D E V E L O P M E N T,T R A D E , A N D

T H E W T OA Handbook

Bernard Hoekman, Aaditya Mattoo, and Philip English, editors

THE WORLD BANKWashington, D.C.

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T E C H N O L O G Y A N D I N T E L L E C T U A L P R O P E R T Y

A critical task facing the global economy is todevelop mechanisms that encourage researchaimed at developing treatments for diseaseswhich are common in poor countries and, at thesame time, achieve widespread distribution ofthose treatments at affordable prices. The issuehas become prominent because of the severe epi-demic of HIV/AIDS, in particular in Sub-SaharanAfrica, South Asia, and Southeast Asia. ButHIV/AIDS is not the only disease plaguing poornations; malaria, tuberculosis, and other maladiesare equally debilitating. In fact, HIV/AIDS isunusual in that it affects both rich and poor coun-tries. Pharmaceutical firms therefore have incen-tives to develop HIV/AIDS medicines for sufferersin high-income economies, and what is beingdebated is how to transfer these medicines topoor countries. In contrast, malaria and other dis-eases endemic to impoverished nations are “neg-lected” in that they attract little research anddevelopment (R&D). For example, the WorldHealth Organization (WHO 1996) has estimatedthat of the US$56 billion spent globally on med-ical R&D in 1994, less than 0.2 percent was spenton tuberculosis, diarrheal maladies, and pneumo-nia, and virtually all of this research was carriedout by public agencies and military authorities.R&D on antimalarial vaccines and drugs is mea-ger. Some research is going on under the aus-pices of the Multilateral Initiative on Malaria,involving the United Nations Development Pro-gramme (UNDP), the World Bank, and WHO,and by the Medicines for Malaria Venture, a pub-lic–private sector cooperative initiative. Fundingfor the Multilateral Initiative comes to perhapsUS$3 million per year, and Medicines for Malariais soliciting support from foundations in the hopeof raising US$30 million per year. These amountsare inadequate for the job, given the costs ofdeveloping and testing new drugs.

There are two main reasons for this low rate ofR&D. Most important, the low purchasing powerin poor companies gives pharmaceutical compa-nies insufficient incentives to introduce newdrugs into those markets. A second reason is thatin the past many developing countries did not

recognize or enforce patent protection for phar-maceutical products. Regarding the latter prob-lem, the TRIPS agreement requires thatdeveloping WTO member countries providepatents for new pharmaceutical products by2005 at the latest (by 2016, for least-developedcountries). There is concern, however, that theprovision of product patents in pharmaceuticalproducts could confer considerably greater mar-ket power on rightsholders by delaying the entryof generic competitors for new products. Thensuch firms might reduce sales or output in partic-ular markets, supporting higher monopolisticprices in key medical therapies.

Considerable pressure has been exerted onpharmaceutical companies to provide drugs topoor countries at marginal production cost (orless). For example, Merck & Co. recentlyannounced that it would cut the prices of twoAIDS-controlling drugs in Africa by 40 to 55 per-cent, adding to sharp price cuts announced ayear earlier. Abbott Laboratories offered to sell itstwo AIDS drugs, Norvir and Kaletra, at prices thatwould earn the company no profit. Many otherfirms, including the Bristol-Myers Squibb Co. andGlaxoSmithKline PLC, have announced similarprice cuts. These research-intensive firms havethree concerns about low-cost distribution pro-grams. First, provision at marginal cost addsnothing to their ability to cover the costs of R&D.Second, while they may be willing to supply theirmedicines cheaply, they wish to retain the exclu-sive distribution rights inherent in patents.Indeed, this preference underlay the recent law-suit by several firms against the South Africangovernment, challenging the constitutionality ofits 1997 Medicine and Related Substances Con-trol Act. Third, drug manufacturers are con-cerned that the availability of far cheapermedicines in poor countries could erode theirability to sustain higher prices in rich countries.

Under Article 68 of Brazil’s Industrial PropertyLaw (Law 9.279/96), foreign firms must manu-facture patented drugs within Brazil before threeyears have elapsed from the grant of the patent.Failure to meet these “working requirements”

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Implementing the TRIPS Agreement

could result in an order by the Brazilian authori-ties to local firms to manufacture generic substi-tutes under compulsory license—a threat thatrecently faced the makers of the AIDS drugsEfavirenz (Merck & Co.) and Nelfinavir (Roche).This issue was raised by the United States at theWTO, but a bilateral settlement was arrived at,and the case was withdrawn.

In economic terms, to address effectively thediseases endemic to poor countries throughdevelopment of and access to new treatmentsrequires separation of the dynamic incentives forR&D from the need for widespread distributionat low cost. Because paying for the requiredR&D is beyond the means of poor countries, anycomprehensive solution to the problem requiressignificant increases in assistance from industrialcountries and financial support from multilateralorganizations and private donors. These monieswould be used for two purposes. An immediatetask would be to build effective health care deliv-ery systems in poor countries, where healthinfrastructures are weak. The second task wouldbe to provide incentives for firms to engage inR&D in new and effective vaccines and medi-cines. Most likely, these incentives would involvepurchase by governments or international publicagencies of bulk amounts of targeted drugs frommanufacturers at negotiated prices and the dis-

tribution of the drugs to designated countries atlow cost, while preventing backflow of cheapmedicines to higher-income nations. If suchnegotiations are unfeasible or ineffective, it maybe advisable to establish a system of royaltiesunder which countries could acquire licenses toproduce and distribute the drugs. For this systemto be effective, small countries without produc-tion facilities may need to be given the right toimport drugs from generic producers in thirdcountries.

Ganslandt, Maskus, and Wong (2001) estimatethe annual cost of such an international strategyat between US$8.2 billion and US$12.1 billion.While this commitment would represent a sub-stantial portion of current aid funding (whichamounted to US$84.9 billion in 1999), it wouldcorrespond to only 0.03 to 0.05 percent of theOECD’s 1998 GDP. Indeed, if the US$12.1 billionwere paid by the United States, the EuropeanUnion, and Japan it would come to onlyUS$13.50 per person per year. For a final per-spective, the US$12.1 billion may be comparedwith the anticipated loss in South African GDP, ifthe current epidemic continues unchecked, ofUS$22 billion in 2010.

Source: Prepared by the volume editors, based on Gans-

landt, Maskus, and Wong (2001).

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