Post-TRIPS options for access to patented medicines in developing nations

This article explores the tension between granting patent protection under the TRIPS Agreements and the availability of medicines at affordable prices to developing countries. A crucial consideration under the TRIPS compulsory licensing option is the 'adequate remuneration' paid. A theoretical and empirical analysis shows that the royalties set under past compulsory licenses have been much lower than those that would be established under the 'foregone profits' standard of US patent law. To respect comparative advantage in the supply of licensed drugs, the TRIPS language requiring that compulsory licensing be predominantly for domestic supply needs clarification. The multinational drug pricing strategy that best combines equity with coverage of R&D costs is a variant of Ramsey pricing, under which prices are much lower in nations with low ability to pay and/or high price elasticities of demand than in wealthy nations. Statistical evidence on the prices of 15 AIDS drugs in 18 low- and medium-income nations reveals that tendencies toward Ramsey pricing were at best weak. To encourage Ramsey pricing, parallel exports should be barred from low-income nations, and price controls should not benchmark the prices charged in low-income nations. Outright donation can also enhance the supply of drugs to low-income nations. A quantitative analysis shows that when the marginal cost of production is low relative to 'inventoriable' average cost, donations can actually enhance a drug producer's after-tax profits under US tax laws. Minor tax law changes to enhance donation incentives are suggested.