Thank you for inviting me to speak on this important topic of intellectual property (IP) and innovation. It may seem odd, therefore, that I am going to discuss disease and drug policy in Africa. I say odd because western drug companies generally bother to enforce patents in most African nations, therefore, one would think that IP drug issues were irrelevant. But just as Africa was a battleground in the Soviet-US cold war, so it is for the battle for IP, drug pricing and hence drug innovation.

The TRIPS agreement at the GATT/WTO Uruguay round encouraged wider adoption of IP around the world--famously India agreed to bring in drug product patents this year and has done so, albeit with some kicking and screaming of many commentators, and some within its own political system. It is widely acknowledged that IP encourages innovation, although it is contestable when poor countries should adopt the strictest IP laws. But I am no expert on that topic, so will not discuss it. However, what I can discuss is the African pharmaceutical battle, and its impact, and current harm, for innovation.

HIV/AIDS

Regardless of differing definitions of the disease and categorization of the opportunistic infections that thrive alongside it, there is little doubt that millions of Africans have HIV. It is estimated by UNAIDS that perhaps 6 million require treatment; far fewer than one million receive it. Over the past 7 years pressure has increased, accelerating particularly in the most recent years, for Africans to be given ARVs. Much of this has been good humanitarian desire (driven no doubt by many health activists in the field)--and at least part of this has been from the belief that without the hope for treatment few would bother to turn up for testing, and hence provide vital epidemiological information for national public health responses. But there has also been a less reputable push by some developing countries, generic manufacturers, and more odiously by a handful of health activists, to use the health crisis in Africa to create leverage for generally weakening the patent system and creating uneconomic pricing systems--I’ll come back to this in a few minutes.

The WTO Doha Declaration (an amendment to TRIPS), was designed to allow for compulsory licensing and parallel importing of patented drugs in health emergencies in poor countries and ARV treatment for HIV was the main impetus. It was initially seen as largely symbolic; its provisions have never been used (although many threats have been made), and indeed it is largely irrelevant. Because the most important aspects HIV treatment are not drug prices, or drug availability, but poor health systems and personnel shortages, driven by widespread poverty.

But what the Doha Declaration did, both after its adoption in 2001 and the prior debate was to push for lower drug prices for ARVs in poor nations. What has this led to?

Well first, drug prices have indeed fallen everywhere--both in western countries but more noticeably across poorer parts of the world. ARVs in particular have drastically come down in price (and for this the activist community deserves some credit). Another aspect of the debate has been a focus on the patenting policies in Africa of some companies, such as GSK. Many have criticized them for even trying to patent in the poorest country. At first I thought this was absurd too, but then I realized what the alternative meant--that these were countries not worthy of selling too--the basket cases of the world (and believe me if the research-based industry didn’t want to sell new products there then neither did most generics companies). And as an aside, donation policies make the same assumptions--that these countries are too poor to help themselves. But the G8 discussions are antithetical to what many Africans, at least the ones I know, want.

But back to ARVs. Part of the reason that drug prices were initially so high was because of the costs of developing the drugs in the first place. Given the much lower price of drugs today, ask yourself the question: if you were a biotech start-up, or more importantly its venture capitalist backer, where would you invest your money--AIDS research, or hypertension, cancer or lifestyle research, baldness, erectile dysfunction? And your answer (if backed by your own money) is unlikely to be AIDS.

Now most of us in here, I expect all, believe that the pharmaceutical industry is driven by profit. Of course individuals may do altruistic things, and even companies do activities that do not immediately benefit the bottom line (e.g. Novartis makes a loss for the sale of each dose of its anti-malarial drug and Coartem--WHO audit). But whether we view that profit-seeking as a good thing depends on ideology and other factors, but I think it's fair to say whether you read (or even write for) the New York Times or Wall Street Journal or Marxism Today or the Washington Times, the idea that the pharma industry is based around profit is non-controversial.

Since 1997, when drug prices for ARVs first came under concerted attack, there has been a reduction of drugs in development for ARVs and drugs for opportunistic infections of about 35% and (more importantly), a drop in companies working in the area of perhaps 27%. Some of this reduction has been due to mergers, but some has been undoubtedly that the bottom line does not encourage further innovation for the companies.

Some companies remain in the sector and are making money, but probably not many, and profit margins are tight. The western market is simply too small for significant profit, and given that new research is driven by expected future profits, declining prices for ARVs means worse profits in the future.

And that brings me to Brazil, India and China. First, these countries, as well as many African states, increase the prices of drugs entering their countries by high tariff rates (8.8% for Brazil and 16% for India--it was much higher for India until the recent budget), which makes their concerns about high drug pricing rather odd. These tariffs are clearly in place to protect domestic industry.

But second, and ignoring the bad news of the disease for a second, these three countries should provide hope for future research. The latter two (India and China) in particular probably have over 7 million cases, and both countries have higher income levels than all but the richest African nations. They therefore should provide a substantial future drugs market. But right now we have a push (not exactly opposed, or at least effectively opposed, by the western pharmaceutical industry) to make drug pricing--beginning with ARVs but also for other medication, a two-tier structure. With high prices in US and Europe and Japan and low prices everywhere else.

This is not what tiered pricing is supposed to be like. There should be at least three tiers (and preferably numerous ones). Angolans and Basutans cannot pay what Indians and Brazilians can pay, who similarly can’t pay what we can. HIV cases in the west are few and increasing slowly, thankfully. But this means that profits must be sought in middle income countries to support research. This is particularly important now as greater drug access inevitably means increasing drug resistance and the need for new formulations. Two tiers benefits China, India and Brazil, harms research and ultimately Africans as fewer treatments become available.

I expect to see more firms leave the AIDS research field, they may be replaced by alternative patent pool systems (Linux for drugs, if you like), or other public ventures and even public private partnerships. I don’t know about you but I don’t expect them to deliver what the current industry can and does. I may be wrong, and nothing is set in stone. The current system of patent protection encourages research and produces drugs and to throw it out without an empirically tested alternative would be unforgivable.

The WHO's 3-by-5 ARV treatment initiative is bound to fail, and may even be causing widespread drug resistance and early drug failure. Certainly profits have been squeezed and with the actions of Brazil, India and China, it seems inevitable that even more researchers are driven away from AIDS. That is tragic for those currently with the disease and could prove very costly for us all down the road.

Of course there is hope. Maybe the relatively good domestic patent laws in Brazil and India will lead to innovation, but the saber rattling has to stop, or the current deliverers of ARVs will have left the business.

Roger Bate is a resident fellow at AEI.