Our drug discovery system seems broken

COVID-19 is causing odd behaviour on the part of some firms. Drug companies with remedies to sell, or who hope for a remedy or vaccine, are making conciliatory gestures of great generosity in the markets for their products. Gilead Sciences Inc. has one of the most promising treatments, Remdesivir. It petitioned the U.S. Food and Drug Administration to retract the “orphan drug” designation benefiting Remdesivir and in any event has waived the exclusive rights, tax deductions and regulatory benefits that attend that designation, which allows preferential treatment of drugs for rare diseases. It also has said it will provide its entire 1.5 million dose supply at no cost to patients with the most severe symptoms. AbbVie, responding to Israel’s compulsory licensing of its product, Kaletra, to treat COVID-19, has pledged not to defend its patent rights to the product anywhere. Johnson & Johnson has pledged to make any vaccine it discovers available on a not-for-profit basis. Medtronic has provided competitors with the rights and plans to make its ventilators.

Firms are supposed to maximize shareholder value. Nothing more. It is difficult to see how these firms’ decisions do that, at least in the short term. The cause for their apparently paradoxical behaviour may be rooted in the politics of defending the intellectual property system we rely on for drug discovery in societies that are increasingly hostile to private enterprise.

Hostility is evident in the compulsory licensing measures many countries have implemented, often specifically in response to the pandemic. In Bill C-13, Canada put in place a very limited provision under the Patent Act to allow government to issue a compulsory licence to a pharmaceutical company’s patents and empower a third-party supplier to make the drug to respond to a public health emergency. Many countries have done the same, to varying extremes and degrees of enthusiasm. Commentators and politicians in Canada, the U.S. and abroad are seizing on the pandemic to agitate for a return to the continual threat of compulsory licensing to control drug prices. But because pharmaceutical companies are expressing willingness to share manufacturing capacity, there may be little need to exercise this power to confiscate rights by compulsory licence.

A moment’s reflection makes clear that, now more than ever, we should want drug companies to be able to charge high prices. Why? To motivate and fund research that could ultimately preserve our lives. Faced with such an urgent need as this pandemic, we want our medical research capacity to respond mightily. It is most likely to do so if a “bonanza” could result. Not because of greed: medical researchers more than most professionals are motivated by a love of and dedication to their vocations. But drug and vaccine development take vast amounts of investment capital, at very high risk. People provide that capital on the expectation of financial return. This is particularly so in an economically stressful time such as we are in.

No existing COVID-19 treatment is yet proven to work. We are still learning how the disease affects the body. Many doctors are unconvinced even that ventilators are beneficial, at least in many cases. Over 170 treatments and vaccines are under investigation. This is fantastic: the system is responding exactly as we would wish.

So why are companies pledging to forgo at least some of the reward for their efforts? I don’t doubt that many of these companies are motivated by public-spirited generosity. But their generosity may have unintended, anti-competitive consequences. In terms of effects, selling at cost may produce results little different from predatory pricing. In a market satisfied by extremely low-cost goods, what incentive remains for new entrants?

But it is precisely these new entrants that we need. Most drug research is now done by small firms. These smaller companies attract capital and expertise mainly in the anticipation of a payoff from acquisition of the product or, indeed, the company, by a large company. But if larger companies pledge not to sell a product above cost, that incentive structure collapses. They will have no incentive to acquire the smaller company — at least, not at a high valuation. Investors will see the payoff to investing in the small company to be much less likely and won’t invest. Highly qualified drug researchers will do something more profitable.

These private-sector concessions we have so far have been few and probably well thought out. Though overtly public-spirited, they likely are also strategically sound for the companies involved. But if they reflect, as I believe to some extent they do, fear of governments and the public, then we urgently need to re-examine our attitudes to the companies we rely on to save us from disease, for our anti-corporate spitefulness may cost us lives — of loved ones or even our own.

FIRMS ARE SUPPOSED TO MAXIMIZE SHAREHOLDER

VALUE. NOTHING MORE.

Financial Post Lawyer Richard C. Owens is a Munk senior fellow at the Macdonald-Laurier Institute and an adjunct professor at the University of Toronto faculty of law. This article is condensed from an online presentation sponsored by the Austrian Economics Center and Competere.