescription drug to 100 times the generic price has the same distorting and corrupting impact as a 10,000 percent tariff. The market doesn’t care that we call the government intervention a “patent” rather than a tariff.
Even people in the drug industry are coming to recognize that the model must change. Andrew Witty, the outgoing CEO of GlaxoSmithKline recently called for delinking the price of drugs from their research costs. He suggests that governments reimburse drug companies on a cost-plus basis for their research and allow new drugs to be sold as generics.
So Bollyky is absolutely right that the real battle is about sustaining and extending an incredibly inefficient and corrupt system of financing drug research or moving to a more modern method. From the standpoint of protecting industry profits, the drug company executives are probably not wasting their time lobbying for the former.
[1] Data exclusivity prevents a generic company from relying on the clinical test results of a brand drug company. In some ways it is a stronger restriction than a patent, since it is often possible to invent around a patent. The restriction on test data would require a company to needlessly due clinical trials on a drug that has already been shown to be effective. Such tests would violate medical norms, since they needlessly expose patients to trial protocols when there is no plausible medical benefit.
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