Stockpiling medicines

by Henry on October 28, 2005

Jamie Love has an FT op-ed with an “interesting suggestion”: (behind paywall) about solving the incentive problems for anti-flu drugs and similar.

bq. The proposal is to permit governments to acquire medicines freely for stockpiles from generic suppliers, on the condition that if the medicines were used to treat people, the patent owner would receive royalties. This makes it much cheaper to acquire the stockpiles, but also increases the value of the ­patented invention, as long as there is some probability that the emergency use will occur. The price of medicines is related to their expected benefit. But this assumes a nearly 100 per cent probability that someone will actually use them. In the case of stockpiles, on the other hand, there is often a fairly low probability of use. Indeed, the lower the risk of the emergency, the lower the expected benefit of the stockpile. As long as the prices for the medicines are above marginal costs and the ­patent owner insists on a price related to the price of the drug when used, stockpiles will be small. But if governments could freely obtain stockpiles at marginal costs, with only a liability to remunerate the patent owner in the event of use, the incentives to match costs and benefits will be far more efficient.

bq. The amount of royalties to pay in such a system should be generous for higher income countries and much smaller for countries with poor populations. As noted, this works best when the medicine has a parallel commercial market for non-emergency uses. For those drugs that would only have a market in the case of an emergency, such as an anthrax or small pox vaccine, the liability rule could also be used, but in combination with other incentives, such as the medical innovation prize fund approach now being considered in the US, which provides for large cash rewards for developers of new drugs.

I can’t see any very obvious problems with this suggestion – it seems to provide an excellent means of addressing short term crises while solving the problem of long term incentives. Any disagreement?

(slight revisions following comments).



theCoach 10.28.05 at 1:54 pm

This seems to be a good compromise solution, but it does not address the underlying problems with the incentives that the current patent system has. Your own John Quiggin and Dean Baker have been very good in examining these problems.


Jeremy Osner 10.28.05 at 3:13 pm

Am I wrong to think that a “smallpox or anthrax vaccine” would not be useful in an emergency? I thought the use of vaccines was preventative. Or is the idea that, once the epidemic gets started, you immediately start vaccinating everybody who has not yet got the disease?


Jack 10.28.05 at 3:16 pm

How does the government decide what to pay in the event of use?

How does the government decide what to stockpile?

Is it reasonable to assume that the drawdown price is going to be affordable?

How does the market ensure that the stockpile is in good working order if it will not be tested for years or decades?

In this situation the less risk averse government is being financed by the more risk averse company which is surely perverse.

The idea of being able to maintain a stockpile at marginal cost is a clear benefit but what is to prevent the government achieving similar results by some kind of licence negotiations? Trading definite money now and possible economies of scale for the chance of some money later and reduced capacity.


Henry 10.28.05 at 3:47 pm

flu vaccines are a special case as I understand it (only partially effective, need to be given yearly, rapid mutations etc), but basically this is sloppy wording on my part. Will revise.


Shelby 10.28.05 at 4:26 pm

what is to prevent the government achieving similar results by some kind of licence negotiations?

The quoted section is consistent with either a general gov’t-mandated mechanism, or negotiated licenses. The latter seems likely to be as effective, and much easier to roll out initially.


'As you know' Bob 10.28.05 at 6:35 pm

I can’t see any very obvious problems with this suggestion

Umm, how about:
it gives big pharmaceutical companies a huge financial incentive to cause a disease outbreak?

Yes, that’s an insane objection, but I live a country that’s put the modern GOP in charge of public policy, so nothing is in ‘tinfoil hat’ country anymore.


Jack 10.28.05 at 6:45 pm

and bob, remember the economist’s mantra — people respond to incentives!


stuart 10.28.05 at 7:36 pm

I’m not sure that’s a particularly strong objection still, after all you can argue they have similarly strong financial incentives to cause disease outbreaks now, especially in first world economies where people have the disposable income to pay top dollar for their drugs.

Thinking about it further having stockpiles of vaccines/cures is more likely to contain an epidemic in it’s earlier stages, a disease that isn’t controlled close to the source of an outbreak would seem to be far more profitable, so limited supplies of vaccines/cures early on would seem to lead to a much larger customer base in the medium term.


Mike Huben 10.28.05 at 9:27 pm

While there is curently an opportunity to cash in on a caused disease outbreak, with production low and the threat of emergency commandeering of the drugs or their patents, there’s not much incentive.

With a planned, contractual payment set up in advance for an enormous amount of drugs, the payoff is vastly larger, and thus so is the moral hazard.

It would be far safer for governments to amend the patent rights so that in exchange for the patent, the government can demand production for stockpiles on a cost-plus basis with no further remuneration.


'As you know' Bob 10.28.05 at 10:36 pm

Mike Huben: With a planned, contractual payment set up in advance for an enormous amount of drugs, the payoff is vastly larger, and thus so is the moral hazard.

AND the payoff would be fully calculable in advance. No uncertainty.


rollo 10.29.05 at 11:01 pm

” strong financial incentives to cause disease outbreaks now”

“Last week, a United Nations panel lambasted the United States for overprescribing psychiatric drugs, particularly stimulants; according to the panel, the United States consumes 80 percent of the world’s methylphenidate (the generic name for Ritalin).”
Susan Brink/Carter Center March 2000

“In February 2000…Dr.Zito published a report in the Journal of the American Medical Association which found that psychotropic medications such as Ritalin and Adderall were being prescribed to preschoolers at alarmingly high rates, especially considering that many of the drugs have not been approved by the FDA for use in children under 6, and there’s little research about their effects on young children.”

Since 1990, Ritalin production is up 700 percent, and nearly 15 percent of America’s school-age children are using psychiatric prescription drugs.
Craig Colgan/National School Boards Ass. Dec. 2000

Looking on the bright side, there’s always the possibility that 5+ years of a Republican Congress and the Bush White House in synchronized minuet with corporate interests generally have managed to alleviate the problem.
And it could be said with some truth that encouraging the misdiagnosis of a disease for financial gain is nothing like the intentional creation and spread of a disease for financial gain.


nikolai 10.30.05 at 10:24 am

“Any disagreement?”

Yes. He’s wrong because he ignores the fact that patents expire and are rendered worthless by new drugs. If the stockpile isn’t used before the patent is lost, the drugs company would have got more money by not licencing the scheme. It’s just wrong to say the scheme would increase the value of the ­patented invention.

There are certain circumstances where the scheme could increase the value of the patent. This is going to depend on how many more units will be stockpiled under the scheme, whether the stockpile is used, and if the stockpiles rendered redundant by a better drug coming on the market, and so on. Predicting which of these is going to happen id impossible, and so you can’t sort cases where this scheme will work from those where it wouldn’t. I don’t think the interests of patent holders and the public go hand in hand the way the article suggests. This isn’t a win-win situation, the op-ed’s flawed and misleading.


Tracy W 10.30.05 at 5:50 pm

Also I have my doubts about what sort of price differential could be maintained between rich and poor countries. Rich countries have a vast amount of unfulfilled wants, they will have an incentive to reduce expenditure on this, in order to spend money on other things. The other things may be more hip operations, and cataract removal at earlier stages, rather than antibiotics and anti-Aids drugs as in poor countries. But they tend to be politically attractive and visible achievements. Preparation for earthquakes in NZ has always suffered from this funding problem.


Tom T. 10.31.05 at 9:06 am

I’m late to this thread, but it just occurred to me that the proposed model bears a lot of resemblance to the prevailing model of book sales in the US. A bookstore typically accepts books on consignment, and unsold copies may be returned to the publisher. In other words, the publisher (like the pharma company in the proposal) bears the risk of loss should the book not actually be purchased (or the drug not actually be used). Thus, it might be useful to look to the book industry for insights as to how this proposal might work out in practice.

Note: I’m assuming that the proposal to pay for the drug stockpile constitutes a loss to the pharma company, in that it won’t cover their R&D costs.

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