BY RICHARD A. EPSTEIN
Thursday, October 25, 2001 12:01 a.m. EDT
One time-honored maxim of the common law is that public necessity suspends ordinary property rights. The property owner could not resist the destruction of his own home or business if necessary to halt a raging fire that threatens the lives and property of many others. This standard view then adopted a split position on the matter of just compensation. If the home or plant destroyed was doomed to go up in flames whether or not the government intervened, then no compensation was owed. But if it were commandeered to prevent destruction when it was not in danger, then full compensation was required. One individual should not bear the full costs of action of benefit to the entire public.
Fast forward through the centuries, and ask how these time-honored should shape public policy over the use of ciprofloxacin to prevent the ravages of anthrax spread by terrorist attack. Bayer AG holds a valid patent on Cipro that expires in 2003 in the U.S. and in 2004 in Canada. As a spur to invention, patent bargains in both countries give the patent holder the exclusive right to produce its invention for limited time, after which it falls into the public domain. Bayer remains exposed to competition by any rival drug company that produces a distinct but superior substitute for Cipro, but is protected against a generic's sale of its product during the patent period.
How then does an unanticipated spike in demand wrought by terrorist acts alter this fundamental equation? There are only three possibilities. One is to take over the production of Cipro without compensation; a second is to break the exclusivity of the patent by freely allowing other firms to make it, with a compulsory fee to Bayer; a third is to do nothing at all. In principle the first possibility should be ruled summarily out of bounds, for no one can imagine how Bayer's patent is doomed with or without government intervention. Nonetheless, first in Canada, and now in the United States, both governments appear to treat the current indisputable crisis as a justification to break, or least bend, these patents, without compensation.
In the initial foray, the Health Canada ordered one million tablets of Cipro from generic drug manufacturer Apotex Inc., at 1.50 Canadian dollars (95 U.S. cents) a pill, below the previously prevailing C$2.50, with no compensation to Bayer Health Canada justified its position, falsely as it turned out, by claiming that Bayer would be unable to supply Cipro in sufficient quantities to meet the dangers of a terrorist threat. Once chastened, its health Minister Allan Rock then backed off when a furor arose this crude assault on the patent system.
A similar scenario has played out in the U.S., only in reverse. Health and Human Services Secretary Tommy Thompson at first defended the sanctity of the patent system only to extract from Bayer a long-term contract for the sale of Cipro at a new low price ($1.00 a pill, below the $1.83 Bayer sought, and far below its $4.67 wholesale price to pharmacies). It is an open secret that Mr. Thompson threatened to purchase generic equivalents from outsiders. It is equally clear that wholly without resorting to this threat he had powerful leverage in price negotiations with Bayer, just as any other volume purchaser whom a monopolist can cheaply provide.
How to sort out this sorry mess? Had Bayer been left to its own devices, it would have sharply upped production of Cipro. But the moment the government enters the market as a buyer as opposed to a regulator, then it must agree on price without, one hopes, threatening to break the law. Nor is there any doubt that the United States has the power to require compulsory licenses from Bayer if it determines that lagging production requires output from other (generic) sources. Thus the dispute boils down to what price should be paid when the patent is undermined or circumvented.
The recent tendency, both here and in South Africa with AIDS, is to chip away at patent protection and to lowball the compensation offered. In the short run this approach plays well before a public when resources are stretched thin. But in the long term, our stock of pharmaceuticals depreciates, and it must be replenished. It takes over a $250 million to bring a new drug to market today, and the revenues derived from a successful drug must cover not only its cost of production, but the costs of experimenting with promising products that never make it to market at all. We rightly do nothing to socialize the costs of pharmaceutical research that leads nowhere. Why then take away the fruits of a high side?
No one doubts the right (indeed the duty) of the government to issue compulsory licenses with reasonable royalties when patent holders cannot gear up production to meet immediate demand when disaster strikes. No one doubts government's right to bargain hard for low prices; nor to distribute Cipro at or below cost to those in need. But threats to break the law sit no better than threats to confiscate land in times of public necessity. We shall all pay dearly for our present victories if some unknown drug company decides to abandon or scale back its efforts to develop the next Cipro out of fear that its success invites the same icy reception that Bayer received in our hour of need.
Mr. Epstein is a professor at the University of Chicago Law School and a senior fellow at the Hoover Institution.
