Name:	Elaine Baker
Student number:	97591521

Faculty:	Arts III Economics
Course:	EC3112 Health Economics
Lecturer:	Rosemary Kelleher

Assignment:	Regulation of intellectual property in the Health sector
Date Due:	24th March 2000

The provision of health care is highly dependent on knowledge as an input, and therefore regulation of intellectual property rights is a key issue in health care.   In this essay, I will analyse the issues and controversies attached to recent globalisation of intellectual property regulation, as they apply to health care.

Property Rights

Property rights are a system whereby individuals or groups have the right to determine how something is used, and can transfer, buy, and sell this right.  Property rights are usually regulated and enforced by national states.  States often limit or place conditions on property rights, for example, using something for illegal purposes can mean a property right is forfeit.

Economics concerns choices about the use of resources and so is fundamentally concerned with property rights systems.  

Under Coase’s theorem (1960), the existence of the resource and the initial allocation of the ownership right are taken as given.  The property system can then create incentives for a resource to be put to the use where it is valued most, through the market.  If one person values the resource more than the owner, then that person will have the incentive to buy and the owner to sell.  Therefore the person or entity which can produce most value with a resource will therefore own it, and there will be efficient use of resources.

Knowledge

Intellectual property rights concern the ownership not of physical resources, but of knowledge.  

Knowledge is produced by people, individually or in groups, through ideas, trial and error, innovation, experimentation and research, and building on the knowledge of others.  Knowledge is used by people through the use of things or products made using knowledge, and through the use of methods and applications, i.e. knowledge itself.

Knowledge has public good characteristics.  It is non-rival in that the use of knowledge by one person does not mean it cannot be used by another.  It is often non-excludable in that once knowledge exists, it is difficult to prevent people from using it.  For these reasons, the production of useful new knowledge benefits society as a whole more than it benefits the person that produced it.  This means that the economic incentive to commit time and resources to producing new knowledge is less than optimal.  

Private intellectual property rights versus public funding

Intellectual property rights attempt to turn knowledge into a private good.  They comprise mechanisms such as patents, copyright and trademarks.  Conventional western patent systems mean that when a new idea which involves an inventive step and is capable of application is developed, the developer can use the legal system to prevent others from using it for a limited amount of time (usually 20 years).  In return, the patent owner must pay an annual fee to a patent office and must disclose the full details of the idea to the public.  (Holyoak and Torremans, 1995, p.60)  Preparation and fees for patents cost in the region of thousands of dollars in Europe and the US. (Tansey, 1999, p.12)

The advantages of patent systems are that 
•	they create incentives to innovate and produce new knowledge

The disadvantages are that 
•	the knowledge producer has monopoly power and so knowledge users must pay a higher price to use knowledge
•	knowledge users cannot freely build on the patented knowledge to create more new knowledge

The public good nature of knowledge can be dealt with by publicly funding it, rather than by turning it into a private good.  Private bodies motivated by an economic payoff are not the only knowledge producers.  A large amount of research and development is carried out in publicly funded research institutions and universities, and by charitable research trusts.  Private production (in general, or of knowledge in this case) is more efficient, and if all knowledge was developed through public funding it is likely that research would very inefficient in meeting market demand.  However, the health knowledge sector is a special case in that it is often obvious what is demanded – cures and treatments for existing prevalent diseases.  Equity in healthcare is also a major concern and public funding means that taxpayers fund research according to their means and those with diseases benefit according to their need.  Therefore the balance between public funding and stringent patent laws can fall into the classic efficiency-equity debate.

The global context

During the Uruguay Round negotiations of the World Trade Organisation (WTO, previously called the General Agreement on Tariffs and Trade), there were movements towards setting up homogenous global intellectual property systems.   This is done using the international agreement on Trade Related Aspects of International Property Rights (TRIPS).  Previously, there were agreements between different groups of (mainly industrialised) countries to adhere to a similar system and recognize each others’ patents under the World Intellectual Property Organisation (WIPO).  However, by bringing these types of agreement under the WTO, participation in the world trading system will become more linked to and conditional upon participation in a homogenous intellectual property system, and trade sanctions will be used against countries who do not participate in a homogenous intellectual property system.

The patent system has been centralised in Europe (European Patent Office) and the US so there are uniform rules.  Patents are not allowed on medical methods, but are allowed on medical substances and related processes.  Therefore, a surgeon cannot patent a new method of heart surgery but a pharmaceutical company can patent a new drug or it’s production process. (Holyoak and Torremans, 1995, p.60)  Patents are not allowed on biological processes but are allowed on microbiological processes. 

The gains of a patent of a certain length, the costs of producing knowledge, and the effects of property rights incentives, vary enormously in different sectors and for different types of research and knowledge building.

Setting up a homogenous global intellectual property system is problematic.  The development of new knowledge can be very valuable.   However, the free use of existing knowledge can also be very valuable. Intellectual property systems must strike a balance between the value of innovation and the value of dissemination.  These values can be very different in different sectors and in different places and contexts.  A sui generis system of rights is an alternative, unique form of intellectual property protection designed to fit particular contexts and needs.  (Tansey, 1999, p.3)

Intellectual property regulation in health - examples illustrating opposing interests in developing and industrialised countries

Knowledge producers in developing countries include indigenous people preserving, cultivating and identifying the medical uses of plants found in the diverse ecosystems and forests.  This knowledge is often used by those in industrialised countries.  Knowledge users in developing countries include those suffering from diseases such as AIDS.  This knowledge is often produced by medical research in research institutions and private pharmaceutical companies in industrialised countries.

Public choice theory analyses regulation with the assumption that regulators are self-interested.  Carlton and Perloff (1994) set out the incentives underlying the “capture” of regulators by producers in health care.  In the global context, many argue that regulation is disproportionally influenced by governments of industrialised countries, who are in turn influenced by large producers (e.g. pharmaceutical companies), at the expense of consumers and small producers.  Stigler (1971) sets out the theory behind the tendency for regulation to benefit small numbers of people who are well-organised where gains will be concentrated, rather than large numbers of people who are dispersed and where gains will be spread.   

AIDS drugs

Present situation

AZT, also known as Zidovudine, is a drug used to treat AIDS and to prevent the transmission of the disease from mothers to unborn children.

In the US, Glaxo holdings / Burroughs Wellcome hold the patent on AZT.  However, Burroughs submitted a large amount of compounds for patents before they knew whether or not they worked.  The publicly funded National Institutes of Health actually did the research which found that AZT was an effective treatment for HIV.  An appeal to the US Supreme Court that National Institutes of Health were co-inventors and so also entitled to license production of the drug, was turned down.  (Barr Laboratories Inc. v. Burroughs Wellcome Co., and Novopharm Inc. v. Burroughs Wellcome Co.) (The Nando Times, 1996) (Aids treatment news achieve, 1991)  This is an example of private research accompanied by strategic patent applications allowing high prices for pharmaceutical companies, while the fruits of publicly funded research directed towards public welfare not benefiting the public through low prices.

Aids is a huge problem in many developing countries, especially in Africa.  Of the 33.6 million people living with HIV/AIDS  in 1999, 23.3 million live in Sub-Saharan Africa.  There were an estimated 2.2 million HIV/AIDS deaths in Sub-Saharan Africa during 1999, 85% of the global total, even though one tenth of the world population lives there.  (World Health Organisation, 1999).  In Zambia, 25% to 30% of adults in urban areas and 10% to 15% of those in rural areas are infected with HIV. (Esipisu, 2000)

There are claims that 94% of AIDS sufferers cannot afford the drugs they need because of high prices (Taylor, 2000).  The government of South Africa decided in the national interest not to enforce the AZT patent and local companies were allowed to produce the drug cheaply.   The monthly cost of AZT in South Africa was reduced from IR£243.60 in 1992 to IR£65.41 in 1995.  However, lobbying of the US government by 40 multinational pharmaceutical companies caused the US to threaten trade measures if patents on a range of AIDS drugs were not enforced.  South Africa was thus forced to amend their law and the government was no longer able to obtain cheaper, generic AIDS drugs for the country where more than 3 million people are HIV positive. (Augusta Times, 1999)  (Hegarty, 1999) 

The benefits of patents

The decision on whether to uphold a patent is a trade-off between encouraging new drugs to be developed, and making those that are already developed widely available.  If developing countries do not uphold patents, there is a danger that pharmaceutical companies will not devote as much research to diseases that are more prevalent in these countries.  

It is difficult to evaluate how much of an incentive medical patents provide.  Shankerman (1998) estimated the value of patents to holders by their willingness to pay the patent renewal fee, which rises each year.  His reasoning is that if they paid this, the patent must benefit them by more than the amount of the fee.  Based on data from France 1969-1987, he estimated that patents were equivalent to a subsidy of 15-25% on average across industries.  However, he found that patents were equivalent to a subsidy of only 5-10% for pharmaceutical companies (although the low patent renewal could also be due to regulation in France which keeps drug prices down).  Companies such as Pfizer say that only patents can allow them enough revenue to engage in continuos research.  (McGibney, 1999)  However, Shankerman’s research indicates that patents are not the principal incentive for pharmaceutical companies to innovate, as direct sales and the advantage of being first on the market are effective inducements for companies to engage in research and development.  First-mover advantage is particularly strong in the pharmaceutical sector.  This is partly due to the high risks and low benefits of trying a new brand when a first-mover brand has been tried and shown to be effective.   Studies by Masson and Steiner (1985), and Hurwitz and Caves (1988) provide empirical evidence for this.  This shows that the extra research incentive provided by patenting may not be large.

Global regulation

India has had a patent regime with substantially weaker standards than those required by the TRIPs Agreement. In particular, it allows the patenting of only processes (and not products) in pharmaceuticals.  This is in order to make medicines rapidly accessible to the poor. A sizable low-cost medicine industry has evolved around reverse engineering in India. Under TRIPs, it will be illegal to reverse engineer patented drugs. (Mehta, 2000)

Article 31 of TRIPS allows a government, in the case of a health crises, to override a patent and produce a cheap version of a medicine on payment of adequate remuneration to the patent holder. (Hegarty, 1999).  However, despite this option being available under TRIPS, and despite the rules based procedures in the WTO, the threat of trade sanctions has successfully prevented low cost drugs being available in the AIDS drugs cases above.  306 drugs are listed by the World Health Organisation as 'essential medicines' and Medicins sans Frontiers have been calls for these to be exempt from patents (Taylor, 2000).  However, the European pharmaceutical industry association EFPIA strongly opposes this, and claims that drugs will be bought in countries which don’t enforce a patent, and sold in countries which do, at a profit to traders.

Proposals

It is important that global regulation strikes a balance between the encouragement of private research, provision for and recognition of public research and the health benefits for consumers of the free use of medical knowledge. 

Exclusive monopoly power is not the only type of right that can be conferred.  For example, AIDS sufferers could be divided into three groups according to their income.  The company which developed the drug would have the exclusive right to sell to those in the high income group.  Those with a “middle income” medical card could buy from imitator companies producing the drug cheaply.  Those with a “low income” medical card would have their treatment funded by the government and supplied by the drug developer company.  In this way, the developer would be rewarded in proportion to demand for its product by both low and high income groups.  There would be an optimal quantity of the drug produced according to imitation production costs and benefits.  The government would have scope to cater for the poorest people.

The fact that drugs are already regulated through prescription means that it would be possible to set up these types of systems without people buying at cheaper prices and selling on to others at higher prices.

Biodiversity and the use of plants and traditional knowledge in medicine

Present situation

Medical knowledge is also often produced in developing countries and used in developed countries. Generations of people living in places with very diverse plant life have built up sizable knowledge about the health characteristics of plants, and how to use them.  However, they have not been able to protect this form of intellectual property partly because the form of the present international legal system is not designed with their form of knowledge in mind, and partly because of their lack of knowledge of and access to this legal system.  

The principal resources necessary to engage in this type of knowledge building are the diverse ecosystems themselves as well as the time and experience of the people who live there.  However, the diversity of the world’s plant life is being rapidly eroded.  Rainforests cover only 7% of the Earth's land surface but they contain more than half the species in the entire world biota.  The forests are being destroyed so rapidly that many will disappear during the 21st century, taking with them hundreds of thousands of species into extinction. Other species-rich biomes are in danger, most notably the tropical coral reefs, geologically ancient lakes, and coastal wetlands. (Wilson and Baird, 1988)

One in every four medicines prescribed in the US is based on a chemical compound originally found in a plant.  Fewer than 1% of all plant species have been screened for bioactive compounds, so every loss of a unique habitat and its species is potentially a loss of future medicines.  Loss of habitat, pressure from non-native species and over-harvesting have put one out of every eight plant species at risk of extinction, according to the World Conservation Union. (Tuxill, 1999)

The costs of this in terms of the stemming of knowledge building about natural health resources are not being taken into account, as the indigenous people living in these regions do not capture gains from the transfer of this knowledge to others.   They are subject to economic pressure to destroy plant habitats for fuel, for wood exports and for agricultural land, and they have few economic incentives to conserve and learn more about their diverse plant life.  Foreign multinational pharmaceutical companies often reap the gains from knowledge of these people.  They use indigenous knowledge and resources, and through a better access to international legal systems, patent the industrial application of health related plants. Examples include the US Patent (No 5401504) granted for the healing properties of turmeric, known for centuries to Indians, and the US Plant Patent (No 5900240) for the use of a combination of herbal compositions as anti-diabetic agents although Indian people have used them in this way and documented their use in ancient texts and scientific literature. (Kothari and Anuradha, 1999, p.2)

In Peru, ancestral wisdom includes knowledge of the healing properties of plant species.  Multinational pharmaceutical companies send doctors and sociologists to obtain information on native plants to determine whether they are candidates for mass production.  The foreign researchers trace the native communities' oral traditions.  Cat's claw is an Amazonian plant whose bark contains substances that boost the human immunological system.  It is used effectively in treating AIDS and several types of cancer.   Two European pharmaceutical labs patented the plant in their respective countries.  In 1993, 200 kg of unprocessed cat's claw bark were exported to the United States. The volume jumped to 20,000 kg in 1994, and reached more than 800,000 kg in 1999.  Cat's claw faces extinction due to unregulated extraction practices. (Lama, 2000)

Co-operation between pharmaceutical companies, publicly funded researchers and indigenous people could be very beneficial, but it is important that the gains of such research be shared.  For example, Dr. Gupta of the University of Panama coordinates a programme consisting of university laboratories and pharmaceutical companies from 19 Latin American countries, plus Spain and Portugal, that are gathering knowledge from traditional healers, screening extracts for activity and characterizing the bioactive molecules.   Latin America contains 60% of all known plants, and has a rich history of use of traditional medicines.   An extract from a tree in Argentina is showing "remarkable anti-HIV activity” (Reuters, 2000)

Global regulation

Contradictions have been pointed out between property rights principles agreed upon in the Convention on Biological Diversity and the TRIPS agreement.  (GAIA foundation/GRAIN, 1999) The TRIPS agreement is likely to take precedence as it is enforceable through trade sanctions.  If plant varieties rights are appropriated by companies from industrialised countries with expertise in patent applications, developing countries will have to pay royalties for the use of resources in their own countries and knowledge built up by themselves.

As well as legal agreements, legal precedents are important in allocating rights.  European and US Patent administrators must continually apply broad rules to new types technology, which leaves significant leeway of interpretation.  Recently legal precedents have been set for patenting of genetic sequences.  This could allow companies with the expertise to isolate and catalogue genetic sequences to patent them despite having drawn on the knowledge of local people about the characteristics of the plant.

Various conventions signed by the members (mostly industrialised countries) of the Union for the Protection of New Varieties of Plants (UPOV) govern intellectual property rights of plant breeders.  In 1991, these rules were strengthened.   The TRIPS agreement means that developing countries will be prevailed upon to adhere to these rules, and to provide some effective form of intellectual property rights for plant varieties, either patents or some effective sui generis version.  

The US and pharmaceutical companies are negotiating that the option of sui generis systems for plants be taken out of TRIPS.  (Tansey, 1999, p.14).  Even if this option is allowed, time limits on the implementation of TRIPS which could limit exploration of alternative systems, and the interpretation of the term “effective”, mean that an UPOV-like system is likely to be set up worldwide.  (Kothari and Anuradha, 1999)  The UPOV system is designed primarily for commercial plant breeders, and not for people engaged in conservation and knowledge gathering.  There is a requirement in the WTO that countries treat nationals of other countries no less favourably than their own nationals under such a system. (Tansey, 1999, p.9).

Proposals

Some organisations advocate a global intellectual property system which provides adequate incentives to preserve and develop new uses for biodiverse environments.  Many alternative systems have been investigated by organisations such as Third World Network and GRAIN (see Nijar, 1996).  One possible scheme could involve royalty payments for the use of indigenous knowledge and resources to community organisations, on condition the organisations preserve the biodiversity of their environment, involve indigenous people in decision making and provide support for their needs to survive in their environment. It is necessary to recognise that intellectual property rights in the plant sector are closely integrated with land, environmental and resource rights and that developing countries are allowed flexibility in adapting intellectual property systems to their own context and needs.  In the Philippines, the Traditional and Alternative Medicines Act 1997 provides for community intellectual rights over biodiversity and local knowledge. (Tansey, 1999, p.11)

Some organisations are against patenting on all forms of life (bio-patenting) and advocate free dissemination of knowledge about seeds and plants.  This is to prevent the danger of people losing access to natural resources essential to their way of life and needs through patents taken by others. Free and shared use of plant resources globally could be combined with global financial commitment to conservation of biodiversity and protection of indigenous communities – the equivalent of public funding although on a global scale.
 
The African group in the Seattle negations proposed that "all living organisms and their parts cannot be patented; and those natural processes that produce living organisms should not be patentable".   In addition, they called for revisions to "ensure the protection of innovations of indigenous and local farming communities”.   This indicates that they view this type of protection as essentially different from and taking a different form to bio-patenting systems.

The African group in Seattle also proposed that the list of exceptions to patentability would include the list of essential drugs identified by the World Health Organisation.  Public funding for research in essential drugs could ensure access for a wider range of people.

Conclusion

These examples illustrate that recent changes in global intellectual property regulation have been heavily balanced in favour of large pharmaceutical companies as knowledge producers and against drug consumers and small knowledge producers.  This could both exasperate global inequality and prevent efficient production of knowledge.  

The recognition and promotion by global institutions of diverse systems of intellectual property regulation and the need for clear principles which link regulation to economic, environmental, development, and social needs and goals, rather than to lobbying power, is necessary to redress this imbalance.

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