Brazil Threatens to Break Company’s Drug Patent

Well, looks like the U.S. Supreme Court is not the only group of people who have decided that property rights don’t matter.

SAO PAULO, Brazil – AIDS activists and humanitarian groups are praising Brazil for taking the first step by any country to break an AIDS drug patent and produce copycat versions, a decision they hope leads to massive exports to other poor countries devastated by the disease.

But property-rights advocates and the pharmaceutical industry are equating the nation’s high-stakes move against U.S.-based Abbott Laboratories Inc. as government-sanctioned piracy of intellectual property driven by greed.

Brazil has repeatedly forced AIDS drugs manufacturers to reduce prices by issuing threats to break patents during the past several years, but it made an unprecedented legal decision last week after it didn’t get as much of a price cut as it wanted from Abbott on its Kaletra pill.

While one could indeed make the case that profiting off of things like AIDS and other diseases are examples of profiting off of other people’s misery I think this is wrong. We live in a world with finite resources and as such we need a mechanism for allocating those resources. The price mechanism of the market is nothing other than an allocation mechanism. The profits that are to be had in a given area are what determines where resources should be allocated.

If the government artificially reduces those profits then there will be fewer resources allocated towards that activity. This is basic economic theory, nothing all that controversial. On top of this, actions such as these could have consequences for additional research into cures and preventatives for not only HIV/AIDS, but also other terminal diseases. A pharmaceutical company is a profit maximizing entity and it is not unreasonable to conclude that patent nullification for one drug could raise the probability of patent nullification for other drugs. This would lead to lower expected profits and quite possible fewer resources allocated not only to HIV/AIDS drug research but other drugs as well.

This also demonstrates another problem called time inconsistency. Examples usually work best to describe this problem.1 We’ll use the current issue of a drug to cure a disease. Initially the optimal strategy by the government might be to promise whoever discovers the cure for the disease monopoly rights for a given period of time. This would act as an incentive to do the research and also to induce the company doing the research a way to recover sunk costs2. But once the cure is in hand the government could improve everybody’s welfare (well except for those who work for the company and invested in it) by reneging on its agreement to grant temporary monopoly rights to the firm. The firm being a forward looking agent would realize this and likely invest little or nothing in drug research. This problem is called time inconsistency and the optimal plans are not attainable. The “work around” for this is something like what the Framers of our Constitution did, build the granting of monopoly rights into the Constitution thus making it difficult to break such promises. This however, is also not optimal in the sense that monopolies, even temporary ones, are not efficient.3, but it is better than not having the drug (this is what economists call Second Best outcomes).

Now, I admit I am not a fan of the current system of protecting intellectual property. I think it should be looked at again and re-done, perhaps along the lines suggested by David Levine and Michelle Boldrin (there is more information at David Levine’s homepage, but it appears to be down at the moment). However, the idea of simply nullifying patent rights even for something like HIV/AIDS is probably not the right way to go about it. It strikes me as killing the goose that lays golden eggs because it doesn’t lay the eggs fast enough.
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1The actual concept while fairly straightforward is also rather technical making use of dynamic programing.
2Sunk costs are costs that once incurred cannot be recovered. Again an example might help: suppose you are to take a vacation and you reserved a room at a hotel and it costs $100 non-refundable to reserve the room. Now on the day you are to leave you feel really sick and don’t really want to go. Some could argue you should go since you’ll lose the $100 non-refundable deposit if you don’t go even though you really want to stay home. This is inaccurate in that the money is already gone since it is non-refundable and you should ignore that $100 when making the decision to go or not. Of course, sunk costs are only sunk once spent so in our example with a drug company, they might decide not to sink those dollars if they might lose the patent rights later on, but I’m getting ahead of myself here.
3By efficient I mean that all the gains from trade are exhausted. The only way for a monopolist to accomplish this is to engage in perfect price discrimination.

FILED UNDER: Economics and Business, Health
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. bryan says:

    It strikes me as killing the goose that lays golden eggs because it doesn’t lay the eggs fast enough.

    Or killing it because it doesn’t lay omelettes.

  2. mitch says:

    maybe the US should concentrate on internationally isolating brazil as like it or not….

    “Under Brazilian law, the government can break drug patents if it is deemed to be in the public interest.”

    from http://news.bbc.co.uk/2/hi/americas/4621735.stm

  3. The Knucklehead of the Day award

    It took me much of the day to come up with a proper winner. The funny thing is, it’s been obvious for hours.

    Today’s winner is the government of Brazil who is threatening to violate patent laws by producing copycat AIDS drugs.

  4. Rick DeMent says:

    Actually the US has done this itself. It basically nulled the patents of the makers of wireless radio in the early 20th century in order to develop radio technology for use in WWI.