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As recently as a decade ago, AIDS was a death sentence across wide swaths of Africa. Today, differential pricing among pharmaceutical product patent holders and generic competition has made AIDS treatments much more affordable for citizens in developing countries. In a new Harvard Kennedy School Faculty Working Paper, “Patents, Monopoly, Power, and the Pricing of Pharmaceuticals in Low-Income Nations,” F.M. Scherer, Aetna Professor Emeritus, explains how these changes came about.
“The problem was quite straightforward,” says Scherer. “In the year 2000, AIDS was proliferating in the world, especially in low-income nations, but antiretroviral drug prices were much too high for affordability in low-income nations. ‘Differential pricing’, i.e., charging much lower prices in low income nations than in wealthy nations – enforced under the proper conditions – both enhanced producers’ profits and benefited low-income nations’ consumers.”
“As events ensued, the cost of providing three-drug therapy to persons afflicted with HIV/Aids in the poorest nations fell from approximately $15,000 for a year’s treatment in 2001 to an average of $127 in 2012,” he writes.
Scherer takes a look at three main reasons drug patent holders initially showed weak tendencies toward differential pricing. One is so-called parallel trade, “in which the middlemen in low-price nations re-export the cheap drugs into high-price jurisdictions and undermine the incentive for differential pricing,” says Scherer. Second are the “so-called external reference price controls,” which have the same effect, and finally, “the tendency for drug patent holders to set their prices in low-income nations high – catering only to the most affluent and well-insured consumers.”
“In the mean time,” says Scherer, “low-income nations were drawing their own conclusions about the failure of significant price differentials to emerge, and so they built up generic pricing sources, only in part through compulsory licensing.” Under a compulsory license, an individual or company seeking to use another's intellectual property can do so without seeking consent, and pays the intellectual property holder a low royalty or sometimes zero for the license.
“Despite these problems,” Scherer writes, “needy consumers in low-income nations ultimately became the beneficiaries of greatly reduced prices for life-saving drugs and vaccines, especially during the 1990s and the first decade of the 21st Century.”
F. M. Scherer is Aetna Professor Emeritus at Harvard Kennedy School. His research specialties are industrial economics and the economics of technological change, leading to numerous publications including, “Industrial Market Structure and Economic Performance,” “The Economics of Multi-Plant Operation: An International Comparisons Study,” and “International High-Technology Competition.”