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Intellectual Property and the COVID Vaccines
The number of COVID-related deaths continues to rise, especially in developing countries like Brazil, where deaths have topped 400,000, while India recently saw 400,000 new COVID cases in a single day. These grim statistics are due to new mutant strains, which have spread rapidly in areas where residents are both poor and in poor health, and where sanitary conditions and local infrastructure are underdeveloped. Major actions are required to slow down and reverse the deadly cycle of death and destruction in these and other places. But what course to take?
To make an appropriate response, it is first necessary to understand how the crisis in developing countries arose. Part of the problem lies in a chronic shortage of vaccine supplies, but much of that shortfall is due to the slow and archaic government systems of distribution, which are often broken (if not corrupt) at every level. The odds that any government can overcome the problematic vaccine shortage by relying on the same officials, programs, and techniques that created the shortage in the first place are slim indeed. A total revision of national programs, preferably with a healthy dose of privatization, is the first priority.
However, many commentators are demanding another approach, calling on wealthy countries like the United States to ease the current vaccine shortage by removing patent protections that private firms have on their vaccines. Thus, Georgetown’s Matthew Kavanagh and Madhavi Sunder, writing for Bloomberg Law, have recently insisted that President Biden “must push drug firms to share science with the world.” Their argument starts with the tragic summary from the WHO that speaks to a colossal failure in the current distribution system: “More than 700 million vaccine doses have been administered globally, but over 87 percent have gone to high-income or upper-middle-income countries, while low income countries have received just 0.2 percent.”
Kavanagh and Sunder hope that without patents restricting access, developing countries can either start to make these products themselves or license sophisticated technologies from companies to make these drugs for them. Variants of that proposal are clearly gaining some degree of strength. Right now, Brazil is poised to strip patent protection for vaccines prepared for use inside the country. Will other nations like India follow?
Kavanagh and Sunder insist that “a better diplomatic approach—sharing US-funded technology with the world—could end this pandemic once and for all.” That technology is already being widely shared, sometimes at a price, but often not. Kavanagh and Sunder’s Panglossian prediction seems wholly implausible, given that the supply of vaccines, medicines, and other technologies constitutes only one piece of a larger puzzle. Local players—such as doctors, health care officials, pharmacists, transportation officials, and many more—all must be able to efficiently utilize these US technologies for any program to work. Do they have the capacity to do that?
Incentives to Innovate
Even if we were to suppose that wider availability of vaccines and other medicines could somehow allow developing nations to end the pandemic, the aggressive proposal to remove patent protection would still do more harm than good. The standard (and correct) rationale for the issuance of patents is that they incentivize the production of new inventions, including new drugs, which would otherwise not be produced. Information is easily shared, so that if one firm develops a formula for the production or administration of a vaccine that is then made public without patent protection, other firms (and nations) are free to adopt it for their own use, thereby allowing them to undersell the firm that developed the drug or technology in the first place. The new firm will bear only the marginal cost of production, while the innovator will bear not only those costs but also the initial costs of invention.
Estimates for those research and development costs vary within the pharmaceutical industry, but even conservative estimates put them at over a billion dollars for a new drug. For a benchmark comparison, the US government, through Operation Warp Speed, invested $18 billion in firms developing COVID vaccines. Each extra unit might cost only pennies or a few dollars, yet marginal cost pricing cannot work. The enormous development costs cannot be levied against the few individuals who first take the vaccine, but instead must be spread across the entire population of potential users to allow firms to recover their initial investment.
Patent protection, which offers the exclusive right to sell a product or service for some limited period, is the most efficient way to secure that advantage. Any effort to use prizes or tax subsidies as patent substitutes is faced with insuperable difficulties. Prizes may work for mathematical proofs, abstract ideas that cannot be patented anyhow. But the sums awarded are puny relative to the enormous costs for patent development. Worse still, the typical prize is awarded only to the first workable product, which may not be the best one. Yet its presence on the market has the unfortunate effect of slowing down the introduction of other (unsubsidized) close substitutes. That wouldn’t happen under current law, where a new drug could not be prevented from entering the market just because the initial patent addressed the same underlying disease or condition.
The patent system is thus organized in a way that allows new drugs to eat away at monopoly profits of any earlier entrant. That same process, moreover, takes place when generic drugs are in competition with new patented drugs, which can survive only if their overall effectiveness is sufficiently superior to offset the price advantage of any generic drug.
The hard question is whether the patent system should be suspended because of the present crisis in developing countries. Wealthy countries have not eliminated patents for COVID-19 drugs, because they see the obvious threat that the loss of revenues poses to innovation. They fear that drugs delivered to an undeveloped country for sale at a low price could be illegally reshipped to a richer country where they could undercut the local prices, which could in turn reduce the ability of the patent holder to recover the front-end costs of its invention.
Government Can Shoulder the Cost
To obtain drugs at lower prices, developing countries often propose to create a compulsory licensing system that lets them get drugs at a lower price by wringing monopoly profits from the system. As Scott Kieff and I argued a decade ago, that strategy is in general a mistake. Compulsory licenses work only in situations where short-term conditions drive prices above competitive levels. However, under the applicable language of Article 31 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), developed under the auspices of the World Trade Organization, any alleged market breakdown does not permit a member state to obtain a license for free but only at a reasonable commercial rate, which thus effects no significant change in pricing policy.
But let us suppose that free drugs could give a substantial boost to developing countries, especially if the United States or another advanced nation manages the distribution system. It still does not follow under applicable US constitutional takings principles that the drug companies in question should bear that loss, given that the eminent domain option (with just compensation) always remains open to the federal government. Right now, the United States already commits extensive public revenues to offering direct aid to hard-hit nations, both out of a sense of altruism and the reasonable concern that any new contagion (e.g., mutant strains in Brazil and India) could easily spread back home.
The objection to these forms of expropriation was best stated by the late Justice Hugo Black in Armstrong v. United States (1960): “The Fifth Amendment’s guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” If the government wants to supply vaccines abroad, it should simply buy them from companies at a fair price and then give them away as seems expedient—or prevail upon local governments to buy the vaccines themselves at bulk rates.
That same principle, moreover, should apply to the Moderna vaccine, even though the United States funded more than 99 percent of that vaccine’s total cost. That investment may or may not have been wise, but it should not be subject to a collateral attack by letting the government renege on its contract—or unduly lean on the company—to ensure a vaccine supply overseas. Putting the cost on the government allows it to maintain the incentives of the patent system while pursuing its international objectives. This global crisis will be best served by adherence to a sound system of property rights.
© 2021 by the Board of Trustees of Leland Stanford Junior University.
Published in Law
People still actually say “developing countries”? That’s so quaint. I think Brazilians themselves long ago stopped doing so.
OK, it doesn’t actually say “reverse death,” but still. I applied to medical school, not law school, for a reason.
Brazil has a long history of requiring non-Brazilian companies to transfer technology to local companies in exchange for access to the local Brazilian market. A consequence has been that non-Brazilian companies sell into Brazil only products with relatively old technology.
“where residents are both poor and in poor health, and where sanitary conditions and local infrastructure are underdeveloped”
This is key: poor health and sanitary conditions are underdeveloped
“Moderna vaccine, even though the United States funded more than 99 percent of that vaccine’s total cost”
This is outrageous
I don’t understand why the governments of India and Brazil don’t simply buy however many doses they need. Both countries have an upper class who pay taxes. There is money in those two countries. The charity that needs to be given out should come from each country’s own government, just as is happening in the United States. It’s the U.S. taxpayers who have charitably funded this vaccine research and production and who have made it available to everyone in the United States.
I suspect that along with the poverty is tremendous ignorance that their governments take advantage of. Rather than address where the money in their own treasuries is going from day to day, the governments continue spending it on whatever they please, even though that money is not going to what the people actually need right now. When questioned, these government officials point to the greedy U.S. pharmaceutical companies. Then those elected officials continue to live off the government’s tax revenues while depriving their citizens of essential services and resources.
I think these countries would be better served over the long run if the United States said to the people, “Your government has all the money it needs to buy these vaccines. Ask your government where that money is going.”
If that doesn’t work, then the United States may need to work through private charities to get vaccines to India and Brazil. But before I did that, I would put an ad in the major daily newspapers in Brazil and India encouraging and urging the citizens of these countries to ask, “Where are our tax dollars? Why is there no money for us to buy these life-saving vaccines?”
Poor countries are poor for a reason. The main reason is bad government, or socialist government. It’s a vicious circle, as their populations are less than literate, meaning it’s difficult for them to demand and elect good government. Instead of just giving them money or free drugs, we in the rich world should insist on increases in literacy for the entire population, and more control of where our foreign-aid money goes (which often lines the pockets of the upper classes and corrupt governments instead of helping the people help themselves). More free markets beget better government and more wealth for any country.
Chile is a good example
Developing countries should focus on treatments. Ivermectin and HCQ are very cheap and about as a effective as vaccines. The treatments are easy to distribute and don’t require special training to administer (over the counter). They do not require a nurse to be on hand to help with the occasional stroke.
The US patent system for drugs is totally abused. Big Pharma games the system to extend patents and uses kickbacks to control what drugs are used. PBMs are evil. If you don’t believe me, Search for “PBMs are evil”.
Great article! Progressives come up with a solution for the lack of vaccines in developing countries, but as usual it’s one that would have long-lasting negative effects on the community to be purportedly helped (c.f., LBJ’s Great Society programs).
With Biden desiring to throw $100 billion here and $100 billion there to solve (what Democrats are calling) problems in America, a small portion from one of these could be used to pay to provide (free or low cost) a chunk of American vaccines to developing countries that are ready to distribute it. With its stringent storage requirements, Pfizer might not be the best candidate, but others are available. @dong‘s point is also valid about other drugs, to help minimize the worst effects of the virus, while waiting for an effective distribution system for the vaccines.
I consider that sort of a non-starter, or an immediate “strike three” if you prefer. The Number will continue to rise if even ONE more person dies.
Except there is no good proof HCQ or ivermectin work-but there is excellent data that vaccines work. Vaccines are also comparatively cheap and prevent disease which is typically preferable to treating it. Big Pharma is evil?- for a measly few billion they developed vaccines worth multiple TRILLIONS to the world.
HCQ and ivermectin are safe and have a long track record
The covid booster shot is new, we don’t know the long term effects of Moderna/Pfizer jabs
I remember Niall Ferguson saying that culture may matter less than the political/economic structure for helping poor countries.
All countries start out poor but which ones become ‘rich’?
Adam Smith provided a blueprint in 1776
Money poured into poor countries enriched the leaders, not the people.
The same thing happens here, in a way.
All the trillion-dollar deficits etc, aren’t making the PEOPLE wealthy.
Actually, the world-wide per-capita death rate reached a peak on April 19 that was not quite as high as the peak on January 26 of 1.85 people per million per day. See URL. If you add Brazil and India to the graph, you see that the death rate in Brazil has been on an uneven but not insignificant decline since its peak on April 12. India’s death rate is at a high and is still rising, though the rate of increase in the death rate seems to be slowing down since a couple of weeks ago.
The U.S. would do better to stick with what the data show us to be true.