Use Patent Buy-outs instead of Waivers to Vaccinate the World against Covid-19

Germany, the European Union (EU) and the United Kingdom have effectively blocked the TRIPS patent waiver for Covid-19 vaccines that had first been demanded by India, South Africa and other poorer countries, then also by the US. Yet, some progress towards greater vaccine access has been made. At the World Health Summit in Rome, the EU and the pharmaceutical industry pledged greater support to the Covid-19 Vaccines Global Access Initiative (Covax) for poorer countries, with 3.5 billion doses of vaccine from Pfizer, Moderna and Johnson & Johnson by the end of 2022 and 100 million doses to be donated by the EU in 2021. At their summit in Cornwall, the G7 countries including the EU have pledged to donate a total of at least one billion doses. 

Shortly before, however, the EU alone had ordered an additional 1.8 billion doses of the BioNTech/Pfizer vaccine for its 450 million inhabitants, comprising less than six percent of the world's population. This is in addition to the 2.6 billion previously ordered from various manufacturers, of which more than ten percent have already been delivered and administered to approximately 50 percent of the adult EU population. 

This cannot be the right approach to overcome global inequality in the fight against the coronavirus. In the face of dangerous mutations, speed is now of the essence. It is therefore important to recognize that a much better strategy exists: a strong financial boost for Covax – transforming it into a potent global fund that acquires, by means of carefully designed auction processes, the patent rights to the most promising vaccines for poorer countries. Covax would use these rights to grant free manufacturing licenses to qualified vaccine and generic drug makers in countries of the global South. The list of particularly promising vaccines would presumably include AstraZeneca's vaccine, developed at Oxford University specifically for poorer countries, and the vaccine developed by Johnson & Johnson’s Janssen subsidiary in the Netherlands, which is claimed to provide full protection after just one dose, thus greatly simplifying the logistics. 

Focus on economic efficiency

Whether a global immunization campaign can succeed is also a question of economic efficiency. Social and economic inequalities can jeopardize it. Infectious diseases often spread more widely among poorer people and in poor countries as a whole and can then persist as a global threat. Equal access to vaccines is therefore essential and that means free of charge for the poor. But free delivery of course is not in the interest of private patent holders who are in the business to make money – and understandably need profits to recoup their, often steep, upfront investments into research and development.  

This dilemma can be overcome by a global fund using patent buy-outs to help provide free access to the poor while inducing vaccine developers to sell the selected patents voluntarily – by offering them a higher financial return on their investment than they could possibly earn in the temporary monopoly they enjoy when keeping the patents for themselves to exploit.  

Economic theory has long established auction schemes capable of determining a price for those patent rights that is both financially attractive to private sellers and still remains far below what the world gains in terms of returns to society from maximum protection against the virus when access to the vaccine technology is free.  Such a positive outcome – in which all sides win – can be achieved because without Covax's help, it would not be possible for vaccine developers, as patent holders, to privately appropriate a financial profit amounting to more than a rather small portion, estimated at well under one-twentieth, of the returns to society from worldwide immunization against Covid-19. 

Existing WTO incentive system is not sufficient 

A global incentive system for pharmaceutical innovation was first created in 1995 with the Trade-related Intellectual Property Rights agreement (TRIPS) as part of the World Trade Organization (WTO) treaty system. It rewards innovators by granting patent holders a worldwide monopoly on any sales, or production licenses, for up to 20 years. TRIPS also enables patent holders to set lower country-specific prices for the poor without having to fear that re-imports, the parallel trade that TRIPS prohibits, might put downward pressure on the higher monopoly prices set in rich countries.  

In poor countries, patent holders can make a profit as long as those countries accept a price above marginal cost. But amid significant inequality within many poor countries, a much higher degree of price differentiation within those countries, such as extensive first-degree price discrimination, would be required than is actually enforceable to generate private profits exceeding one-twentieth, or five percent, of the social value of population-wide immunization. 

Where do the five percent come from? Health economics research has long sought to determine both the size of returns to society from investments in pharmaceutical innovation and the percentage share of those returns that patent holders can privately appropriate. For example, a 2008 article in the Journal of Health Economics by Anupam Jena and Tomas Philipson of the University of Chicago reports estimates implying that in most cases, the private profits for patent holders were well below 25 percent of the social value they had generated in the US population. The private profit share tended to average around ten to 15 percent, and was even lower in infectiology. In the case of antiretroviral drugs introduced since 1995 for the treatment of HIV/AIDS patients, patent holders appropriated merely five percent of their social value.  

Thus, even in the US, a country with a large home market and a long tradition of strong patent protection, the financial incentives for innovation do not appear to be particularly large. In other countries they are much smaller, and they also tend to be smaller for vaccines than for treatments in acute care. 

Furthermore, the private value of immunization to individuals not yet vaccinated, and thus their individual willingness-to-pay, tends to decrease as the population share of those already vaccinated increases. From a societal perspective, by contrast, an increasing population share of the vaccinated has an increasing value until herd immunity is reached – holding the prospect of controlling the disease at the population-level and making further pathogen mutations much less likely. When that is achieved, private demand for vaccines will likely fall and vaccine makers’ business decline. Thus, the private financial returns and the social gains from mass vaccination may not only diverge sharply, but they may even move in opposite directions over time as the campaign succeeds. 

Rich countries also benefit from successful immunization elsewhere

Because vaccinated individuals are not only protected themselves, but also help protect others and thus also strengthen economic activity, richer folks and rich countries as a whole also benefit from vaccinating as many of the world’s poor as possible. At the World Health Summit, the International Monetary Fund’s managing director, Kristalina Georgieva, predicted 40 percent of the boost to global economic growth of up to nine trillion dollars that a successful worldwide Corona vaccination campaign is expected to trigger would accrue to rich countries. 

From a global perspective, we do not have too strong, but generally far too weak financial incentives for the development of vaccines and treatments against infectious diseases. Should rich countries now change their attitude and endow Covax with an adequate budget, it could quickly demonstrate how targeted patent buy-outs and subsequent free licensing of vaccine technology would help eliminate access barriers among the poor without impairing the financial incentives for innovation created by worldwide patent protection. This might establish a model for fighting future pandemics and other infectious diseases – such as tuberculosis, which has long been killing between 1.4 and two million people per year in poorer countries like India. 

A slightly edited version of this article was published by Süddeutsche Zeitung on 6 June 2021. 

Coverfoto: © AMISOM Mkhtar Mohamed (Flickr)

The Kiel Focus series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.