Glaxo (NYSE:GSK) has just announced that it is changing its method of protecting its intellectual property around the world. It's possible for us to view this as some groundbreaking and revolutionary new plan but a better way to think of it is probably as an overdue recognition of reality. Poor countries, health systems in poor countries, don't have any money and cannot afford new drugs at full price. Thus whether Glaxo has patent protection on them or not makes no difference to the finances of the company: if they're protected there will be no sales and thus no revenue. If they're not protected then again, to any reasonable calculation, there will be no revenue.
So, it seems that it doesn't make much difference. However, that's not quite true. Because by offering more than governments are already demanding the company steals a march in those slightly richer, developing, countries where some marginal revenue can be gained. This is a good and sensible move:
Pharmaceutical firm GlaxoSmithKline has said it wants to make it easier for manufacturers in the world's poorest countries to copy its medicines. The British company said it would not file patents in these countries. Chief executive Sir Andrew Witty said he wanted to take a "graduated" approach to the company's "intellectual property" based on the wealth of nations around the globe.
The point is not that the intellectual property will be free to all, rather that there will be graduated access to it:
Under the new approach, whether the firm will seek IP protection will depend on a country's economic maturity. For Least Developed Countries (LDCs) and Low Income Countries (LICs), GSK will not file patents for its medicines, so as to give clarity and confidence to generic companies seeking to manufacture and supply generic versions of GSK medicines in those countries. For Lower Middle Income Countries generally, GSK will file for patents but will seek to offer and agree licences to allow supplies of generic versions of its medicines for 10 years, seeking a small royalty on sales in those countries. For High Income Countries, Upper Middle Income Countries and G20 countries, GSK will continue to seek full patent protection.
To take a step back and think about the economics here. It costs somewhere between $1 billion and $2.5 billion to bring a new drug to market and gain approval (depends upon who is doing the estimating in that range). This is a sunk cost before any sales at all are made. But the manufacturing cost, the marginal production cost, is usually somewhere between pennies and spit.
This is an economic problem which generally comes under the "public goods" rubric. It costs vast amounts of money to create something but once created it's easy to copy. This means that, in a pure free market, the creation is non-rivalrous and non-excludable. There are many things like this, innovation and invention being just one of them. Our problem with this is that if people can't make money out of their inventions because anyone can just copy them then people won't make those billion (NYSE:S) of dollars investments to make the inventions and prove them. This makes us sad because we like inventions, especially of nice new drugs that cure our diseases.
Thus we invent something called intellectual property. There's various forms, patents, copyrights, trade marks and so on but the essential point is to, artificially, create a property right in the invention so that it can be excluded and thus profits can be made. That excluding being that you can't use my invention unless you pay me.
All of which is fine: we've solved, perhaps not perfectly but at least to some extent (imperfection comes from things like Apple (NASDAQ:AAPL) trying to design patent rounded corners) our basic economic problem, how to provide an incentive to inventors and innovators.
In the pharmaceutical drugs industry this then runs into a brick wall of what people perceive as fairness. Why should poor people die just because they cannot afford drugs? The answer, well, they're poor people who cannot afford drugs is not politically acceptable. We've thus got a series of laws where a government can, if it so wishes, break the patent protections and licence other manufacturers to produce various drugs. This has happened with HIV retrovirals for example.
This is obviously a problem for drug companies. Because they've got to make that billion back somehow and the uncertainty over who will breach the patent and how much that supply will leak into non-poor markets just ain't a good thing.
But now come back to that basic point above. The poor places, the poor people, just don't have the money anyway. That billion and more is only ever going to come back from rich world customers and health care systems. So, why not be clever about this? Accept that the poor world just will never provide more than a few pence towards those development costs? And why not get out ahead of governments thinking about breaching patents by simply stating that we'll apply for and enforce patents only where people can afford the drugs? And poor people can have them for the cost of manufacture, not the cost of development.
In economic terms this is very good thinking indeed. Human utility is maximised as more people have access to those drugs. The incentives to invest in producing drugs have not, in revenue terms, declined at all: it was only ever the rich world that would pay those costs anyway. In corporate and business terms it benefits the company. Uncertainty is reduced and there's obviously a slight halo of doing the right thing which will accrue to the company.
It's rare that we get good economics, good politics and good business all rolled up into one but this is one of those times. Not charging the poor the money they haven't got for drugs they wouldn't buy anyway is sensible: and so is having a clear delineation of when this is so and when, conversely, it isn't and people can and should be paying full freight.
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