Spread of Compulsory Licenses Threatens to Undermine Latin America’s Innovation Ecosystem

August 24, 2018

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

A wave of bad public policy is sweeping across Latin America in the form of compulsory licenses on novel pharmaceutical drugs, and it threatens to undermine the very ecosystem supporting the development of medicines designed to treat deadly diseases in the first place.

A growing number of countries, including Chile, Colombia, Ecuador, El Salvador, and Peru, have issued or are considering issuing compulsory licenses that force companies to relinquish the intellectual property behind a variety of drugs, including ones intended to combat diseases such as hepatitis C and HIV/AIDS. For instance, Colombia’s health minister, Alejandro Gaviria, has initiated two compulsory licensing processes against hepatitis C drugs; Chile’s legislature has passed resolutions demanding that its Minister of Health issue a compulsory license on the hepatitis C treatment sofosbuvir; and Peru’s Congress has introduced legislation that would demand issuance of a compulsory license on an innovative HIV treatment. Meanwhile, El Salvador’s health ministry is working on a proposal that it’s expected to introduce shortly that would modify intellectual property rules to make compulsory licensing easier there, too.

Policymakers in these countries contend that compulsory licenses are in the public interest because the price of the medicines in question are putatively too high. But the reality is that if they proceed with issuing such compulsory licenses they will actually inflict far higher costs on their own economies, while achieving little in terms of lowering drug prices or expanding access to innovative medicines.

Unfortunately, Latin American policymakers’ dangerous move toward compulsory licenses threatens to inflict lasting damage on the Latin American innovation ecosystem, and not just in the life sciences, but across all innovation-based sectors. That’s because, if governments elect to forcibly appropriate others’ intellectual property, innovators—whether individual entrepreneurs or large commercial enterprises—will have little incentive to invest in the risky, complex, difficult, and expensive process of innovating new products, whether they are new pharmaceutical drugs or other technologies in sectors like clean energy or agriculture. And if a government demonstrates that it’s willing to appropriate the intellectual property behind a novel pharmaceutical drug—often asserting the dubious justification that it’s too expensive—then it may be willing to do the same for new types of solar panels or lithium-ion batteries (as India has explored), or for more drought or insect-resistant forms of crop seed.

For developing countries, the effects of compulsory licenses are especially pernicious when it comes to the life sciences. That’s because many of the world’s most promising medicines, for non-communicable and infectious diseases alike, are being innovated elsewhere and sold in-country. If Latin American governments are going to issue compulsory licenses on the novel intellectual property introduced in their countries, then the reality is that companies are going to refrain from or delay introducing the most cutting-edge technologies in these countries, and so these governments are going to own responsibility for denying their own citizens’ access to the latest, life-improving or saving medical technologies. For instance, a study of 642 new drug launches in 76 countries from 1983 to 2002 found that the speed and extent of drug diffusion was strongly associated with countries’ patent (and price-regulation) regimes and that countries moving from a regime of “no product patents” to “long product-patent terms” reduced drug launch lag times by 55 percent. As taking a company’s patent is effectively the same as offering no patent (in the sense that it reflects an environment that fails to protect intellectual property), it’s only reasonable to infer that countries will be self-imposing significant drug lags on themselves.

And again, it’s not just in the life-sciences sector that developing nations harm themselves when issuing compulsory licenses. Indeed, as research by Lee Branstetter and others has shown, multinational firms tend to increase innovation-oriented activities such as research and development (R&D), technology transfer, and foreign direct investment in countries that enact intellectual property reforms. Multinational companies thus play an important role as conduits facilitating the flow of productive ideas across national borders, and in so doing help to close the “ideas gaps” in developing countries. Countries that choose to implement compulsory licenses are electing to forestall this flow of ideas, knowledge, and technologies, not just in the life sciences but across all advanced-technology sectors.

Put simply, compulsory licenses represent a poor instrument in dealing with public health challenges. As the Information Technology and Innovation Foundation (ITIF) and the Center for the Protection of Intellectual Property (CPIP) demonstrated in our joint report Innovate4Health: How Innovators Are Solving Global Health Challenges, developing-country policymakers’ best response to local (and global) health challenges lies in unlocking their own societies’ potential for biomedical innovation by creating the conditions—including robust intellectual property rights and enforcement, investments in scientific research, education in biomedical fields, streamlined drug approval processes, etc.—that can encourage innovators and entrepreneurs to tap into the rich ecological and biological diversity of Latin American countries as a platform for innovation. Indeed, numerous studies, including ones by the Global Innovation Policy Center and Pugatch Consilium, have found a strong connection between the strength of a country’s intellectual property regime and its capacity for biotechnology innovation, whether in clinical trials or R&D activity toward the development of new pharmaceutical or biologic drugs. For example, Brazil’s introduction of stronger patent rights in the late 1990s to become eligible for TRIPS (the agreement on Trade-Related Aspects of Intellectual Property Rights) led to a flourishing of local biotechnological innovation. Spurring local innovation, promoting competition by approving multiple types of treatments (such as for hepatitis C), promoting greater access to public healthcare to facilitate earlier detection of health risks, or entering into good-faith price negotiations all represent far more effective public policy choices than issuing compulsory licenses on novel pharmaceutical drugs.

Finally, it’s worth noting that policymakers’ focus on drug costs is often misplaced in the context of the overall value those medicines can produce for society. For instance, Frank Lichentenberg’s study, “Pharmaceutical Innovation and Longevity Growth in 30 Developing and High-income Countries,” found that from 2000 to 2009 pharmaceutical innovation accounted for 73 percent of the increase in life expectancy at birth in 30 countries (1.27 years of the 1.73 year increase). Indeed, the invention of innovative new drugs, in addition to more reliable access to them, is a significant part of the reason why life expectancy at birth in Latin American countries has increased by more than 35 percent over the past half-century, from 56 years in 1960 to 76 years in 2016. Innovative drugs contribute to healthier, more productive societies and can play an important role in helping manage chronic diseases that otherwise can contribute to absenteeism or preclude work opportunities. (For instance, it’s estimated that 40 percent of Mexicans who have sought employment in the country’s automobile factories were physically unable to work in those environments.) In the United States, improvement in life expectancy from 1970 to 1990 added $2.8 trillion to the country’s productivity, equivalent to $12,000 per U.S. citizen per added year of life expectancy. That’s the prism through which policymakers should be examining the cost of innovative drugs—through the tremendous value they are poised to contribute to societal welfare and productivity, not as targets for the forced expropriation of hard-earned intellectual property.