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The European Journal of Health Economics

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01-01-2015 | Original Paper

Compulsory licensing and access to drugs

Authors: Charitini Stavropoulou, Tommaso Valletti

Published in: The European Journal of Health Economics | Issue 1/2015

Abstract

Compulsory licensing allows the use of a patented invention without the owner’s consent, with the aim of improving access to essential drugs. The pharmaceutical sector argues that, if broadly used, it can be detrimental to innovation. We model the interaction between a company in the North that holds the patent for a certain drug and a government in the South that needs to purchase it. We show that both access to drugs and pharmaceutical innovation depend largely on the Southern country’s ability to manufacture a generic version. If the manufacturing cost is too high, compulsory licensing is not exercised. As the cost decreases, it becomes a credible threat forcing prices down, but reducing both access and innovation. When the cost is low enough, the South produces its own generic version and access reaches its highest value, despite a reduction in innovation. The global welfare analysis shows that the overall impact of compulsory licensing can be positive, even when accounting for its impact on innovation. We also consider the interaction between compulsory licensing and the strength of intellectual property rights, which can have global repercussions in other markets beyond the South.

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This is why the terms access and coverage are used interchangeably in this article.

Countries that do not meet their certain obligations are subject to trade penalties [20].

For more details on the Brazilian case, see, for instance, http://www.cptech.org/ip/health/c/brazil/.

Indonesia, India, Vietnam and South Korea have all threatened Roche with a compulsory license for Tamiflu, a commonly used drug for flu treatment. Roche decided to manufacture the drug with partners from these four countries [36].

Compulsory licenses are used in a wider variety of cases, in both the patent and copyright areas. In the US, National Public Radio and PBS have a license as non-commercial institutions to play music on public broadcasting. In the biotech industry, the US government has granted a number of compulsory licenses on key patents to other biotech and pharmaceutical companies. The US government also uses compulsory licenses of air-pollution technology to promote clean air under the Clean Air Act. See http://www.cptech.org/ip/health/cl for more information and examples.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:157:0001:0007:EN:PDF.

There are many factors that can weaken the ability of a drug company to adopt differential pricing globally. Even if parallel trade under compulsory licence is illegal, it does not mean it is not possible, especially if enforcement is weak. Hornbeck [18] finds evidence of illegal international smuggling of expensive AIDS drugs from African countries to the US.

Preferences of this kind have been employed to describe pharmaceutical markets by Wright [38] and Valletti and Szymanski [35], among others, and can also be interpreted as stemming from income heterogeneity. Notice that we are therefore assuming that there are disparities of income in both the North and South. We avoid any reference to co-payment mechanisms, as these preferences are simply meant to generate downward demands in both countries: if the price of a drug decreases, more people will have access to it (either by paying in part or by having a health provider paying for it). Similarly, if the quality of a drug increases, ceteris paribus, there is a demand expansion effect. The model could easily be amended to include a third-party payer. This would not change the profit per unit for the supplier. The elasticity of demand for the drug would increase on the level of patients’ co-payment.

As will become apparent below, the parameter restriction \(\frac{k}{a^{4}\sigma ^{2}}>\frac{1}{16C^{\prime \prime }}\) is needed for the second-order condition w.r.t. u to always be satisfied.

One interpretation is the following. Imagine that, in the South, there is a certain mass of potential consumers who live in different locations, which are ordered according to a “distance” parameter x. This represents how easy or difficult it is to supply and market drugs at that location (e.g., geographic access). Consumers at x = 0 are those in the biggest city, where it is very easy to supply them (e.g., because basic services are already in place), while to reach, supply and administer drugs to more people in remote regions becomes progressively more expensive for the provider. The model will endogenously determine the equilibrium value of x, i.e., the coverage of those locations where people might have access to the drug.

All proofs are in the “Appendix,” where also the expressions for the threshold value L, which determines the interval of validity of the region where CL is exercised, are derived.

In Fig. 2, we use a quadratic cost function C(u) = u ²/2, and set k = 1, a = 1, σ = 1. While we frame the discussion in terms of F, one could similarly refer, e.g., to the equilibrium size of the South relative to the North, as described by k, after having fixed a value for the other parameters. What matters to distinguish the three regions of Proposition 1 is in fact simply the term Fk/(a ⁴ σ ²).

Under a quadratic cost function \(C(u)=\frac{u^{2}}{2}\), it is \(u^{\ast }=\frac{4k}{16k-a^{4}\sigma ^{2}}\) and \(u^{N}=\frac{1}{4}\). Hence \(x^{{\rm CL}}=\frac{u^{N}a^{2}\sigma }{2k}>x^{\ast }=\frac{u^{\ast }a^{2}\sigma }{4k}\) for all values \(k>\frac{a^{4}\sigma ^{2}}{8}\).

Instead of (6), the value of the outside option would now be \(W_{S}^{{\rm CL}}=\frac{\sigma ^{2}(a^{2}u^{2}-p_{S}^{2})^{2}}{8ku^{2}}-F,\) where p _S is the solution to the break-even condition in the South \(\frac{\sigma ^{2}(au-p_{S})^{2}(3p_{S}-au)(p_{S}+au)}{8ku^{2}}-F=0.\)

We observe here that the unrestricted case can arise from all sorts of leakages. For instance, this could happen when, under paragraph 6 of the Doha Declaration, a developed country manufactures a drug on behalf of a developing one, and the shipments of the drug to the developing country are not easy to monitor.

This is a standard assumption in the literature on parallel trade. It is easy to accommodate imperfect arbitrage in the model, e.g., by having unit transportation costs t for parallel traders. In this case, if t is not large, p _N = p _S + t.

Precisely because in region (iii), under a “restricted” regime, the good produced under CL in the South would not be reimported in the North, while in region (ii) the good produced by the monopolist (and not under CL) would be lawfully subject to parallel trade, the monopolist has a stronger incentive to let region (iii) emerge under parallel trade than without. This explains why the threshold values satisfy \(\widetilde{L}>L\), that is, the region where CL is exercised is wider under parallel trade.

Recall that in order for the SOC to be satisfied, it must be k/(a ⁴ σ ²) > 1/16; hence, \(u^{\ast }>0\).

The difference between marginal profits without and with parallel trade is \(\frac{(u-2p_{S})(2p_{S}^{3}-3p_{S}^{2}+u^{3})}{4u(u-p_{S})^{2}(u-4p_{S})}\), which is positive for all \(u/4<p_{S}<p^{\ast }\).

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Title: Compulsory licensing and access to drugs
Authors: Charitini Stavropoulou
Tommaso Valletti
Publication date: 01-01-2015
Publisher: Springer Berlin Heidelberg
Published in: The European Journal of Health Economics / Issue 1/2015
Print ISSN: 1618-7598
Electronic ISSN: 1618-7601
DOI: https://doi.org/10.1007/s10198-013-0556-2

2024 ASCO Annual Meeting

Springer Medicine

Compulsory licensing and access to drugs

Abstract

2024 ASCO Annual Meeting

Springer Medicine

Abstract

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