Closing Case Political, Legal, and Ethical Dilemmas in the Global Pharmaceutical Industry
The $900 billion global pharmaceutical industry is dominated by about ten firms; five are headquartered in the United States, two in the United Kingdom, two in Switzerland, and one in Israel. Examples include GlaxoSmithKline (United Kingdom, www.gsk.com), Novartis AG (Switzerland, www.novartis.com), Teva (Israel, www.tevapharm.com), Merck (United States, www.merck.com), and Pfizer (United States, www.pfizer.com). Europe and the United States account for roughly 25 percent and 50 percent of worldwide pharmaceutical sales, respectively. The industry is confronted with several challenges.
High Cost of Research and Development
Pharmaceutical firms engage in large-scale, intensive R&D to create and market drugs meant to treat everything from cancer to hair loss. Thousands of pharmaceutical drugs allow people to live longer and healthier lives. Europe and the United States are home to the major pharmaceutical firms and to industry R&D. They benefit from strong patent protection laws and abundant investment capital. According to industry statistics, it takes 12 to 15 years, and more than $800 million in R&D expense, to successfully bring a new pharmaceutical compound to market. Only 1 in 10,000 investigated and tested compounds is approved for patient use. Only three out of every ten new, approved compounds are successful enough to recover their R&D costs. For their successful products, pharmaceutical firms must charge prices high enough to recover not only the high costs of product development, but also to recover the cost of products that never achieve profitability.
Limited Protection for Intellectual Property
Governments grant patents and provide other types of protections for intellectual property. In practice, such protection is frequently inadequate, especially in developing countries. India has a history of weak intellectual property protection, which has discouraged R&D and innovation. It is one of the world’s poorest countries, and very few of its citizens can afford health care or medications. In 1972, a major revision to the Indian Patent Act revoked all patents for medicines. Following this dramatic shift, foreign-branded pharmaceutical manufacturers abandoned India, and numerous pharmaceutical “chop shops” emerged. The new firms freely infringed on drug patents and engaged in a selling “free-for-all” in the huge Indian pharmaceutical market. They reverse-engineered patented compounds developed by European and U.S. companies and began selling the pirated generics at drastically lower prices. The foreign pharmaceuticals launched legal actions against these violations but, in the absence of strict patent protection and with little local competition, India’s generic drug manufacturers flourished.
The Challenge from Generic Brands
Under World Trade Organization (WTO) rules, a patent protects a drug inventor from competition for up to 20 years. In reality, when the lengthy testing and approval phase is factored in, the effective life of a drug patent is often less than 12 years. The manufacturer typically has only 5 to 8 years of patent protection in which to recover its investment before generic manufacturers can legally enter the market. Once a patent expires, generic manufacturers have the right to produce medications originally invented by major pharmaceuticals. Generic manufacturers typically sell the medications that they produce at very low prices. Patent protections are important because they encourage innovation by allowing inventors a limited opportunity to recover their R&D investments. However, patent protection laws governing pharmaceuticals differ substantially around the world.
A branded compound is produced under patent protection by a pharmaceutical manufacturer that has undertaken expensive R&D to invent the drug. Each year, pharmaceutical firms typically invest some 20 percent of revenues into R&D to invent new compounds. “Approved generic compounds,” manufactured in countries with strict bio-equivalency regulations, are comparable to branded compounds in safety, efficacy, and intended use. The main reason that generic manufacturers can charge lower prices is that they do not incur the high costs of R&D to develop new drugs. Because the medications are already established in the marketplace, generic manufacturers also incur substantially lower marketing and sales expenses.
In the world of generic drugs, Israel-based Teva is the largest manufacturer with global sales of more than $16 billion. Teva and other generic producers have greatly increased their world market share in recent years due to the patent expiration of leading medications and rising demand for medications in developing economies and countries with weak patent protection. In the United States alone, generic medications now account for over half of all dispensed prescriptions. Once a branded compound’s patent expires, generic manufacturers, after receiving government approval, begin producing generic versions almost immediately. Retail prices for the compound can fall by as much as 90 percent within 12 to 18 months.
Counterfeit Drugs
Many governments fail to ensure the quality of imported medicines. As a result, a growing industry of counterfeit and bio-inequivalent medications has emerged worldwide. A counterfeit ring from China supplied 1 million fake OneTouch Test Strips (used to treat diabetes) to hundreds of pharmacies in Canada, India, the United States, and numerous other countries. A healthy 22year-old woman in Argentina died from liver failure after receiving iron injections to treat mild anemia. The medicine she received was a highly toxic counterfeit. In Niger, some 2,500 people died after receiving fake vaccines for meningitis. Recently, European Union officials seized more than 35 million fake pills at ports around Europe, including drugs intended to treat malaria, cancer, cholesterol, and pain.
The United Nations estimates that sales of counterfeit pharmaceuticals exceeds $500 billion annually. Counterfeiting is greatest in countries where regulatory oversight is weakest. The WHO estimates that up to 30 percent of medicines sold in developing countries may be counterfeit. It is estimated that between 200,000 and 300,000 people die each year in China due to counterfeit or substandard medicine.
Internet-based pharmacies are especially dubious. A woman in Canada died of metal poisoning after taking a tainted prescription medicine obtained from an Internet pharmacy. MarkMonitor, an industry watchdog, found that only a fraction of several thousand online pharmacies it examined were legitimate. Many of the pharmacies claiming to be based in Canada and the United States were in fact traced to China, Russia, and India. It is estimated that over 50 percent of medicines sold through the Internet are fake—often containing no or too little of the active ingredient.
Because of the threats posed by counterfeit manufacturers, branded pharmaceutical firms spend significant resources to protect their patents and intellectual property around the world. Branded pharmaceutical manufacturers have pursued legal actions at the WTO and against individual nations. In 1995, the WTO’s agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS) was approved by approximately 150 WTO member countries.
Counterfeit Drugs
Many governments fail to ensure the quality of imported medicines. As a result, a growing industry of counterfeit and bio-inequivalent medications has emerged worldwide. A counterfeit ring from China supplied 1 million fake OneTouch Test Strips (used to treat diabetes) to hundreds of pharmacies in Canada, India, the United States, and numerous other countries. A healthy 22year-old woman in Argentina died from liver failure after receiving iron injections to treat mild anemia. The medicine she received was a highly toxic counterfeit. In Niger, some 2,500 people died after receiving fake vaccines for meningitis. Recently, European Union officials seized more than 35 million fake pills at ports around Europe, including drugs intended to treat malaria, cancer, cholesterol, and pain.
The United Nations estimates that sales of counterfeit pharmaceuticals exceeds $500 billion annually. Counterfeiting is greatest in countries where regulatory oversight is weakest. The WHO estimates that up to 30 percent of medicines sold in developing countries may be counterfeit. It is estimated that between 200,000 and 300,000 people die each year in China due to counterfeit or substandard medicine.
Internet-based pharmacies are especially dubious. A woman in Canada died of metal poisoning after taking a tainted prescription medicine obtained from an Internet pharmacy. MarkMonitor, an industry watchdog, found that only a fraction of several thousand online pharmacies it examined were legitimate. Many of the pharmacies claiming to be based in Canada and the United States were in fact traced to China, Russia, and India. It is estimated that over 50 percent of medicines sold through the Internet are fake—often containing no or too little of the active ingredient.
Because of the threats posed by counterfeit manufacturers, branded pharmaceutical firms spend significant resources to protect their patents and intellectual property around the world. Branded pharmaceutical manufacturers have pursued legal actions at the WTO and against individual nations. In 1995, the WTO’s agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS) was approved by approximately 150 WTO member countries.
Neglected Therapeutic Areas
A large portion of pharmaceutical research is focused on developing treatments for diseases that can return the cost of capital and generate profits. For these reasons, pharmaceutical firms tend to target the most attractive markets. For example, these firms are much more likely to develop a drug for cancer and central nervous system diseases (such as psychiatric ailments) than for ailments common to poor countries (such as tuberculosis). Some in the pharmaceutical industry believe that R&D is too costly and risky to invest in diseases common to poor countries.
At the same time, governmental and private initiatives have begun to address these market realities by providing incentive packages and public-private partnerships. For example, the Bill and Melinda Gates Foundation (www.gatesfoundation.org) is investing billions of dollars to fight AIDS, tuberculosis, and various infectious diseases that affect developing countries.
Public Scrutiny
The pharmaceutical industry’s actions are often subject to public scrutiny. For example, the government of South Africa got into a tussle with several manufacturers of branded AIDS drugs. Because of high prices, the government sanctioned the importation of nonapproved generics. The reaction from branded pharmaceutical manufacturers was to sue South Africa, which created an international backlash against the firms. Not only did the episode generate much negative publicity for the branded pharmaceutical firms, it made people more aware of the generic drug industry and its potential for helping those affected by the AIDS pandemic. In the wake of the South African debacle, Brazil and several other countries threatened to break patents if pharmaceutical firms did not make their drugs more affordable. In the interest of good public relations, several branded pharmaceutical firms began to offer their AIDS drugs at lower prices in Africa. In all, the pharmaceutical firms have developed at least eighty-eight medicines to treat AIDS and related conditions. The United States and various European governments have provided billions of dollars in subsidies to support AIDS treatment in Africa.
The Future
Without adequate intellectual property protection, the pharmaceutical industry has fewer incentives to invent new drugs. At the same time, consumers in poor countries need access to drugs but can’t afford them. Lax intellectual property laws facilitate the production of cheap generic drugs, but without these protections, major pharmaceutical firms have fewer incentives to fund the R&D that results in new treatments for the diseases that plague the world.
Case Questions
- Specify the types of country risks that pharmaceutical firms face in international business. How do the political and legal systems of countries affect the global pharmaceutical industry?
- People need medications, but the poor often cannot afford them. Governments may not provide subsidies for health care and medications. Meanwhile, pharmaceutical firms focus their R&D on compounds likely to provide the best returns. What is the proper role of the following groups in addressing these dilemmas: national governments, branded pharmaceutical firms, and generic manufacturers?
- Consult www.phrma.org, The Pharmaceutical Research and Manufacturers of America. What steps is the branded industry taking to address the various ethical issues it faces, such as providing affordable drugs to poor countries?
- Consult the TRIPS agreement at the WTO portal (www.wto.org). What are the latest developments regarding this treaty? What types of protection does this treaty provide to pharmaceutical firms? What enforcement mechanisms does TRIPS provide for ensuring that these protections will be carried out?
- Recommend a strategy that management at a large pharmaceutical firm should employ to reduce the likelihood of political and legal risks that such firms face. What steps should management take to minimize its exposure to such risks?