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06 Apr 2020
BY André J Maré

The drugs (pricing policy) don’t work, they just make it worse

A recent report published by the White House Council of Economic Advisers (“CEA”) on drug pricing in the United States of America has put the cost of medicine and the access thereto by the poor, firmly back in the spotlight, and on a global scale.

In the CEA report, President Donald Trump’s administration argues that the USA pays higher prices for pharmaceuticals because other developed countries have systems in place to actively force down drug pricing. Some countries even force negative pricing on pharmaceutical manufacturers meaning that certain drug prices are adjusted downward each year, irrespective of increased input costs.

The argument from the CEA, as we understand it, goes like this: pharmaceutical companies charge high prices and achieve high margins on sales to support the massively expensive research and development activities to discover new drugs. The US, which has no real form of universal healthcare, basically relies on free market principles to regulate the pricing of its medicine. Other developed countries, particularly those with strong forms of universal healthcare, use the economies of scale and the bargaining power of a central (government) purchaser to negotiate lower drug prices. This means that, in the opinion of the Trump Administration, the US taxpayer and patients need to make up the shortfall to ensure enough funds remain available for the R&D activities.

The report states that:

“…Lower prices obtained by single-payer systems have the effect of undermining the original purpose of patent policy for prescription drugs: creating a strong financial incentive for innovative R&D…”

The report uses emotive language to describe the above, referring to these counties as “free-riders”, stating that:

“…Stringent government underpricing in foreign countries has substantially increased foreign free-riding on the United States...” .

Some examples from the report mention that the UK pays a mere 34% of US prices, while Canada (35%), France (42%) and Germany (43%) all make an appearance.

On its face, the findings of this report appear to be driven towards maintaining pharmaceutical industry margins and presumably the associated tax benefits for the US. To complicate matters, President Trump has recently stated his support for certain interventions aimed at lowering drug prices in the US, even voicing his support for a bipartisan bill aimed to achieve this.

Making pharmaceuticals is an expensive business. Developing new drugs even more so. The often repeated number for taking a new pharmaceutical from “molecule to market” is around USD2.6-billion from a 2019 report. This number is heavily criticized in civil society circles and other studies have put the average number somewhere between USD850-million and USD1.8-billion. The one thing that everyone seems to agree on is: it is expensive.

Applying the above number to the CEA report would be oversimplification, but it does illustrate the core of the matter. Someone needs to make up the R&D cost for a new drug launch. The report argues that a disproportionate segment of the number is made up by the US tax payers and patients.

Is this true? PhDs have been written on the subject and even those learned academics would answer: it’s not that simple.

US, UK, Germany? France? What does all this have to do with South Africa and drug pricing here?

We have written previously on the South African IP Policy (Phase 1) of 2018, which has a key objective to increase access to medicine by lowering prices. Many mechanisms are proposed to achieve this aim, which includes making use of certain rarely used international intellectual property law exemptions to change the South African patent laws around pharmaceuticals.

This policy was very topical in the lead up to the last national elections in 2019 but it appears that it may have lost a little momentum, for the moment at least. One expects that the fire will be reignited by the CEA Report.

The aims of the South African IP Policy as they relate to access to medicine are moral and should be supported. Although the mechanisms have come in for some justified criticism, the sense is that the policy is not going to change and the next round of engagements will come in when the changes to the patent laws are tabled.

Given how the US has reacted to the proposed Copyright Amendment Bill (where they have threatened to amend or cancel trade agreements with South Africa if US intellectual property rights are not respected) one can expect further pressure from US pharmaceutical lobby groups if the IP Policy proceeds to the next step.

South Africa remains the largest pharmaceutical market in Africa and despite the challenges, it remains seen as a gateway to the African pharmaceutical market. It is of enormous strategic value and do not be surprised if the US government supports the US based pharmaceutical industry if it feels it wants to have its say in South African IP policy. Then there are also the debates around the proposed National Health Insurance (“NHI”) with central negotiating and purchasing objectives for medical services and pharmaceuticals (sound familiar?) and Expropriation Without Compensation  (“EWC”) (intellectual property is also property) to muddy the waters further.

The CEA report certainly supports the often repeated view that President Trump’s administration is very closely aligned with the US pharmaceutical lobby. The companies behind this lobby usually list the value of its intellectual property around 85% to 90% of its total asset value. Expect them to fight for that.

André J Maré
Executive | IP
+27 82 440 1517