The World Health Organization (WHO) is exploring possibly sweeping changes to intellectual property policies in the name of cheaper drug prices, write Richard Owens and Sean Speer. Such a policy shift should be rejected.

By Richard Owens and Sean Speer, Jan. 19, 2018

The World Health Organization (WHO), a United Nations agency with a public health mandate, will hold board meetings later this month to establish priorities. The five-day meeting is unlikely to generate much public attention. It’s understandable. The meeting agenda is written in standard bureaucratese and the meetings themselves will inevitably be jargon-filled and tedious.

The WHO meeting is meant to tackle big questions, including a “lack of access to medicines and vaccines” and a “global strategy on public health, innovation, and intellectual property.” Its judgments on these questions – if they were to pick up any momentum and support – could have significant consequences for investment, innovation, and ultimately public health. This obscure meeting could thus have considerable implications for Canadians and the world.

The UN had previously looked at the interrelationship between intellectual property (IP), innovation, and access to medicines. In a September 2016 report, the UN High-Level Panel on Access to Medicines recommended sweeping changes to IP policies in the name of cheaper drug prices. It seems like a noble goal and a simple solution. Who doesn’t support the goal of cheaper access to drugs, particularly in developing countries? And if IP rights contribute to higher prices, why not simply curtail those rights in the name of more affordable access?

Of course, policy-making is very rarely about simple solutions. It’s about balancing competing priorities and difficult trade-offs. This one is no different.

To this point, we warned at the time that the adoption of the UN panel’s recommendations could have inadvertent and perverse consequences. There’s considerable evidence that an erosion of IP rights can discourage innovation and in turn the development of new drugs. In individual countries that do not respect IP sufficiently, their access to new drugs diminishes.  The long-term result could be less access, not more.

Policy-making is very rarely about simple solutions. It’s about balancing competing priorities and difficult trade-offs.

We were generally pleased therefore when it seemed like the UN had mostly discarded this agenda. The new secretary-general didn’t seem to share his predecessor’s enthusiasm for the panel’s recommendations. A more dispassionate, clear-eyed perspective had seemingly won out.

Yet it now seems the WHO is proposing to revive the spirit and substance of the UN panel’s report. It’s a reminder of the fecundity of “bad” ideas (and in particular, simple ideas) – particularly when attached to pious intentions.

One of the specific proposals likely to be discussed at the WHO meetings is the replacement of IP rights with government-funded “prizes” as the primary means of incentivizing the development of new medicines. In effect, the purpose would be to replace today’s market incentives, inherent in IP law, with government subsidies. Developers of new drugs would receive government-funded cash prizes for the successful development of new medicines. Companies would be required to hand over their IP rights to the government. Other manufacturers would be able to enter the market immediately. Governments would henceforth shape innovation priorities and drug development in the pharmaceutical sector.

This proposed model is known as “delinking.” It effectively delinks the cost of research and development from the final price paid for a medicine and makes the state the principal funder and planner of drug development.

It should be obvious that to pretend real costs aren’t there is an uneconomic strategy. There are various problems with this proposal, but let us focus on three.

Substituting IP rights for government financing would be enormously costly.

The first is that it’s rooted in the assumption that IP rights are the sole reason why drug prices are high and access issues persist. It neglects questions related to distribution, regulatory obstacles, local expertise, and so on. Scrapping IP rights will do nothing to address these other factors. A policy agenda to improve access to medicines must be holistic and evidence-based rather than narrow and ideological.  The overwhelming majority of WHO essential drugs are off patent—but access is still a problem.  Clearly, IP rights are not the only, or even the main, issue.  New medicines are often biologics and difficult and very costly to manufacture. They are also increasingly part of complex treatment modalities that demand the spread of expertise as well as of product.  These factors inhibit access in the developed world too and play a significant role justifying high prices.

The second is that substituting IP rights for government financing would be enormously costly. The pharmaceutical industry spent US$141 billion on research and development in 2016. That is 26 times more than the UN’s annual budget and more than total annual spending on global aid. No government subsidizing could replace such private sector research and development. The result would be a net loss in innovation and new drug development.

Also, imagine how difficult it would be to coordinate government contributions to prizes.  A government making a disproportionate contribution, as some inevitably would, would expect a return on its investment – defeating the whole purpose.  And the process would be terribly inefficient, for governments would have to guess what a reasonable prize would be. To be effective, that prize would have to be less than the value of the drug on an open market; otherwise we might as well go back to monopolies. So the target should be some lucrative amount above development costs – but not too lucrative.  It has to be the right number to attract private investment in enormously expensive research efforts; and if it is too low, it will encourage the abandonment of the efforts at an amount less than the present value of the prize.  It’s simple math.

The third is that there are inherent risks with governments becoming responsible for judging the true economic and social value of new medicines and determining which ones ought to be prioritized and supported. Remember the innovative process is messy and unclear. It’s rarely clear if research and development is going to prove useful. IP rights in a market-based system strike a useful balance between risk and reward. The monopolization of these decisions would invariably lead to politicization. Funding decisions would not necessarily be based on clinical needs but political economy factors such as lobbying resources, the location of projects and facilities, and the profile of particular diseases.

The WHO’s focus on access to medicines – all medicines – raises good questions. But replacing IP rights with a government monopoly over innovation and drug development is the wrong answer. The WHO should follow the example of the UN and discard this idea, and instead continue to work towards richer solutions to a multi-layered and complex problem.

Richard Owens and Sean Speer are Munk Senior Fellows at the Macdonald-Laurier Institute.