Friday, October 08, 2004

Re-importation, follow up

There were lots of interesting comments on the original post about prescription drug re-importation. One commenter noted that the patent argument may be a red herring. Here is why I think that the issue ultimately becomes one of honoring patents.

The drug companies are willing to sell in foreign countries closer to their marginal cost--and yet still continue in the market year after year--because the United States already allows them enough patent protection to cover their fixed costs by selling domestically. The foreign countries are "free riding" on the American consumer's willingness to do this.

To continue the idea, suppose that re-importation were allowed from Canada. The drug companies would act to curb their exports to Canada to protect their patent. The Canadian government would now face shortages of the drug and, I am guessing a bit here, would abridge the patent by producing the drug itself. That threat is what strengthens the foreign government's hand in the negotiations.

Unlimited re-importation is not a stable outcome in a dynamic sense. It is true that limited re-importation would initially lower some prices for some consumers in the United States and raise it for some consumers in other countries. But it would do so in a haphazard and circuitous way. Smaller price differentials would still exist, and not everyone would be able to buy re-imported drugs at the cheaper price. Shortening the patent period--and getting the foreign countries to honor that patent period--achieves the same type of result for price changes but does so in a more sensible way. That's why it is a policy that we should be pursuing, in cooperation with our trading partners.


bigmustelid said...

Ok I don't get it. Please correct me if I am wrong.

Amgen makes Enbrel. Enbrel costs $30K/year for normal dosage in US. Amgen manufactures the drug in the US. Amgen then exports some of it into Canada where it is sold (let's say) for $10K/year - because of the reasons you explained. Ok so far?

Now - re-importation means bringing the US-manufactured Enbrel *back* from Canada into the US in order to pay less? Does this even make sense? Why would Amgen *ever* agree to that? Why can't it make its sales to Canada conditional on the fact that only Canadians can buy it - and have Canadian government enforce this, or no Enbrel for Canda at all? What reason would Amgen have NOT to do that?

As for the patent stuff - yes, Canada could throw all patents laws in the dumpster and start manufacturing all the drugs itself (don't think it would be able to manufacture Enbrel, though - it takes more than a patent to do that, it is an extremely tedious, difficult and involved process). Don't think it would though - it would be extremely detrimental to the country to do that. International patent laws exist for a reason, and countries that accept them mutually benefit from them.

Andrew Samwick said...

I think your understanding of the issue is right. The key question is whether Amgen can stipulate that sort of conditionality on the sale of its product and have it supported. It works only if Canada cannot produce the drug on its own. In your example, that barrier to competition is what preserves Amgen's patent (rather than a legal obligation to do so).

bigmustelid said...

In Enbrel's case - yes. But come on, Andrew, Canada also has pharmaceutical companies. It also has quite a few technology companies. If Canada starts to violate patent laws, what prevents US and other contries from ignoring Canadian patents? There is no way Canada can afford to allow things to get to that point - and neither can any other developed country.

Anonymous said...

Canada actually has a history of ignoring pharmaceutical patents. Until 1992, they did so regularly using compulsory licensing. (See the link

Compulsory licensing is allowed under the TRIPS in the event of a "national health emergency." Some developing countries are using this clause as a weapon in their negotiations with pharma companies (Brazil is one example that comes to mind).

The CL loophole applies to developed countries as well. Suppose a pharma company says to France that they are not going to provide a new blockbuster, lifesaving drug to them. France has the right under international law to argue that they face a national health crisis and can start producing the drug without regard to patent status. That seems like a lot of negotiating leverage for the French. Unless of course it is a product like Enbrel where the production process is difficult to replicate.