Basic for an R&D Treaty

By Audrey Edwards,2014-11-28 06:16
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Basic for an R&D Treaty

    From TRIPS to RIPS: A better Trade Framework

    to support Innovation in Medical Technologies

    Agence nationale de recherches sur le sida/Institute d' économie publique

    Workshop on Economic issues related to

    access to HIV/AIDS care in developing countries

    Université de la Méditerranée, Marseille, France

    May 27th, 2003.

     1 James Love

    Consumer Project on Technology


    There is an almost unbounded interest in the development of new health care technologies that will prolong life or reduce suffering. The pace and direction of innovation will depend in part on the resources mobilized for research and development (R&D). National governments have a variety of policy instruments to lift and shape R&D expenditures. Public sector grants and contracts, tax incentives, government imposed research mandates, philanthropic efforts, and an expanding universe of intellectual property protection schemes are all important in raising levels of R&D investments. Each instrument has its own advantages and shortcomings. Most countries undertake a mixed strategy of public and private funding.

    In recent years the framework for funding such R&D has become the subject of a multilateral, regional and bilateral trade negotiations. The most important discussions have concerned intellectual property rights, the systems of private rights in data and inventions that protect investment and create incentives to develop new commercially important products. The World Trade Organization (WTO) Agreement on the Trade Related Aspects of Intellectual Property Rights (TRIPS) is the best known such agreement, but increasingly important are other multilateral agreements administered by

     1 Director, Consumer Project on Technology. This paper is based up collaboration with Tim Hubbard of the Welcome Trust/Sanger Institute, and has benefited from comments and suggestions by many public health experts, scientists, trade professionals, economists, pharmaceutical industry stakeholders, and others in several seminars. Notable was a September 2002, meeting organized by Aventis in Ottrott-le-Haut, France on "Pharma Scenarios for Sustainable Healthcare," where Tim Hubbard and James Love presented Radical IP Scenarios #1 and #2. The proposals were also discussed at the 2002 Trans Atlantic Consumer Dialogue meeting on intellectual property and health care, an October Buko/HAI meeting at Bad Boll Germany, the December 2002 MSF seminar on drugs for neglected diseases in Rio, a March 2003 conference in Stellenbosch, South Africa on Africa and the Human Genome, a March 2003 workshop on benefit sharing at University of Pennsylvania, an April workshop on TRIPS and public health in Sri Lanka, an April meeting on TRIPS and Public Goods at Duke University, and the April 29, 2003 CPTech, MSF, Oxfam, HAI workshop on a global framework for supporting health research and development (R&D) in areas of market and public policy failure, and at several other workshops and meetings. Many have offered thoughtful criticisms and suggestions, and none should be blamed for shortcomings of this paper.


    the World Intellectual Property Organization (WIPO), and hundreds of bilateral and regional agreements on intellectual property norms and enforcement mechanisms, particularly those between the United States or Europe and smaller economies.

    It is well known that patents and other forms of intellectual property protection have only limited efficacy in stimulating innovation in the health care field. Basic research, development of high-risk projects, and research on vaccines or neglected diseases are some well-known examples of areas where private market incentives are insufficient to secure adequate investment. There is also considerable evidence that systems of intellectual property protection are fraught with high costs in terms of administration and dispute resolution, and a number of well-known inefficiencies, such as anticompetitive barriers to follow-on innovators. Recently there is considerable interest in new collaborative open source development models, which in some cases work best with little or no intellectual property protection.

    Intellectual property regimes that rely upon exclusive rights often lead to unacceptable barriers to access to treatments. This is problem in both rich and poor countries. For example, while developing countries struggle to pay for the least expensive HAART regimes to treat AIDS, there are also increasingly severe problems managing limited budgets for AIDS treatments in the United States and other wealthy countries, particularly with the introduction of products such as T-20, which are so expensive they threaten to exhaust limited public funding for indigent AIDS patients. Canada, France, Sweden and the UK are among the countries that see high fees for breast cancer screening patents as a barrier to deployment of these new technologies. The impact of high prices in the United States is a growing crisis for access among the uninsured, and in the United States, Europe and other OECD countries there are substantial controversies over which treatments will be reimbursed under public or private insurance schemes -- a rationing of the most expensive new medicines.

    Historically, governments have recognized these and other limitations, and complement the intellectual property approach with a variety of direct and indirect public subsidies to raise investment levels in health care R&D. The United States, for example, will spend more than $27 billion this year at the National Institutes of Health (NIH), and more through a variety of other agency efforts, and also subsidize R&D though income tax credits. Every OECD country and many developing countries have some public sector grant, tax or other subsidy programs to support health care R&D. In some areas, the US government simply mandates that private firms undertake R&D as a condition of doing business. Other national governments have their own mixed models of supporting R&D. For example, in the UK domestic prices of pharmaceutical drugs depend in part upon firm R&D expenditures, Canada linked NAFTA changes in its patent laws to a negotiated increases in levels of R&D that industry was obligated to undertake, and at the regional level, Brazil has imposed R&D mandates on private sector firms.

    Despite the widely recognized importance of non-intellectual property factors in determining the levels of R&D and the rate of innovation in new treatments for disease, there has been little discussion of the trade related aspects of such programs. There are


    notable exceptions, such as the G-8 discussions regarding funding R&D on drugs for neglected diseases, or the Blair/Clinton statement on the benefits of unencumbered access to human genome sequence. The G-8 discussions involved a handful of wealthy countries that were motivated to raise global levels of R&D on specific diseases, such as malaria or tuberculosis, that primarily afflict the poor, and for which the patent system does not provide sufficient incentives relative to the importance of these diseases from a public health perspective. The Blair/Clinton statement on the Human Genome Project (HGP) sought to address a different global IPR failure. The United States NIH, the UK Welcome Trust, and funding agencies in Japan, France and Germany agreed that donor and public sector funds would be used to sequence the human genome, and to place the results immediately in the public domain, without any IP claims. The no-IPR approach to the HGP was influenced by the growing interest in “open source” development models for software and medicines, that emphasized the benefits of increased access to information, and it also enjoyed substantial support within the pharmaceutical sector, due to concerns that broad gene patents would saddle researchers and firms with high royalties and deter development of new products. The Blair/Clinton statement strongly supported the principle of making raw research data freely available in order to maximize its use, as a way of obtaining the greatest medical benefits for humankind.

There are additionally a number of proposals for global agreements that would increase 2 or address other areas where there funding for vaccines, broaden the scientific commons,

    is a both a need and an opportunity for global cooperation on the development of public goods. However, none of these initiatives have the same level of multilateral, regional or bilateral attention that is now given to agreements on intellectual property rules.

    We propose a new emphasis be placed on the development of formal global frameworks that consider jointly both the IP and the non-IP instruments for funding health care R&D. One fundamental rationale for any global framework is to address the free rider problem. There are global benefits to R&D, but local costs. The efforts to create more uniform IP regimes are efforts to share more broadly the costs of funding R&D, but there is clearly a need to expand the trade framework to address a broader range of funding instruments.

    Even for a privatized research model, the IP regime by itself only addresses one aspect of financing R&D. In particular, the regulation of drug prices and the availability of social insurance to pay for medicines are two very important factors in determining the level of incentives for new drug development. Indeed, in recent years, the United States trade policy has placed increased emphasis the issue of drug pricing or the structure of social insurance reimbursement schemes, even though the US does not regulate drug prices or provide social insurance for drug purchases in its domestic market. The United States successfully demanded that Korea impose a seven country reference pricing system for minimum prices on innovative drugs, and the US trade officials have pressed Australia,

     2 John Barton, Science and Technology Diplomacy Initiative and the ICTSD-UNCTAD Project on IPRs and Sustainable Development , Policy Dialogue on a Proposal for an International Science and Technology Treaty, Room XXV, Palais des Nations, Geneva Friday, 11 April 2003.


    3 to raise Canada, France, Germany, New Zealand, Thailand and many other countries

    prices and extend reimbursement for new medicines. The US efforts to raise prices are bitterly resented by governments and patients, as higher prices inevitably reduce access to new treatments, and they do not recognize other ways that countries might support R&D, such as funding research that enters the public domain, or any number of public private partnerships to advance particular public health goals.

A Trade Framework that focuses on R&D

    It is possible to craft a trade framework that recognizes the entire range of instruments that might be used to support health care R&D, and such a framework can be shaped to address public health goals. Iintellectual property agreements are often the product of lobbying by commercial interests. Pfizer, IBM and other intellectual property owner interests are widely credited with the design of the TRIPS agreement. But if one sought to design a trade framework that sought first and foremost to promote innovation and the advances of public health goals, it would be different. Intellectual property rights would be a means to an end, but not the only means. The protection of property rights would not be an end in itself, but one of several instruments to finance investments in


Treaties or Trade Negotiations that address R&D

    There are many treaties and trade discussions that have addressed R&D directly. For example:

     The Treaty of Europe includes provisions for public sector funding of R&D.

    There are measures to ensure that the least developed countries in Europe

    receive a relatively greater share of R&D investments in order to promote a

    more equal level of development. This is the type of operational mechanism

    to give effect to technology transfer and capacity building that was promised

    but never delivered in the TRIPS agreement.

     The Landmine Treaty requires support for R&D into humanitarian de-mining


     The Koyto Climate Treaty calls for R&D into energy efficient technologies.

     The G-8 has held discussions over the need to increase public sector support

    for funding R&D for vaccines and drugs for neglected diseases.

     3 Often motivated by industry submissions to USTR. For example: PhRMA “Special 301” Submission:

    Priority Watch List Countries. The Croatian sick fund disregards the considerable R&D costs associated with innovative medicines. Many innovative products that are still protected by patents in the U.S. or the EU are reimbursed in Croatia at levels that are not significantly different than the prices of local and Slovenian copies, therefore disregarding the high R&D costs of pharmaceutical innovation.”


     The Human Genome Project (HGP) involved coordination between the United

    States and several governments, including for example the highly publicized

    Clinton/Blair announcement that the donor and government funded

    sequencing efforts would put data into the public domain in order to provide

    the research community with a global public good.

    How might one frame a treaty or trade agreement to support R&D for health care research? If this framework would ever replace TRIPS, it would have to address the free rider problem. Everyone wants to enjoy the benefits of health care R&D, but no one wants to pay. The trade agreement would have to address this issue. But there are also many other topics to explore. Features of a treaty or trade agreement might include:

     Transparency of investment flows,

     Identification of areas of the greatest public health R&D needs,

     Mechanisms to ensure that there is access to new inventions,

     Technology transfer and capacity building in lesser developed countries,

     Greater efficiency in terms of the costs of acquiring R&D, and

     Avoidance of anti-competitive or unfair trade practices.

Proposal for a Trade Framework

    The following is a proposal for a trade framework to support innovation in health care. It is designed to be an alternative to the WTO TRIPS accord, but it would easily work independent of or together with the TRIPS. It is designed to support the entire health care sector, but it could also be implemented in a much narrower way, for example to address only medicines for HIV or neglected diseases, databases and other public goods, or for a broader category of essential medicines.

The key features of this proposal are as follows:

    1. Every country would have to take measures to ensure greater transparency of

    R&D investment flows and financing.

    2. Every country would be expected to meet or exceed norms regarding

    aggregate funding of R&D. The funding could be supported through a variety

    of means, including purchase of commercial products from innovators, direct

    public funding, research mandates, or other mechanisms.

    3. The measured contributions of support for investment would reflect social

    valuations that would differ from market transactions. A set of multipliers

    would increase the weights given to investments that were open, addressed

    public health priorities, or which transferred technology or built research

    capacity in developing countries.

    4. The member countries would have flexibility to manage their own R&D

    investments. They could adopt strategies that were highly centralized or

    highly decentralized. They could cooperate with other countries in managing

    R&D funding or projects, or they could act entirely independent. They could


    outsource R&D performance in foreign countries, or do everything


    5. There would be experimentation and competition between countries to find

    the best implementation strategies. There would be coercion regarding the

    aggregate level of support for R&D, and global agreement on the rules for

    transparency and social weights, but considerable freedom to choose a

    particular national implementation strategy given those requirements and

    global values.

    6. Nations could choose to have high levels of intellectual protection, or no

    intellectual property protection at all. Nations could choose an entirely

    proprietary research program, or a strategy that would put all research in the

    public domain, or any combination of strategies.

    7. The trading system would have a tool other than intellectual property rights to

    address the aggregate level of funding R&D, and also to ensure that

    investment flows in R&D addressed social priorities, such as sufficient R&D

    in areas of the greatest public health need, the creation of public goods, or to

    help developing countries enhance their own levels of economic development.

    8. One caveat would concern anti-competitive or unfair trade policies, in the

    context of a trade liberation agenda. One could imagine some constraints in

    national implementation strategies to address these issues.

    The following further describes how such a trade framework would work, and provides a discussion of transition and implementation issues.

Transparency of Investment Flows

    Public health authorities know very little about current investment flows on R&D. There are some data published by trade associations, such as the US based Pharmaceutics Research and Manufacturing Association (PhRMA) annual survey of R&D expenditures, information from company annual reports and SEC disclosure reports, and some independent data, such as information reported by the US Internal Revenue Service (IRS) in connection with the increasing R&D income tax credit, or disclosed to governments of Canada or the UK in connection with pharmaceutical pricing policies. But in general, little is systematically collected on core details of the global allocation of R&D funds. A treaty or trade framework for R&D that addressed norms for support for R&D would need to rely upon more information than what currently exists. A global effort to increase transparency of investment flows would benefit from a framework for disclosure and reporting of investment flows. Policy makers would benefit from information on the (a) stage of R&D, including each phase of clinical trials, (b) the disease or condition the R&D was directed at, (c) the sources of funds and (d) the intellectual property status, and 4 The performers in particular, to determine if the research project is proprietary or open.of the R&D would make these disclosures.

     4 Private corporations sometimes fund open projects, of non-profit educational institutions often seek patents and other intellectual property protections on government funded research.


    Table 1

    Disclosures of investment flows

    (disclosure by performers)

Stage of R&D

    Basic research

    Clinical trials

    Phase I, II, III and IV

    Disease or condition

    AIDS, malaria, cancer, diabetes, spinal injuries, etc…

    Source of Funds




    IP status


    Open Source

Measurement of Contributions to R&D

    Each country would report its contributions to R&D investments. This would involve two steps. The first is to identify the raw monetary value of the contribution. The second is to introduce weights to reflect social priorities.

The measurement of the raw monetary values would reflect the contributions in dollar or

    euro terms, of R&D supported by a particular country. These contributions would come from a variety of actions. Purchases of medicines from innovators would count, to the degree that a percent of the turnover was reinvested in R&D. Thus, for example, if Sales were S, and the reinvestment rate was r, the raw contribution from sales would be Sr.

    This would require reporting of both S and r. There would also be a variety of research

    that was funded by the government. In some cases, private firms are required by the government to fund or perform research. For purposes for this illustration, all government funded and mandated research would be identified as M.

    Raw contributions

     Pharmaceutical Sales = S i

    Re-Investment in R&D = r i

    Mandated Research (including public sector funded) = M i

    Next, a system of multipliers gives greater weights to R&D investments that address social priorities. In particular, there are three areas where R&D investments would be given greater weights. Open research would be valued higher than proprietary research. Countries that place R&D into the public domain provide a global public good. And many researchers believe that research that is open and readily available for other researchers to explore and advance is more productive than research that is protected by


    patents, secrecy or other measures. Second, there are clearly areas of research that are more important than others. For example, the development of a new innovative medicine for an untreated condition is a higher priority than one that simply expands the number of options within an existing class of therapies. We are certainly under investing in vaccines, diseases that primarily afflict the poor, or for emerging public health threats such as SARS. Third, there is a social value in giving effect to various global pronouncements in favor of technology transfer and capacity building in poorer countries. The full set of multipliers would be as follows:

    Social Priority Multipliers

    ; Open Research = i

    Priority Research = i

    Technology transfer = i

    The raw contributions would be recalculated to reflect these social priorities. The adjusted contribution could be expressed as follows:

    Adjusted Contribution = ; [ M S r] iii i i +ii i

    The sum of the adjusted contributions would have to met or exceed the minimum investment norms established by the trade agreement.

Simple Illustration of Adjusted Contributions

    The weights would be uniform globally, and both controversial and interesting from public health, trade and social points of view. One can imagine countries with large prevalence of HIV or malaria arguing for high weights on those diseases, and developing countries in general pushing for a significant multiplier for technology transfer. There would be debates between commercial interests and the non-profit research community on the multiplier for openness. The following is a simple illustration of how such a system might work, with arbitrary values for ;, and . i,i, i

    In this example, a country will compare the contributions it is credited with through two different strategies. The first is to buy medicines at willing buyer/willing seller prices from patent owners who have exclusive rights. The second is a public sector investment in an open source effort to develop a vaccine for HIV, with one half of the investment performed by researchers in Africa, Asian and Latin American counties.

    Possible values


    For purposes of this illustration, suppose the evidence based reinvestment rate for R&D was 10 percent of turnover from pharmaceutical sales, and we assigned a weight of 2 for each of the three social multipliers.

    r = .1

    Social multipliers:

    ; = = = 2 i,i, i

    A purchase of $100 million of pharmaceuticals from the innovator would count toward the required expenditures as follows:

    $100 million pharmaceutical sales x .1 = $10 million

    Next consider an alternative expenditure of $10 million on open source research on a HIV vaccine. In this case the investment is funded in a developed economy, but half of the expenditures are performed by researchers in developing countries, and qualify for the technology transfer multiplier.

    Performed in developed economy

    $5 million x 2 x 2 = $20 million.

    Performed in developing economy

    $5 million x 2 x 2 x 2 = $40 million.

    In this example, $100 million on purchases of pharmaceutical drugs from innovators would count as $10 million toward the required minimum expenditure, while $10 million in open source research on a HIV vaccine that was performed half in developing economies would count as $60 million. In other words, the $10 million in open source HIV vaccine research would be equivalent to $600 million in purchasers of medicines from innovators.

Norms for Aggregate R&D levels

    The norms for investment would be related to both the global targets for funding innovation and the fiscal capacity of a particular country to support health care R&D. At the global level, the norm could be set higher in order to increase the rate of innovation. At the local level, rich countries would be expected to invest more, in absolute terms, and less would be expected from poorer countries.


    Without more data, particularly regarding public expenditures on health care R&D, it is not obvious what the norms should be, or how they might vary by the income of countries. However, one can make some assessments by looking at data of expenditures on pharmaceutical products. Given the fact that most countries have modest budgets for public sector R&D, and that the TRIPS itself only focuses on the private sector sales of pharmaceuticals, this is a useful place to start. Table 2 reports 2002 retail pharmaceutical sales for 20 countries. There are huge differences in per capita expenditures, ranging from $3 in India to $544 for the United States. However, as a percentage of GDP, the range is much narrower, ranging from .5 to 1.5 percent, with most countries fairly close to 1 percent, regardless of income. India, Thailand and the UK are both at .7 percent of GDP. Brazil, Germany and Australia and New Zealand (combined) are at .8 percent. Mexico, Spain, France and Japan are at 1.1 percent. The Philippines is at 1.4 percent, second only to the US at 1.5 percent.


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