Thursday, February 1, 2007

You're Only Hurting Yourself, Thailand

By Brian Lawler
January 31, 2007

When I was in grad school, we were repeatedly bombarded with examples of governments making idiotic, short-sighted moves that hampered the long-term health of their economies and citizens. And now it appears that Thailand has made just such a gaffe. On Monday, Thailand's government announced that it was going to allow either the manufacture or importation of generic versions of Abbott's (NYSE: ABT) HIV treatment Kaletra and Sanofi-Aventis' (NYSE: SNY) blood clot drug Plavix, even though the drugs are still under patent protection and producing generic versions of them would be illegal in many countries.

Estimates of the savings on health-care costs in Thailand from this move are a measly $24 million a year, and with the Thai economy at almost $600 billion a year (the 21st-largest in the world) the savings will be peanuts. Meanwhile, the perception of how the country treats intellectual property rights and patents could be very costly.

In truth, this decision is not going to have a material impact on Abbott's and Sanofi's bottom lines. Kaletra sales were $1.1 billion last year and Plavix sales were $1.8 billion through the first nine months of the year, and the market for pharmaceuticals in Thailand is tiny compared to the rest of the world. It's the precedent that Thailand's proposal sets for other countries that is worrying for pharmaceutical firms.

While producing generic equivalents of these drugs might (it's still somewhat of a gray area) technically not be illegal -- Thailand is a member of the World Trade Organization, and developing countries have until 2016 to implement protections for pharmaceutical patents -- the country is still obligated to pay and negotiate licensing fees for the drugs, or else risk having a trade complaint filed against it.

Interestingly enough, discouraging pharmaceutical innovation with compulsory rules forcing the price of drugs down doesn't really help countries save on drug costs. The FDA has a white paper that shows that prices of generic drugs are cheaper in the U.S. than their Canadian-branded and generic counterparts, even though the U.S. gives stronger "incentives for R&D" spending.

There's a whole litany of reasons why artificially capping drug prices or circumventing payment for branded drugs under valid patent protections is a bad idea. It only takes a simple understanding of economics to know that the less revenue the pharmaceutical companies receive for their products, the less cash they have to plow back into the R&D of new and improved medicines. Places like Thailand that fail to realize this and attempt to save a buck in the short run really are hurting everyone in the long run, as these sorts of actions slow the pace of pharmaceutical innovation.

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