Working Paper Series,
Research Institute of Industrial Economics

Abstract: The poorest nations of the world suffer from extreme disease burdens, which go largely untreated because weak incomes and the prevailing system of intellectual property rights fail to provide sufficient incentives to develop new treatments and distribute them at low cost. Recent price reductions for HIV/AIDS drugs are encouraging but offer only a limited solution. We discuss the economic tradeoffs involved in supporting drug and vaccine research through exclusive rights and distributing the fruits of that research to poor countries. We offer a proposal to overcome these incentive problems. Our DEFEND ("Developing Economies' Fund for Essential New Drugs") proposal would work within the existing international legal structure but significantly would raise the returns to R&D in critical medicines and expand distribution programs. A public international organization would purchase the license rights for designated areas and distribute the drugs at low cost with a required co-payment from local governments. Furthermore, governments would restrict parallel trade to support desirable price discrimination. Costs would be funded largely by increased foreign assistance from the developed nations, but these costs would be low in relation to current aid budgets. We believe a strong program could be mounted for $8 billion to $12 billion per year and would be an extremely effective use of foreign aid.

Keywords: Drug pricing; Essential medicines; Parallel imports; Developing countries; Patents

JEL-codes: F13; H51; H73; I12; I18

26 pages, May 2, 2001

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