Vanderbilt Law Review


F. M. Scherer

First Page



When I was a high school student during the late 1940s, the first so-called "wonder drugs"-initially penicillin and then the broad-spectrum antibiotics such as tetracycline-were entering the U.S. market. From their profitable experience developing the broad- spectrum antibiotics, the leading pharmaceutical companies of America and Europe acquired a strong research orientation that led to a cascade of new therapeutic entities, including additional anti-infectives, vaccines, diuretics, and then other agents to reduce heart attack risks, tranquilizers, antidepressants, birth control pills, anti-fungal agents, immuno suppressants, corticosteroids, AIDS inhibitors, powerful pain relief agents, and many other agents effective against specific diseases. Thanks to this pharmaceutical revolution, life spans have been prolonged, the incidence and duration of hospital stays have been reduced, and the quality of countless citizens' lives has been enhanced.'

The benefits of modern pharmaceutical therapy have accrued mainly to the citizens of the world's more prosperous nations. United Nations staff have estimated that average purchases per capita of modern pharmaceutical products (excluding traditional medicines) in 1990 (calculated at prevailing exchange rates) in diverse parts of the world were as follows: North America $123.90 European Community 102.90 Other Western Europe 85.70 Japan 276.60 South and East Asia 5.00 China 4.80 Latin America 20.30 Sub-Saharan Africa 3.30 A rough extrapolation of these figures reveals that the 73 percent of the world's 1990 population located in south and east Asia, including China, Sub-Saharan Africa, and Latin America, consumes only 16.2 percent of modern pharmaceutical output by dollar volume. One consequence of the inadequate purchasing power that limits such nations' ability to consume pharmaceuticals is a higher rate of morbidity and debility, which in turn impairs the growth of income so that pharmaceuticals can be afforded-a vicious cycle.

Nearly all of the research-oriented pharmaceutical companies responsible for innovations in drug therapy have their home bases in the United States, the European Community nations, or Japan, where demand is most intense and highly able scientists interacting with first-rate universities are at hand. Excepting those of Japan, the research-oriented pharmaceutical companies are among the most multinationally oriented enterprises in the world. Discovering a new drug and carrying it through the tests required to obtain marketing approval from regulatory agencies in the United States and Europe costs upwards of $100 million per successful new chemical entity. Once such a large investment has been made, there are powerful incentives to obtain requisite regulatory approvals in other nations and sell the product as widely as possible. Foreign markets are served both by exporting, often from a tax haven such as Puerto Rico, Ireland, or Singapore, and through direct plant investment in consuming nations. According to United Nations estimates, pharmaceutical imports averaged 8.2 percent of domestic consumption during 1989 in developed nations and 19.8 percent in less-developed nations. In 1980, approximately 27 percent of the world's demand was satisfied through local production by foreign-owned companies.4 Since then, the extent of multi-national operation has increased, in part due to numerous cross-border mergers. In 1995, members of the Pharmaceutical Research and Manufacturers of America trade association recorded prescription drug sales of $65 billion within the United States and $37 billion outside the United States.

Most of the R&D outlays incurred by pharmaceutical companies are made to discover therapeutically interesting molecules and prove their efficacy and safety through extensive human trials-i.e., to create knowledge that approximates what economists call a pure public good. Absent legal barriers to copying, once a drug has been found to be safe and effective, another firm might come up with a generic equivalent by spending roughly a million dollars on production process methods and formulation and begin to compete with the pioneering firm. If such generic imitation were widespread and rapid, surplus revenues that repay pioneers' initial R&D outlays and make them worthwhile would be severely eroded, undermining incentives to invest in research and product testing. Because of the huge disparity between drug finding and imitation costs, multi- industry surveys show, pharmaceutical manufacturers attach unusually high importance to the patent system, which in effect grants them 20 years of exclusive rights to their invention from the time a patent application is filed, as a means of recouping their R&D expenditures.