Welcome to Plugging the Gap (my email newsletter about Covid-19 and its economics). In case you don’t know me, I’m an economist and professor at the University of Toronto. I have written lots of books including, most recently, on Covid-19. You can follow me on Twitter (@joshgans) or subscribe to this email newsletter here. (I am also part of the CDL Rapid Screening Consortium. The views expressed here are my own and should not be taken as representing organisations I work for.)
The big news of the last couple of days was that the US government has decided to support the waiving of patent rights over Covid-19 vaccines at the World Trade Organization. Now the usual trade-off here is that patents prevent businesses from manufacturing and selling vaccines without the permission of the patent holder which protects them against imitation but this comes at the cost of creating a monopoly which may limit distribution. Vaccines, like other pharmaceutical drugs, can be easily copied without such protection and since the R&D costs in drug development can be very high, that protection is needed to incentivise firms to develop drugs in the first place.
But vaccines developed in a crisis are different. They are so different that, as I am going to explain in today’s newsletter, the news that patent protection might be waived is not “news” at all. For the basic trade-off that everyone thinks it matters for — that is, incentivising R&D versus broader distribution — it changes nothing. The reason is that nobody with any sense thought that patents were going to play an important role in a global pandemic.
What would happen normally?
The starting point to understand this is to consider what should have happened if patents were important and were doing their “job” for Covid-19 vaccines.
Vaccine prices should have been much higher. The basic logic is outlined in this scene from National Lampoon’s Vacation:
Vaccines are really valuable. Not just socially but privately. A vaccine maker should have been able to, literally, hold up people until they paid up. It is highly likely that you could earn 100 times more per treatment if you priced at a monopoly level which means that you would earn much more supplying the 1-2% of the world willing to pay that especially since you don’t have to build manufacturing facilities to cover the remaining 98%.
That didn’t happen. Moreover, the market didn’t expect it to happen. Take a look at the share prices of vaccine makers over the past year.
Even if we are generous, the private returns to holding a patent on a Covid-19 vaccine are between $0 (for AZ; the largest producer) to $26 billion (for Moderna) and $40 billion (for Pfizer) to $51 billion (for J&J). But, for Moderna, the benefit was having a first successful product and the other firms have lots more going on. In any case, when the social value of this is in the trillions, there seems to be s**t ton of money left on the table here.
Patents don't work for pandemics
One of the first things I wrote about Covid-19 was about incentives to develop vaccines (back in April 2020). Let me reproduce what I wrote here:
This chapter is about how we can innovate our way out of this and future crises. Thus, it seems appropriate to begin with the movie Mission Impossible 2. Released in 2000, the antagonist is an Australian-based biotech company (Biocyte Pharmaceuticals, if you must know) with a rather unique commercialization plan. They have developed a virus, Chimera, that could start a very bad pandemic—it lies dormant for 20 hours before destroying the carrier’s red blood cells. One plan might have been threatening to release the virus and being paid not to do so. But the folks at Biocyte went one step further. They planned to release the virus itself because they had also developed the cure. And because, of course, they hold the patent on it. I suspect some venture capitalists would call this one “fundable.”
The movie plot involved the chase to stop the virus being released but also to secure the cure in case it was. But I wonder, did they have to? The plan was to release the virus and then charge for the cure. Drugs normally, once made available, are easy to copy and so have patents. So it appears that the plan here was to use the patent to extort world governments to pay up much of global wealth. But herein lies the problem: the patent is granted by those governments. Surely in this situation, they would just invalidate the patent and take the cure?
The point—and you will see that I do have one—is that when it comes to innovations in the face of global pandemics, business as usual for our innovation system is unlikely to apply. The reason is that once an innovation has been created, there are strong pressures to make it freely available and, in the process, push down the return to any R&D that has been conducted. Anticipating this, businesses may not invest in R&D in the first place. And this is not a hypothetical situation.
Such concerns are likely very salient to firms. For example, after Senator Paula Hawkins (R-FL) asked a major vaccine manufacturer how it could justify charging nearly three times as much to the U.S. government for vaccines as to foreign countries, U.S. manufacturers stopped submitting bids to UNICEF to supply vaccines. . . . When President Bill Clinton announced his plan to immunize all children against a standard list of diseases in 1993, he said, “I cannot believe that anyone seriously believes that America should manufacture vaccines for the world, sell them cheaper in foreign countries, and immunize fewer kids as a percentage of the population than any nation in this hemisphere but Bolivia and Haiti.” . . . In the face of such statements, potential risks facing firms seem real.1
It is very unlikely that governments around the world are going to accept monopoly pricing for a vaccine developed for COVID-19 that potentially will benefit 7 billion people. For life-saving drugs, it is not uncommon for those prices to be in the hundreds of thousands per person. For a vaccine intended to be given to a population such as that of the United States, even $10,000 per dose would set the government back $3 trillion. That is not going to happen.
Will governments likely pay a princely sum for a vaccine for COVID-19? Yes. Will it cover the costs and the risks associated with developing and trialing that vaccine? Hopefully. But given the uncertainty amid the crisis, there is a concern that pharmaceutical companies and their researchers do not need to add further uncertainty. Moreover, this isn’t just about the current crisis. Like the flu, coronaviruses are probably with us for the foreseeable future and may require annual vaccine development. There are other innovations (e.g., methods to test and anticipate pandemics) that we might finally demand, having felt the costs of a global pandemic in the modern era. All of those will be of a public nature with the idea of using them widely. That means that the price for these innovations will be set in negotiation with governments that, we can imagine, are unlikely to be less stingy with public funds for pandemic prevention going forward. Given this, how should we think about an innovation system for what are essentially ideas that will enhance the global public good?
The point is that governments were never going to be held to pay real monopoly prices for vaccines and everyone knew it. Instead, what they did is that they pre-purchased doses even before we knew they were going to work in order to fast track manufacturing facilities so production could occur quickly. This compressed the timeline considerably and helped us get the miracle of vaccines within a year. And not only one but many.
So when people decry the waiving of patent rights as claiming it is going to de-incentivise vaccine development, it is important to remember that it won’t do that because the patent system wasn’t doing that job in the first place. Indeed, in October, Moderna already told the world it would not enforce its patents during the pandemic.
On the flip-side, waiving patent rights is not going to get more vaccines into the hands of those who need it any faster. They weren’t and are likely not the main constraint. Instead, it is the ingredients and know-how to manufacture those doses which matters. It will take time for that technology to transfer.
In other words, this is not news although it does signal a virtue.
[What is more concerning is the EU suing AstraZeneca. That was a deal made in lieu of another mechanism and so you have to worry about the adverse signal a dispute ending up in the courts sends.]
What really matters
Here’s what I worry about: waiving patent rights will be seen as helping and reduce pressure to really help. What really matters is to use wealth to manufacture doses more quickly.
People in the know realise this:
Luciana Borio, MD @llborioSadly, this action won't help get more vaccines available to the world. There is no reason to celebrate. We wouldn't have our amazing vaccines without U.S. innovative companies. These vaccines are hard to develop and manufacture, and our companies do that most efficiently. https://t.co/dKgWEQSWOm
Here’s the actual problem:
Even when we do the US, Canada and Europe, we are talking about a small fraction of the world vaccinated. What doesn’t show up here, for instance, is China. There are issues associated with their own vaccine candidate which, at the start of the pandemic, could easily have gone the other way around. No one knew what would work.
What really matters is dollars to produce doses and ship them out. That may well be assisted a little by waiving patent rights as it would allow, say, China to manufacture doses (something they would likely do anyway) but do so officially and without the threat of WTO action on other fronts. In other words, some future consequences are stripped away but the real outcomes are approximately the same.
But the real constraints are in supply bottlenecks. Alex Tabarrok provides an overview of those. He concludes:
What can we do to increase supply? Sorry, there is no quick and cheap solution. We must spend. Trump’s Operation Warp Speed spent on the order of $15 billion. If we want more, we need to spend more and on similar scale. The Biden administration paid $269 million to Merck to retool its factories to make the J&J vaccine. That was a good start. We could also offer Pfizer and Moderna say $100 a dose to produce in excess of their current production and maybe with those resources there is more they could do. South Africa and India and every other country in the world should offer the same (India hasn’t even approved the Pfizer vaccine and they are complaining about IP!??) We should ease up on the DPA and invest more in the supply chain–let’s get CureVac and the Serum Institute what they need. We should work like hell to find a substitute for Chilean tree bark. See my piece in Science co-authored with Michael Kremer et. al. for more ideas. (Note also that these ideas are better at dealing with current supply constraints and they also increase the incentive to produce future vaccines, unlike shortsighted patent abrogation.)
Bottom line is that producing more takes real resources not waving magic patent wands.