[Ip-health] Ronald A. Cass in the Wall Street Journal: Thai Patent Turmoil

Tue Mar 13 07:02:16 2007

Mr. Cass is chairman of the Center for the Rule of Law, dean emeritus
of Boston University School of Law, and served as commissioner and
vice-chairman of the U.S. International Trade Commission under
Presidents Reagan and George H.W. Bush.

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http://online.wsj.com/article_print/SB117373600377534563.html

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Thai Patent Turmoil
By RONALD A. CASS
March 13, 2007

Milton Friedman, the Nobel Prize-winning economist, often said "there's
no such thing as a free lunch." When you think you've found a way to
get something for nothing, you generally wind up with less than you
thought at costs you didn't foresee.

Authoritarian governments and social activists, however, hate to pay
for what they want. Whether their goal is advancing a utopian vision,
deflecting attention from unpopular behavior or shifting funds
elsewhere, they expect someone else to pick up the bill.

The "free lunch" crowd today applauds Thailand's imposition of
compulsory licenses on patented drugs that combat HIV/AIDS and
cardiovascular disease. They are intense, well-meaning -- and wrong.

Assertions of entitlement to the fruits of IP investment without paying
its costs draw on claims that patent systems misallocate resources and
over-compensate patent owners. In fact, firms and industries with large
patent portfolios tend to earn only average rates of return. As sound
economics predicts, the expected return from investments in R&D is the
same as other investments. The greatest successes earn a great deal,
but those are balanced by R&D failures. Only the omniscient can avoid
drilling dry holes or pursuing research into dead ends.

Concern that patent systems misalign rewards and investments can be
found among academics as well as activists. The most recent example
comes from Nobel laureate Joseph Stiglitz, whose article in The Nation,
published March 9, considers patent systems, drug companies and the
plight of poor nations. Mr. Stiglitz calls for a prize system -- with
set rewards for discoveries based on their social value -- to provide
better incentives for drug research than current patent systems. Coming
out now, Professor Stiglitz's article has been seen as an endorsement
of Thailand's conduct.

Professor Stiglitz's contribution to the debate is unfortunate, more
for its timing and tone than its actual content. He misstates the
relative investment of drug companies in research compared to
advertising (companies spend far more on R&D), condemns their failure
adequately to protect Third World interests, and generally seems to
support actions like Thailand's that weaken patent rights.

Even so, however, closer reading reduces the gap between Professor
Stiglitz and defenders of patent rights. Though touting its advantages,
Professor Stiglitz recognizes that his prize system must be an add-on,
not a replacement, for the patent system. His prize system, indeed, is
like a patent system that requires ultra-knowledgeable officials in
order to set each prize in the right way.

Patent systems deficiencies trace largely to the difficulty of knowing
in advance what route will lead most expeditiously to innovation, what
a given innovation will be worth, and what costs will attend award of
strong rights to control its use. Unfortunately, prize systems only
improve things if their designers have that missing information.
Ultimately, Professor Stiglitz's effort to improve intellectual
property systems should not give succor to those who reject them.
* * *

Thailand is an especially bad fit with any reasoned argument for
compulsory licensing. While it is not at the top of the world's wealth
or population charts, it is neither small nor poor by world standards.
At 65 million, Thailand is the world's 19th most populous nation. And
it is comfortably in the top half of all nations ranked by per capita
GDP, with an average income 15 times that of the world's poorest
countries.

Thailand's current regime took office via military coup last fall, and
kept on taking. Shortly after the new government seized power, its
military leaders awarded themselves pay increases that amounted to over
$9 million a year. They cut its public health budget by $12 million --
not because they lacked funds, but because they had different
priorities. In addition to raising their own pay, they increased the
military budget by more than one third, or $1.1 billion. The government
then declared its universal health-care program too costly and
instituted compulsory licensing for certain patented HIV and
cardiovascular drugs as emergency measures under the World Trade
Organization's Trade-Related Aspects of Intellectual Property Rights,
or TRIPs, agreement.

Thailand's assertion of a right under TRIPs to impose compulsory
licensing rests on shaky ground. TRIPs Article 31 permits compulsory
licensing for "public non-commercial use." This phrase comprehends uses
such as public research programs, not monopoly provision by a
for-profit government agency. Only the most cynical distortion of the
text could conceivably cover Thailand's conduct here.

Article 31 also authorizes compulsory licensing when needed to fight
"national emergencies" or "other circumstances of extreme urgency."
Thailand does not fit under these provisions either. AIDS is an awful
disease that affects far too many Thais. It should command attention
from Thai health officials. But Thailand today has a relatively low
rate of HIV/AIDS compared to much of the developing world, has enjoyed
notable success in reducing the rate of new infections (cutting the
annual increase to about 13% of its level a decade before), and has
seen a dramatic decrease in its AIDS death rate since 2000.

If there were an emergency, Thailand wouldn't gain much from compulsory
licensing. It already benefits from cut-rate pricing on the AIDS drugs
it is commandeering. Thai officials estimate compulsory licensing will
save $24 million per year -- a mere 2% of Thailand's additional
military spending. That itself may be the motivation for its actions,
but a desire to shift funds from health care to military spending or
personal pay isn't recognized under TRIPs as a valid reason for
violating patent rights.

The nature of drug supply in Thailand also casts doubt on this
solution. Thailand's government-owned, for-profit drug supplier, the
Government Pharmaceutical Organization, or GPO, already produces an
HIV/AIDS drug but its version is widely thought to be less effective
than branded, commercial versions and is suspected of increasing drug
resistance among Thai AIDS patients. Even after four years of
production, the World Heath Organization hasn't certified GPO's drug as
meeting internationally acceptable standards for generics. A shift to
GPO provision will shift income to the state-owned monopoly, but is
more likely to harm than improve the health of Thai citizens.

Thai officials are on even weaker ground in commandeering patented
blood-thinners and other cardiovascular drugs. By imposing compulsory
licenses for these drugs, Thailand starts down a very slippery slope.
If it can breach patent protections for cardiovascular treatments as a
national emergency, what drugs would be beyond its reach? Thailand's
interpretation -- in effect asserting a right to strip patent
protections to subsidize other spending priorities -- would set a
dangerous precedent for TRIPs, reduce the security of all intellectual
property (not just pharmaceuticals) and threaten the precarious balance
that promotes investment and trade in IP-intensive goods.
* * *

Like intellectual property, pharmaceutical products are subjects of
intense argument, but generally not because of questions about their
value. Vaccines and other drug therapies have been crucial to the
dramatic increases in longevity over the past century, extending life
expectancy in developed nations by more than half. They have helped
conquer diseases like tuberculosis, smallpox and polio that caused
devastation in earlier times and promise even more dramatic advances to
come.

The serious question is how we assure that life-saving drugs are
created and made available to those who need them.

Decision-makers in developed nations focus on the first part of the
equation, seeing financial rewards as the best inducements to drug
creation -- without them, new treatments would be created at a far
slower rate and in far smaller numbers. That already was understood
when 14th century Venetians established a patent system that in all
significant respects set the pattern for systems we see today,
providing temporary exclusive rights to creators of novel inventions as
both reward and inducement for innovation. Patent rights remain the
backbone of an industry where it costs on average about $1 billion to
bring a new drug to market.

Authoritarians and activists, in contrast, focus predominantly on
making drugs that have been created available to populations
particularly important to them. Creation of the drugs is a
pre-requisite -- if adequate incentives for drug creation aren't there,
schemes for copying and distributing them are irrelevant. But that
isn't their chief concern.

Regrettably, in their eagerness to serve other ends -- protecting
spending priorities, making short-term progress against a particular
disease, giving immediate help to the poor, or advancing political
opposition to private enterprise -- dictators and do-gooders promote
solutions that do long-term harm. The Thai government's actions will
undermine investments needed to fight diseases like AIDS and set a
precedent that could undermine as well the international agreement that
promotes diffusion of IP-intensive goods, harming a broad range of
creative investments and enterprises beyond the pharmaceutical
industry.

There are no free lunches -- and cutting the chef's pay doesn't make
for more or better cooking.

Mr. Cass is chairman of the Center for the Rule of Law, dean emeritus
of Boston University School of Law, and served as commissioner and
vice-chairman of the U.S. International Trade Commission under
Presidents Reagan and George H.W. Bush.

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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
voice +41.22.791.6727
fax +41.22.723.2988
mobile +41 76 508 0997
thiru@keionline.org