In late 2006, Thailand issued a “compulsory license” order for efavirenz, an HIV treatment drug. In January 2007, Thailand issued a similar order for lopinavir/ritonavir, another anti-HIV drug. Earlier this month, Brazil followed Thailand’s lead, issuing a compulsory license order for efavirenz. Does this mean we on the verge of a cascade of compulsory licensing orders? And, if we are, is that a trend to be welcomed?
First, some facts. A compulsory licensing order allows a country to make or import a generic version of a drug. It is essentially a huge bargaining chip in negotiations over price with patent holders. It is also legal. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) allows countries to issue such orders. Normally, they should do so only after negotiations with the patent holder have failed. However, in the event of a national emergency, the state can issue the order directly. Either way, the patent holder needs to be paid “adequate remuneration.”
So, will there be a cascade of such orders? The answer depends less on multilateral trade law than on the bargaining power of the parties. Though compulsory licensing is allowed, the option need not be exercised. Bilateral trade agreements provide an opportunity for rich countries to arm-twist poor countries into accepting tougher intellectual property arrangements, including stricter restrictions on compulsory licensing. “TRIPS-plus,” such provisions are called.
Are compulsory licenses a good or bad thing? Patents provide an incentive for innovation by awarding a monopoly to the patent holder. Monopoly pricing, however, can mean that some countries are priced out of the market, even when they are willing to pay more to obtain a drug than that drug costs to produce. So, there is a tradeoff between dynamic efficiency (innovation) and static efficiency (distribution). However, this tradeoff is partially false for two reasons.
First, only “enough” of an economic surplus is needed to spur innovation. The Thai market may have no bearing on the decision of a pharmaceutical company to invest in R&D when the market in North America, Japan, and Europe is sufficiently big. Second, pharmaceutical company profits can actually increase when poor countries are charged less than rich countries. The difficulty is that this can only work if rich countries agree to pay more.
Ideally, the poorest countries willing and able to pay the least for a drug should be able to procure it for a small fraction of the price paid by rich countries. Since compulsory licensing orders give poor countries the ability to negotiate such low prices, they are thus to be welcomed. But the incentive for pharmaceutical companies to innovate will then depend on rich countries paying a high enough price to stimulate R&D. This is the rub. A cascade of compulsory license orders will materialize only if the rich countries do not take away with the one hand (the hand that negotiates bilateral agreements) the authority they gave poor countries previously (in multilateral talks) with the other.