Boston University School of Law Scholarly Commons at Boston University School of Law Faculty Scholarship 2005 Pharmaceutical Arbitrage: Balancing Access and Innovation in International Prescription Drug Markets Kevin Outterson Boston Univeristy School of Law Follow this and additional works at: https://scholarship.law.bu.edu/faculty_scholarship Part of the Health Law and Policy Commons Recommended Citation Kevin Outterson, Pharmaceutical Arbitrage: Balancing Access and Innovation in International Prescription Drug Markets, 5 Yale Journal of Health Policy, Law & Ethics 193 (2005). Available at: https://scholarship.law.bu.edu/faculty_scholarship/400 This Article is brought to you for free and open access by Scholarly Commons at Boston University School of Law. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Scholarly Commons at Boston University School of Law. For more information, please contact [email protected]. 193 ART_OUTTERSONV5 12/25/2004 4:45 PM Pharmaceutical Arbitrage: Balancing Access and Innovation in International Prescription Drug Markets Kevin Outterson, J.D., LL.M.* INTRODUCTION The price of prescription drugs lies at the heart of two major public health issues: distributing antiretroviral medicines for use against the global AIDS epidemic and purchasing medications from Canada by U.S. consumers using the Internet. Both situations highlight the need to reduce financial barriers to access to medications, while maintaining incentives to promote pharmaceutical innovation. For better or worse, the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)1 is a global nexus for drug access issues.2 In TRIPS-related * Associate Professor of Law, West Virginia University College of Law. Special thanks to the American Society of Law, Medicine & Ethics September 2003 Health Law Young Scholars Workshop and the West Virginia University College of Law Faculty Workshop for helpful comments and suggestions. This research was supported by a Hodges Research Grant from the West Virginia College of Law. An early draft of this Article was prepared during my tenure as a Visiting Fellow at the Lauterpacht Research Centre for International Law at the University of Cambridge. Helpful comments were received from many people, including Frances Miller, Ben Moulton, Charity Scott, Ana Iltis, Timothy D. McBride, Thomas Greaney, Jesse Goldner, Sidney Watson, Sandra Johnson, Nicolas Terry, Aidan Hollis, and Andrew Farlow, as well as from participants at the New Economic Windows 2004 conference in Salerno, the symposium at the University of Connecticut School of Law (October 2004), The Canadian Conference on International Health (October 2004), and the Global Forum for Health Research Forum 8 Conference in Mexico City (November 2004). 1. See Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, art. 27.1, LEGAL INSTRUMENTS–RESULTS OF THE URUGUAY ROUND vol. 31, 33 I.L.M. 81 (1994) [hereinafter TRIPS or TRIPS Agreement]. The United States implemented the WTO agreements in the Uruguay Round Agreements Act, Pub. L. No. 103-465, 108 Stat. 4809 (1994). 2. The story of how the WTO TRIPS Agreement became the de facto forum for these 193 193 ART_OUTTERSONV5 12/25/2004 4:45 PM YALE JOURNAL OF HEALTH POLICY, LAW, AND ETHICS V:1 (2005) discussions, two sets of arguments are usually forwarded. Some argue that pharmaceutical prices are necessarily high because innovation is expensive.3 They posit that the research and development (R&D) enterprise must be nurtured by high prices to yield the next generation of breakthrough therapies.4 Others counter that much of the profits going to pharmaceutical companies5 are used for marketing and other expenses issues has been told by many authors. Among the best accounts are books by Peter Drahos and John Braithwaite, Susan Sell, and an article by Laurence Helfer. PETER DRAHOS WITH JOHN BRAITHWAITE, INFORMATION FEUDALISM: WHO OWNS THE KNOWLEDGE ECONOMY? (2002); SUSAN K. SELL, POWER AND IDEAS: NORTH-SOUTH POLITICS OF INTELLECTUAL PROPERTY AND ANTITRUST (1998); SUSAN K. SELL, PRIVATE POWER, PUBLIC LAW: THE GLOBALIZATION OF INTELLECTUAL PROPERTY RIGHTS (2003); Laurence R. Helfer, Regime Shifting: The TRIPS Agreement and New Dynamics of International Intellectual Property Lawmaking, 29 YALE J. INT’L L. 1 (2004). 3. See, e.g., Harvey E. Bale Jr., Patents, Patients and Developing Countries: Access, Innovation and the Political Dimensions of Trade Policy, in THE ECONOMICS OF ESSENTIAL MEDICINES 100, 102-04 (Brigitte Granville ed., 2002) [hereinafter ECONOMICS OF ESSENTIAL MEDICINES]. Dr. Bale is the Director-General of the International Federation of Pharmaceutical Manufacturers Association. 4. ANDY SCHNEIDER, TAXPAYERS AGAINST FRAUD EDUCATION FUND, REDUCING MEDICARE AND MEDICAID FRAUD BY DRUG MANUFACTURERS: THE ROLE OF THE FALSE CLAIMS ACT 47 (2003) (“Pharmaceutical manufacturers have long maintained that government price controls will thwart the development of vital new drugs with the potential to cure diseases and relieve human suffering. The desired alternative, they argue, is a vigorous free market, with prices set through negotiations between buyers and sellers. For this market to work effectively, manufacturers contend, they must retain the right to keep their prices confidential from competitors.”). 5. In this Article, the terms “pharmaceutical companies” and “PhRMA companies” refer to the research-based pharmaceutical companies that are members of the PhRMA trade association. Pharmaceutical companies have traditionally been categorized as either research companies (e.g., Pfizer, Merck) or generic companies without significant research programs (e.g., Mylan Labs, Cipla Ltd.). The United States trade association of research pharmaceutical companies is the Pharmaceutical Research and Manufacturers of America (PhRMA). See Pharmaceutical Research and Manufacturers of America, at http://www. phrma.org (last visited Oct. 20, 2004). The international trade association of PhRMA company groups is the International Federation of Pharmaceutical Manufacturers Associations (IFPMA). See International Federation of Pharmaceutical Manufacturers, at http://www.ifpma.org (last visited Oct. 20, 2004). Generic drug companies have their own trade associations, such as GPhA, at http://www.gphaonline.com (last visited Oct. 20, 2004). In recent years, these distinctions have blurred as research companies have invested in generic subsidiaries and as generic companies have begun substantial research programs. It may sometimes be more accurate to describe research or generic lines of business, rather than companies per se. 194 193 ART_OUTTERSONV5 12/25/2004 4:45 PM PHARMACEUTICAL ARBITRAGE rather than for R&D6 and that without affordable access, innovation is a cruel taunt.7 New wonder drugs will not improve health unless patients are actually able to receive them. A pill you cannot afford is neither safe nor effective. Medicines, according to this argument, are not normal market goods to be distributed primarily to the wealthy.8 Nowhere are the arguments for the equitable distribution of medicines made with more force than in the AIDS treatment crisis. Differential pricing is one response to the tension between innovation and access with regard to AIDS medications: It permits antiretroviral drugs to be sold cheaply or donated in low income countries, while maintaining high prices in markets like the United States.9 In theory, high prices in high income countries can support innovation, while lower prices in low income countries improve access. However, differences in pricing—and thus opportunities for arbitrage—do not always reflect direct or voluntary efforts to facilitate access in developing countries;10 they may also result from diverse systems of government regulation and intervention and corporate efforts to maximize profit. The price of drugs is affected by domestic intellectual property (IP) laws, pharmaceutical reimbursement systems, and other legal systems specific to each country. As a result, for example, patented pills in Australia are often cheaper than their equivalents in Canada, which are in turn often cheaper than those in the United States. These pricing gaps create the demand for cross-border pharmaceutical parallel trade, or pharmaceutical arbitrage. It is alleged that if such trade is left unchecked, it will significantly reduce the financial gains reaped in certain countries, most prominently the United States, 6. See, e.g., Marcia Angell, The Truth About Drug Companies, N.Y. REV. BOOKS, July 15, 2004, at 51. 7. See, e.g., Ellen ‘t Hoen, TRIPS, Pharmaceutical Patents, and Access to Essential Medicines: A Long Way from Seattle to Doha, 3 CHI. J. INT’L L. 27, 29-30 (2002). 8. MÉDECINS SANS FRONTIÈRES, MSF CAMPAIGN BROCHURE 5 (2004), http://www.access med-msf.org/documents/campaignbrochure2004.pdf (“Medicines aren’t just any consumer goods.”). 9. A joint workshop was conducted in 2001 on differential pricing for essential drugs by the World Health Organization and the World Trade Organization, with substantial participation from global drug companies. The final report is published as WORLD HEALTH ORG., REPORT OF THE WORKSHOP ON DIFFERENTIAL PRICING AND FINANCING OF ESSENTIAL DRUGS: A WHO/WTO SECRETARIAT WORKSHOP (2001), http://whqlibdoc.who.int/hq/ 2001/a73725.pdf. A more concise summary of the final report was published in