Differential Pricing and Politics of Health Development

by Helene Bank

Oslo 25 Apr 2001 - - The World Trade Organization and the World Health Organization, jointly convened a meeting on “differential pricing and financing of essential drugs”, which due to the controversies over the issue in the United States was held in H’Bsjor, Norway on 8-11 April.

The title of the meeting underlined the fact that the hosts had no intention of finding any other solution to the issue of unfair and unaffordable monopolistic pricing of drugs than ‘differential pricing’. The WTO-WHO meeting pre-emptively chose the solution for the expert participants, flying in the face of economic theory and evidence from real life. The fundamental problems of the patent systems, which South Africa, Brazil and Thailand now face - namely the problem of the multilateral trading system securing monopoly rights over, among other things, life saving knowledge and technology - were not intended to be negotiable outcomes from the meeting.

The WTO press release highlighted that the workshop “examined in detail ways to reduce pharmaceutical prices in low-income countries and how to increase financing so that the world’s poorest people can obtain necessary medicines and healthcare.” The press release said that differential prices was the measure which could contribute to solving the problem.

The disputes of the meeting did not come through in the WTO press release which said that “differential pricing” - companies charging different prices in different markets according to purchasing power - is a feasible means of achieving this, provided certain conditions are met”.

“Differential pricing would allow companies that make patented drugs to recover most of the costs of research and development in richer markets and at the same time to sell or license production at lower prices in lower income countries.  Advocates said this could be a win-win solution if consumers in richer countries do not face higher prices as a result... Critical to the success of this would be methods of preventing lower priced drugs from finding their ways into rich country markets. ...”, claimed the WTO.

The interesting thing about this “finding” is that it is precisely the privilege won by the private sector in the patent agreement of the WTO (the TRIPs agreement). The only minor caveat lies in the safeguard clauses of the agreement. Differential pricing already divides markets and maximises profit for each segment. Africa is a small market today for many essential drugs, HIV/AIDS and others (1-2% of total market). If the WTO and WHO guarantee an expanded market in Africa while at the same time helping the monopolists avoid demands to lower prices from other market segments, the monopolists are better off.

This is “smart partnership”.

In addition, differential pricing binds the hands of northern governments. These governments also have the right to use safeguard measures under TRIPS. Even in countries with high social security, or high level of private insurance, the poorest citizens are those most hurt by high, monopoly drug pricing.  Differential pricing sets the interest of poor people in different countries against one other, instead of promoting a common front against private monopolists, who hold the life of these people in their hands.

Participating in the Hosbjor meeting via video-conference was Prof. Jeffery Sachs from Harvard University, and co-chair of the WHO macroeconomic commission on health. He argued for even stronger intellectual property right (IPR) legislation than that demanded by the TRIPS agreement. He believed that the big pharmaceuticals would lower prices to almost marginal costs, but some monitoring of prices may be needed. These statements were strongly contested by other participants, but there was no space for extended debate on this issue at the meeting

Another WHO advisor, Patricia Danzon (of Pennsylvania University, and advisor to Pfizer) also participated through video. She argued that the free entry of new drug companies to enter the market ensured the efficiency in the medicines market, and thus the pricing problem of monopolies. She strongly opposed national price controls and parallel imports.

James Love, from Consumer Project of Technology made a strong case against the advice that many developing countries had received from both WTO and WIPO (on implementing TRIPS).

“I think the technical assistance on IPR issues borders on legal malpractice, because the advice benefits the big pharmaceutical companies, but not the poor .... If developing countries want to change things, they should give Carlos Correa (an Argentine expert) a top job at WIPO “, he said. Love argued for developing countries making active use of both compulsory license and parallel import. He also argued for a global convention on R&D and added a number of examples, which could ensure funding for such research. The proposal for the global convention would replace the TRIPS as it relates to medicine, and give countries direct obligations to fund R&D, according to their ability and stage of development., through policy instruments that make sense for them.

The workshop experts agreed, however, that the “countries need to be able to make use of the public health safeguards built into the TRIPS agreement.” This includes compulsory licensing (governments produce a patented invention due to a compulsory license) and parallel import (i.e. imports of products supplied by the patent owner or his licensee at a lower price in another country).

In all other aspects of the globalization process, monopolies are seen as a barrier to efficiency and good governance. Therefore many developing countries have been requested to privatise public - national monopolies. The level of truth to this statement is another story; but the issue here (of TRIPS) is the double standard which meets developing countries when they try to take steps they believe are best for their citizens.

The big pharmaceuticals, which hold patents of life saving drugs, comprise private monopolies with the ultimate aim of profit maximisation. Because they lack competition, domestic and global, the prices in each country are designed for profit maximisation. In economic theory, one more unit sold will result in less profit. Only when markets can be divided, so that they can segment their prices due to willingness to pay, may the monopolists decide to increase production. This has nothing to do with efficiency, only profit maximisation.  This IPR system has resulted in pricing differences of several hundred percent between e.g. Thailand and South Africa, and even Europe and East African countries, where Africa is worst off.

Both evidence and theory has shown that drugs produced in a competitive environment are far cheaper than monopolistic pricing of the same drugs. Why is this controversial?

Participants of the workshop recognised that IPRs is an important incentive for R&D into new drugs. But there seemed to be no consensus that there were also other ways to encourage R&D.

Arguments used for these monopoly rights include the need for incentives for pharmaceutical companies to engage in research and development. Before challenging this argument, three characteristics of the big pharmaceutical research and development need to be highlighted:

·        There is very little transparency on actual spending on R&D - i.e. the public has very little control on the efficiency of R&D

·        To quote Glaxo, from 1999, they claimed to have re-invested 14.6% of its revenues in R&D.

But WHO reckons that most patented medicines are sold for 20 to 100 times marginal costs - an expensive way of financing R&D.

·        Main R&D is focussed on drugs for the rich markets ( life style and drugs to increase male sexuality), while there are many un-funded and under-funded health areas of interest to developing countries and other weaker consumer groups, such as sleeping illness, malaria etc.

The notion that the big pharmaceuticals are the most efficient bodies to develop new drugs can be challenged on at least 5 reasons, mentioned in the above observations above. It is not necessarily true that the best solution for society is that the same companies are both doing research, testing, production, marketing and providing information for specific drugs on which they have a patents. Governments may choose a solution where they purchase research due to the needs and aims of their societies, instead of relying on market monopolies to solve the problems.

First, if the cost of such research is that hundreds and thousands of people die due to lack of access to affordable medicines. The cost is too high.

Second, the research seems to be directed towards strong markets. Public decisions on where research funding should be spent, will ensure more public control on priority areas.

Third, many ideas to new drugs have been developed in national research institutions, or developed by traditional medicine in developing countries. The ideas should thus already be regarded as a public good. The company that has bought the idea from the researcher/traditional doctor does further development.  Competition on efficient use of research could be an option which could promote small domestic companies as well.

Fourth, knowledge will only be utilised optimally if as much people as possible share it. Through public funded research and conditioned publication of findings, efficiency can be maximised.

Fifth, the costs of producing incentives for big pharmaceuticals to research on the “right” issues, and to hold an efficient patent office in each country may be so costly so that important resources are lost.

Incentives can be developed so that the pharmaceutical industry conducts research on the diseases of priority to society, and keep their full monopoly rights. But governments may also want another solution where they for e.g.  purchase relevant research from research institutes, and reduce the monopoly rights of the industry.

These are two different but equally valid political choices. Neither were discussed in depth at the meeting.

In the workshop, official advisors (even “economists”) to the WHO and WTO suggested and pushed a line where differential pricing was a unique solution to ensure affordable prices in a system where pharmaceuticals are left with monopoly rights and all decisions on research and development. This implies the development of strong patent offices for administration and control (US alone uses $ 1 billion per year), and incentives to make big pharmaceuticals research something from which they will not benefit.

The promoters of this (in WHO and WTO) are not even promoting neoliberal economic theory. These people have left their area of competence and entered a political sphere where they have become political players in the hand of a powerful system. Policymakers should be aware of this.

The purpose of the workshop, with focus on differential pricing instead of focus on the fundamental problems of the IPR systems seemed to be a rescue operation for the TRIPS agreement. TRIPS is in serious troubles of legitimacy due to the apparently unfair litigation launched by the big pharmaceuticals against the South African government, and the nearly 20 000 persons currently dying every month from AIDS in that country alone.

WHO in its background paper for the conference states that the concept of differential pricing mean that “..essential drugs prices should in some way reflect countries‘ ability to pay as measured by their level of income”. WHO also present their experience of being able to reduce vaccines prices to “1-5% of high income market prices....”

Why does not WHO reflect on this system and whose interests it is promoting. The WHO is the agency which is supposed to be helping poor and sick people, not protecting big pharmaceuticals profit.

(* Helene Bank is a Norwegian development activist and NGO at the DIC, the non-governmental ‘Centre for partnership in Development’. She wrote this piece for the special bulletin of the Harare-based SEATINI Bulletin and it is reproduced in SUNS with acknowledgement). – SUNS4883

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