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Improving the Drug Trade

Dan Tortorice

With sky-high prices putting drugs out of reach for the Third World’s poor, more and more countries are exploring the obvious “solution”: ignoring patent protections, they produce the drugs themselves, selling them to the poor at little or no cost. Take the case of Brazil, which despite its WTO pledges to honor the patents of other WTO member nations, produces a patented AIDS drug and distributes it for free to its people. As Brazil sees it, Brazilians benefit from receiving drugs, and American firms are fine because they still have tons of profits from their domestic sales. So no harm no foul. Right? Wrong. The actions of the Brazilian government are shortsighted, for they destroy the incentive mechanism that will allow drugs to developed in the future.

The lack of price discrimination by drug companies is one of the most curious facts surrounding the pricing of drugs. That is to say, one would expect that drug companies would charge high prices in developed countries where consumers can pay the high price, and lower prices in developing countries. The drug companies would then make a higher profit than they would if they sold at only one high price. Yet this is not a common strategy. Brazil began its program because of the lack of affordable AIDS drugs.

So why don’t drug companies price discriminate? The most obvious and logical answer is that they are afraid it will lower their profits. They are afraid that the drugs sold for low prices in Brazil will make their way back into the United States and be sold cheaply on the black market, cutting into their U.S. profits.

Well, what happens if the drug companies are right? If more countries like Brazil continue to produce generic versions of patented drugs, these drugs may seep into the markets of developing countries, destroying the profits of drug manufacturers, profits necessary to recoup research and development costs. The firms no longer will have an incentive to undertake research and development. Drugs need to be made available to the sick, but not at the expense of making drugs unavailable for the new diseases of future generations.

Is there a better solution, then? One which lets drug companies keep their incentives and lets Brazilians get the drugs they desperately need? Of course there is, and it’s fairly clear. Drug companies will be able to meet demand in both developed countries and developing countries if they are able to sell at different prices in both countries. They can do this if countries work together to prevent the transfer of drugs form one country to another.

You are never going to stop the transfer completely, but this is not necessary. It just needs to be done adequately, so that while the drug companies may lose a little bit of profit from black market drug sales, the gain from selling in Third World countries will offset it. And since the countries involved in these transfers are, for the most part, members of cooperative organizations like the UN and the WTO, the spirit of mutual cooperation for mutual benefit is already in place to make it work.

Currently, the United States is suing Brazil in the WTO for its patent infringements. If the United States wins it will be allowed to place retaliatory sanctions against Brazil. This would be a mistake. The WTO should encourage Brazil and the US to work together to find a mutually beneficial solution, not work against each other in a sprit of mutual destruction.

It may be that even with price discrimination by drug companies, drug prices will still be too high for the poorest citizens. But government policies are available to remedy the solution. The government can put a price cap on drugs, high enough to let drug companies make a profit, but low enough so that the poor can buy the drugs, or low enough so the government can afford to buy and distribute the drugs. And while such a cap would cut into drug companies’ profits, they make more than enough in developed markets to recoup research costs.

Brazil’s drug piracy and the United States’ legal bullying must stop. This sprit of mutual destruction will lead only to less medical innovation and further harm to the people of Brazil. Instead the two countries should come together in a sprit of mutual cooperation, and provide the infrastructure necessary to allow drug companies to sell drugs cheaply in developing countries while maintaining the incentive for further research, so that both current and future generations will reap the benefits of readily available cures to deadly diseases.