Author: Banri Ito, Research Associate, RIETI

The United States has announced its policy of supporting a proposed temporary waiver of intellectual property rights on COVID-19-related pharmaceuticals that was discussed at a meeting of the General Council of the World Trade Organization (WTO) on May 5-6, marking a policy reversal from its previous opposition to the waiver. It is said that behind this change of course is a growing tide of international criticism, mainly among developing countries, that the monopoly on vaccines by developed countries is impeding both equitable supply and the U.S. government’s attempt to counter the “vaccine diplomacy” being promoted by China and Russia. Will the policy reversal by the United States actually lead to an improvement in vaccine supply?

Will a Waiver of Intellectual Property Protection Promote Technology Transfer?

Regarding waivers of vaccine patents, there have been some voluntary initiatives. On October 8, soon after South Africa and India proposed a waiver of the TRIPS agreement on October 2, 2020, Moderna, a U.S. pharmaceutical company, expressed its intention not to exercise its patent rights on its COVID-19 vaccine (Note 1). Although Moderna has reached an agreement with South Korean pharmaceutical company Samsung Biologics on consignment production of the vaccine on May 22, 2021, however, so far, there have been very few confirmed cases of efforts to reproduce Moderna’s vaccine or of licenses being granted to other companies.

With respect to the COVID-19 vaccines developed by Pfizer (jointly with BioNTech of Germany) and Moderna, it appears that the whole body of relevant technical knowledge has not necessarily been patented but that some of the technical knowledge remains undisclosed as trade secrets. Patenting is only one means of ensuring “appropriability,” which refers to a company’s capacity to secure profits from its own technological innovation. While patent information may make it possible for outsiders to achieve development results similar to those achieved by the patented technology through a similar method without infringing the patent right, keeping the technology undisclosed as a trade secret or incorporating complex processes into it may be an effective means of ensuring appropriability. Pharmaceuticals can easily be counterfeited through “reverse engineering,” which refers to a process in which the active ingredients of a drug are identified as a result of deformulation. Therefore, as a general rule, it is considered important to exclude the risk of counterfeiting through patenting.

While it is not clear how much of the relevant technological knowledge remains unpatented, there are apparently some technical reasons for not obtaining full patent protection. The Pfizer and Moderna vaccines use advanced technology based on messenger RNA (mRNA), representing the first case of practical application of such technology. Although I, a non-expert in this field, will refrain from going into further detail, it is highly likely that those vaccines cannot easily be counterfeited as their production requires complex production processes and unique technology.

Patenting involves public disclosure of technical knowledge, providing information on how to reproduce patented inventions. It has the function of lowering technology trade costs by clarifying property rights on technical knowledge. If the technical knowledge necessary for manufacturing a certain product remains undisclosed as a trade secret, it may not be recorded in a written or other tangible form, and it may become necessary to pass down the technical information as cumulative implicit knowledge. As a result, technology transfer may become difficult.

Perhaps in view of that risk, in April 2021, the World Health Organization (WHO) established a COVID-19 vaccine technology transfer hub as a scheme to promote the sharing of mRNA-based technology. However, there are no media reports to date indicating that technical knowledge has been provided through this scheme (Note 2).

Given the “economies of scope” entailed in the development of pharmaceuticals, mRNA-based advanced technology may become applicable to other common diseases in the future. The scope of the proposed TRIPS waiver under discussion at the WTO extends beyond patent protection to include the protection of industrial designs, copyrights and undisclosed information (Note 3). However, even if the waiver of the TRIPS agreement is applied to the Pfizer and Moderna vaccines, it remains unclear for the moment how much of the undisclosed information regarding unpatented elements will be disclosed in order to facilitate technology transfer to developing countries.

Will Equitable Vaccine Supply Be Realized?

If technical knowledge regarding patented vaccines is disclosed and if it becomes possible to produce the vaccines in third-party countries, as a general rule, a supply increase would bring benefits to consumers as the elimination of a monopoly lowers prices. Among past cases, we should look at the application of the waiver of the WTO TRIPS agreement to drugs to treat HIV/AIDS in 2001. According to an estimate by Doctors Without Borders, the prices of patented drugs dropped to less than a tenth of the previous level in one year, improving access to the drugs around the world (Note 4). Given that the principle of competition works, access to the COVID-19 vaccines is expected to improve.

On the other hand, the successful experience of the waiver applied to the HIV/AIDS drugs may be hard to replicate if, as the pharmaceutical industry argues, developing countries lack the technology necessary for producing and managing the vaccines, if a rapid increase in demand for the raw materials of the vaccines disrupts production around the world, or if restrictions are imposed on exports of the raw materials (Note 5). Moreover, even if a patent waiver is applied, unrestricted dispersion of production sites would be inefficient given that the principle of economies of scale applies when fixed costs (costs of factories, storage facilities, etc.) for vaccine production are enormous. The most efficient method would probably be to concentrate production in a smaller number of particular countries with sufficient production capacity and export the vaccines from there.

Impact on Japan and Japan’s Position

For Japan, where vaccination is lagging behind, it would be desirable if a waiver of the protection of intellectual property rights on the COVID-19 vaccines led to an improvement in vaccine access. However, the proposed temporary waiver of the TRIPS agreement is primarily intended to assist countries with poor access, and therefore, the impact on Japan, which has concluded purchase contracts to cover most of its needs, will be limited. Rather, Japan, which has maintained opposition to the proposed waiver, must consider what action to take in response to the United States’ policy reversal (Note 6).

As Japan is preparing to realize the supply of Japanese vaccines now under development, the country will face a difficult decision between the need to secure development incentives and the expectations for the waiver. Even if the waiver of the TRIPS agreement is applied only to U.S.-developed vaccines, vaccine producers in other countries, including Japan, are expected to be negatively affected by it, due to the fact that, as a general rule, it would be desirable for producers if prices remain high across the market. However, if price competition occurs in an oligopolistic market like the market for the COVID-19 vaccines, in which the number of vaccine producers is limited, a price cut by a producer will force other producers to lower their prices as well.

As vaccine projects are subject to externalities, they are prone to the problem of supply shortages (Note 7). As shown by the announcement of a governmental procurement plan for domestically-developed COVID-19 vaccines on May 13, it is important to secure incentives for the development of domestic vaccines in order to prepare for future pandemics. On the other hand, unless the COVID-19 pandemic is contained everywhere in the world, prospects remain dim for the normalization of the Japanese economy, which is internationalized in all aspects. Japan must continue to lead efforts to strengthen the COVAX Facility (COVID-19 Vaccine Global Access Facility) (Note 8), an international framework for promoting equitable access to vaccines, including domestic access (Note 9), while minimizing negative impacts on innovation.

Read the article on the RIETI website or in Japanese.

Image taken by Ali Raza and sourced from pxhere.