Emerging economies are increasingly flexing their muscles over stratospherically-priced life-saving drugs. And before the Big Pharma defenders start caviling about how the high cost of drug development is squeezing profits, it’s hard to be sympathetic. First, the Federal government pays for a staggering amount of drug research (it’s hard to get solid numbers, since the National Institutes of Health is the biggest but not sole funder, but the latest estimate I saw was over 30% of the total). Second, pharmaceutical companies have not done much truly new drug development in a while. Well over 80% of the so-called “new drug applications” are for extensions or reformulations (eg, a delayed release version) of an existing drug. Third, Big Pharma spends more on marketing than on R&D.
The move by China follows targeted measures by Malaysia, Indonesia, Thailand and most recently India to use “compulsory licenses” to make their own generic versions of patented drugs. From Reuters (hat tip reader Joel B):
The amended Chinese patent law allows Beijing to issue compulsory licenses to eligible companies to produce generic versions of patented drugs during state emergencies, or unusual circumstances, or in the interests of the public.
For “reasons of public health”, eligible drug makers can also ask to export these medicines to other countries, including members of the World Trade Organisation.
The intriguing part of this is that this Chinese initiative is completely kosher under WTO rules when life-saving medicines are too costly. Given the high prices put on certain AIDS and cancer drugs in dollar terms, they’re the perfect targets for an action like this. India gave a compulsory license for the manufacture of Nexavar which is used to treat kidney and liver cancers. China appears to be using the compulsory license threat to improve its bargaining leverage for some of the newer HIV drugs, such at Gilead’s tenofovir. China was excluded from a deal with a group of nations to buy tenofovir by paying cost plus a small royalty. Gilead has offered more concessions after the media leaked that China was considering implementing compulsory licensing.
Given that China has repeatedly shown it does not have a lot of respect for intellectual property, and it already makes many active pharmaceutical ingredients, one also has to wonder whether this program will serve, intentionally or by accident, to embolden companies that already make the ingredients to start selling bootleg drugs on the side. The US and most other advanced economies have strict manufacturing restrictions on “pharmaceutical grade” products. The fear mongering around generics is that they aren’t as good as the version made by the patent-holder; that’s bunk if you have sufficiently tough production oversight. But this may not wind up being the case in China (note that we do have drug quality problems in the US, but that’s due to problems with distribution, namely, that certain crooked distributors will repackage drugs, remarking expired ones to look current, or low dose as higher dose). And it is not hard to imagine that you’d see these drugs marketed broadly, not just in China. The flip side is China has a tendency to deal harshly with people who produce PR disasters for the government, and ineffective or dangerous drugs would fall into that category. So I’d expect Big Pharma to be more at risk than Chinese consumers.
It isn’t clear whether this move could help US consumers. Obamacare prohibits drug reimportation, and that provision was targeted at reimportation from Canada. In any event, Chinese generics would not be reimports (expect Big Pharma to try to get this redefined pronto). While it would seem awfully brave to buy drugs from unknown and potentially fly-by-night foreign manufactures, anyone who is sick and is having trouble paying for the US version would be almost certain to give a foreign version a try if they thought they had a reliable source. Even so, the loss of foreign buyers (more likely, fantasy foreign buyers, since people who can’t afford the medicines were not potential customers) is likely to make the drugmakers hold even more firmly to their extortionate pricing for the customers (or their insurers) who can afford it.
Nevertheless, this move is a shot across the bow of pharmaceutical companies. The odds favor them reacting the way Detroit did to the threat of Japanese selling small, fuel-efficient cars: to deny the severity of the challenge and over-rely on lobbying as the solution.
This post originally appeared at naked capitalism and is posted with permission.