Luis Currais University of La Coruña. Abstract

Transcription

1 Potential onflits in the fight against ounterfeit drugs Luis Currais University of La Coruña Berta Rivera University of La Coruña Paolo Rungo University of La Coruña Abstrat This analysis looks at the best way to deal with the proliferation of fake drugs, and onsiders the onflit that arises when government agenies aim to redue the harmful effets of the fake mediine trade while the pharmaeutial firms seek profit maximization It is demonstrated that the pharmaeutial industry might wish to enourage better law enforement rather than improved information poliies, even when the latter would lead to a greater redution in the fake drug trade We thank the Merk Foundation for its support through the projet Pharmaeutial Poliy in the Light of the Soial Siene Citation: Currais, Luis, Berta Rivera, and Paolo Rungo, (008) "Potential onflits in the fight against ounterfeit drugs" Eonomis Bulletin, Vol 9, No 5 pp -7 Submitted: Marh 7, 008 Aepted: Marh 7, 008 URL:

2 Introdution The spread of fake and substandard drugs is a major problem in both developed and developing ountries Evidene suggests that they an lead to therapeuti failure or drug resistane; in some ases, they led to death The WHO (006), for example, reports that during a meningitis epidemi in Niger in 995, more than 50,000 people were inoulated with fake vaines resulting in 500 deaths In one of the few reports that present quantitative data olleted in a ontrolled and methodial manner, Shakoor, Taylor and Behrens (997) indiate that 365% of the samples of hloroquine and seleted antibaterials from Nigeria and Thailand were substandard with respet to pharmaopoeial limits Dondrom et al (004) attempt to assess the prevalene of ounterfeit antimalarial drugs in Southeast Asia, and they observe that 53% of the tablet paks purhased in their study were labelled as manufatured by an authorized firm but did not ontain any ative ingredient Kelesidis et al (007) review the existing literature on ounterfeit antimirobial drugs and onlude that the problem has titani proportions and similarly devastating effets In fat, fake drugs are almost ertainly detrimental to publi health, they undermine publi onfidene in mediines and, in addition, ounterfeiting damages the pharmaeutial supply system and the benefits that this might generate in terms of researh and new produts Morris and Stevens (006) highlight a number of fators that potentially enourage the fake-drug-trade, the foremost of these being the fat that ounterfeiting is a lurative riminal business Hene, the Delaration of Rome (WHO, 006a), art, states that, Beause of its diret impat on health, ounterfeiting mediines should be ombated and punished aordingly In order to ombat ounterfeit drugs, the World Health Organization launhed the International Medial Produts Anti-Counterfeiting Taskfore (IMPACT) in February 006 The main objetive of IMPACT is to stop the prodution and trading of fake mediines IMPACT is a partnership of international organizations, non-governmental organizations, enforement agenies, pharmaeutial manufaturing assoiations and drug and regulatory authorities The inlusion of all onerned parties is onsistent with the reommendations of the WHO (WHO, 999) Given that ounterfeiting damages both publi health and the profits of the pharmaeutial industry, the ollaboration of manufaturers and publi authorities seems logial However, profit maximization may not neessarily go hand in hand with a redution in the ounterfeit drugs trade This paper develops a simple model of vertial produt differentiation and prie ompetition between an authorized pharmaeutial firm and a ounterfeit produer, and onsiders the possibility of Government intervention through either improved law enforement or an information poliy, whih onsists of providing potential patients with the means for distinguish between fake and genuine drugs The lak of information on substandard drugs is a major soure of onern and this has been onsidered by other authors For instane, Cokburn et al (005) analyse this phenomenon and suggest that pharmaeutial ompanies do not publiize the problem due to the belief that it would harm sales and brand-name produts This paper takes a different approah, and it is shown that the pharmaeutial industry and publi agenies aimed at fighting ounterfeit trade might have different preferenes with respet to the best poliy option In fat, though all agents agree on the main objetive, whih is the redution of ounterfeiting, strengthening the legal disinentive to produe and distribute ounterfeit drugs might simply benefit profit maximization rather than simply leading to a redution in ounterfeit produts

3 Competition between pharmaeutial firms and ounterfeit drug produers Two pharmaeutial firms ompete in the market for a speifi drug Firm is assumed to be the produer of a fake drug, whereas Firm has been authorized to produe the same drug with a ertified quality standard The produt of Firm is substandard with respet to pharmaeutial quality and testing limits and thus, the trade of the ounterfeit drug is soially undesirable This is learly a strong assumption, provided that many persons have no aess to genuine drugs and it ould be benefiial for them to fae the risk of prejudiial side-effets instead of passively observe the ourse of their diseases However, the aim of this paper is to show the existene of a onflit of interests in the fight against fake drugs, even when it is assumed that all ounterfeit drugs are substandard and detrimental to publi health Hene, produts are differentiated by their pereived quality, whih is related to the apaity of individuals to distinguish between ounterfeit and brand drugs Expliitly, the main differene between fake and genuine drugs is their intrinsi quality in terms of prinipal ative ingredients, but the potential reipients of these drugs are not always in a position to judge sine they may be illiterate For example, fake drugs are sold and pakaged as if they were the genuine artile Let s s be the pereived quality of produt and, respetively Firms ompete in pries and hene, Firm must sell its produt at a lower prie with respet to Firm in order to obtain a positive demand, p < p Provided that the ounterfeiter faes neither researh osts nor quality ontrols, it is assumed that prodution osts are higher for Firm For the sake of simpliity, we thus assume that the marginal ost faed by Firm is lower than the marginal ost of Firm, < Eah potential patient an buy just one unit of a given drug or, alternatively, nothing; hene, individual utility is equal to U ϑs i p i, if the individual buys the drug () 0, otherwise where i, and ϑ an be interpreted as the preferene for quality, whih might depend on the level of inome or the risk-propensity, for example The value of ϑ is bounded from both below and above, ϑ < ϑ < ϑ, where heterogeneity in individuals preferenes is onstrained by ϑ < ϑ The previous assumption is justified by a ommon inlination for high quality and effetive drugs In partiular, onsumers preferenes are uniformly distributed in the interval ( ϑ, ϑ), and the total population is normalized to one Eah patient is indifferent between buying the ounterfeit drug or the brand drug if p p ϑ, () where s s Hene, demand funtions faed by Firm and Firm are equal to p p D ϑ, (3) p p D ϑ (4)

4 Firms hoose the prie p i in order to maximize profits Π p ) D (5) i ( i i i This simple optimisation problem is solved by eah firm and implies the equilibrium pries p [ + + ( ϑ ϑ )], 3 (6) p [ + + (ϑ ] 3 (7) Substituting (6) and (7) into (3) and (4) we obtain (ϑ D, (ϑ D, where and hene, Π Π [ (ϑ ], 9 (ϑ 9 [ ] (8) (9) (0) () As an be observed, inreased differential of pereived quality lowers the demand and profits of the unauthorized Firm, whereas the inreased osts differential results in lower profits for the authorized Firm In addition, onsumer demand might be at a orner for either fake drugs or real drugs depending on the relationship between quality and ost differentials In partiular, when the pereived quality differential, weighted with quality preferene, is higher than the ost differential, ( ϑ ϑ ) D 0 () Conversely, suffiiently high ost differential implies that onsumer demand for genuine drugs is equal to zero, ( ϑ ϑ ) D 0 (3) Hene, an interior solution exists if and when ( ϑ < < (ϑ 3 Effets of Government intervention It is now assumed that a Government ageny intervenes in the market in order to urtail ounterfeit trade Two different poliies are onsidered here, namely the enforement of property rights laws and the onsequent proseution of Firm, and an information poliy 3

5 While the proseution of Firm results in inreased osts of prodution, provided that Firm an internalise the expeted ost of santions, the information poliy is aimed at providing individuals with the means for distinguishing between fake and authenti drugs In other words, ( LE), LE > 0, (4) s s( ), s < 0, (5) I where LE stands for improved Low Enforement poliy and I for Information poliy Government ageny intervention affets both ounterfeit pharmaeutial trade and firms profits In partiular, onsidering law enforement it an be observed that I dd dle D d, LE (6) dle Redution of ounterfeit pharmaeutial trade is proportional to the effiieny with whih the enforement of law affets prodution osts, and it depends inversely on the pereived quality differential Regarding profits of Firm, Π dle δ d dle [ (ϑ ], LE In other words, the profits of the authorized firm inrease with improved law enforement Another possibility for the Government ageny onsists of altering the pereived quality of ounterfeit drugs by providing itizens with adequate information The effets of this poliy on both the demand of fake drugs and profits of Firm are 9 (7) dd di D ds s,, I (8) s di di Π δs ds di ϑ ϑ ) 9 ( s, I (9) As in the previous situation, Government intervention both redues fake drug trade and results in inreased profits for Firm The hoie of the Government ageny between these two alternative poliies ruially depends on the level of the prodution ost differential, the pereived quality differential and the effiay in affeting the ost struture or the onsumers pereption of quality Obviously, Firm is also interested in ombating fake drugs, due to the possibility of monetary benefits as shown in (7) and (9), but while the Government ageny aims to redue the diffusion of harmful mediines, Firm is moved by profit maximization In order to highlight the potential onflit of interests between Firm and the Government ageny, it is initially assumed that the ageny is indifferent to intervention through law enforement or by providing individuals with adequate information 4

6 Assumption (Government ageny indifferene), LE s, I (A) Assumption ensures that one additional dollar spent on either law enforement or diffusion of information has the same marginal utility in terms of redution of ounterfeit drug trade Under A, it is interesting to analyse what the preferred poliy for Firm will be Substituting A into (9) and omparing with (7) it is possible to obtain (ϑ < 3 > (0) dle di Proposition Under A, Firm prefers improved law enforement in order to maximize profits when ( ϑ < 3 ; the firm is indifferent between the two poliies when ( ϑ 3, and prefers information diffusion otherwise Proof The proof follows from the effets of Government ageny intervention under A, see (7) and (9) Proposition states that when ( ϑ < 3, Firm faes an inentive to enourage improved law enforement The interest of this onlusion relies on the reality of the assumption regarding the relationship between quality and ost differentials For example, ounterfeit firms are sueeding in fooling onsumers by using offiial-looking pakaging, while, of ourse, the prodution osts are muh higher for authorized firms It should be noted that Firm prefers improved law enforement even when (3) holds, that is, when the demand for real drugs is equal to zero Assumption an be relaxed in order to show the existene of a region of onflit when the Government ageny has a preferene for the information poliy Assumption (Government ageny preferene for information poliy) where ξ > 0 + ξ s, (A), LE I A states that the marginal utility of the information poliy in terms of redution of fake drug trade is equal to the marginal utility of law enforement plus a positive parameter ξ and hene, the Government ageny prefers to invest in providing information about drugs quality Under A, the preferenes of Firm are now analysed Substituting A into (9) and omparing with (7), it follows that + (ϑ ξ <, LE ξ* > () dle di [ + (ϑ ] 5

7 Proposition Under A and for ξ < ξ *, the Government ageny prefers to fight against ounterfeit drug trade via the information poliy, whereas Firm prefers improved law enforement in order to affet the ost struture of Firm Proof The proof follows from a simple omparison between equations (7) and (9) under A and () A orollary of Proposition is that when the information poliy is muh more effetive in reduing ounterfeit trade with respet to improved law enforement ( ξ ξ *), both the Government ageny and Firm agree on the poliy to be adopted Corollary When ξ ξ * both the Government ageny and Firm prefer the information poliy in order to ombat fake drugs It should be noted that the above onlusion follows from the different objetives of the two agents being onsidered In partiular, the Government ageny aims to redue the quantity of fake drugs in the market, while Firm seeks profit maximization A limitation of this approah is that Assumption and mean that it is possible to draw onlusions without expliitly onsidering poliy osts In other words, it is important to bear in mind that the different levels of effiieny of the two poliies is affeted by osts, though this is not expliitly stated in A and A In order to assess the effets of real strategies to ombat ounterfeit drugs, however, differential effiieny should be assessed and hene, it would be possible to evaluate the existene of potential onflits of interest 4 Conlusions Fake mediines might be detrimental to publi health and therefore, it is neessary to develop strategies to ombat ounterfeit trade All of the parties onerned, from Government agenies to pharmaeutial manufaturers and onsumers, are usually enouraged to take part in the development of plans for reduing this phenomenon However, this paper shows that a onflit between agenies aimed at reduing ounterfeit trade and firms motivated by profit maximization might arise In partiular, when the differential of pereived quality between fake and genuine drugs is low and ounterfeit produers fae very low osts of prodution, pharmaeutial firms might enourage improved law enforement rather than information poliies, even when the latter option would result in a greater redution in fake drug trade Therefore, aution should be exerised when inluding the pharmaeutial industry in task fores that ombat ounterfeit drugs Referenes Cokburn R, PN Newton, EK Agyarko, D Akunyili, NJ White (005) The Global Threat of Counterfeit Drugs: Why Industry and Governments Must Communiate the Dangers PLoS Med (4): e00 doi:037/journalpmed00000 Dondorp, M, PN Newton, M Mayxay, W Van Damme, FM Smithuis, S Yeung, A Petit, AJ Lynam, A Johnson, TT Hien, R MGready, JJ Farrar, S Looareesuwan, NPJ Day, MD Green, NJ White 6

8 (004) Fake antimalarials in Southeast Asia are a major impediment to malaria ontrol: multinational ross-setional survey on the prevalene of fake antimalarials Tropial Mediine & International Health 9 (), 4 46 Kelesidis, T, I Kelesidis, PI Rafailidis, ME Falagas (007) Counterfeit or substandard antimirobial drugs: a review of the sientifi evidene Journal of Antimirobial Chemotherapy 60, 4-36 Morris, J, and P Stevens (006) Counterfeit mediines in less developed ountries Problems and solutions, London: International Poliy Network Shakoor, RB Taylor, RH Behrens (997) Assessment of the inidene of substandard drugs in developing ountries Tropial Mediine & International Health (9), WHO (006) Counterfeit mediines Fat sheet Nº 75 (revised February 006) World Health Organization Available at: WHO (006a) Delaration of Rome WHO International Conferene on Combating ounterfeit drugs: building effetive international ollaboration Rome, 8 February WHO (999) Counterfeit Drugs: Guidelines for the development of measures to ombat ounterfeit drugs Department for Essential Drugs and Other Mediines, World Health Organization Geneva, Switzerland 7