Cipro Shortage: An Invented Scarcity

Ilana Mercer, October 25, 2001

During the anthrax attacks, Bayer AG, the German pharmaceutical giant and manufacturer of the anthrax-fighting drug Cipro, experienced a windfall. The sudden demand for Cipro could not have come at a better time for a company that had been in a slump and was hemorrhaging due to a considerable operating-profit shortfall. The financial press’s accounts of how Bayer was scouting for bailout partners soon gave way to detailing Bayer’s moves to triple its production of Cipro. With Cipro, Bayer was vying for some of the $643 million the Bush administration had planned to put toward increasing stockpiles of antibiotics.


Scrambling to fill every order placed by government, Bayer ran its facilities 24 hours a day, seven days a week; placed its Connecticut plant on an accelerated production schedule; and even reopened a defunct German plant. The likelihood, however, that Bayer would ever meet consumer demand for Cipro is slim, if not anorexic.


In a command economy, government decides when the demand for anthrax tablets has been satisfied, but not in a free market. In a free market, consumers direct supply and demand. And in a free market, increased demand leads to increased supply, as producers compete with one another to meet the demand. When the demand for Cipro has approximated the supply of Cipro, buyers—not the government—will have indicated their needs have been satisfied. But Bayer’s promise to triple the production of Cipro—cranking out 200 million tablets over the next three months—may do little to satisfy a temporary demand driven by almost as many Americans.


When there is a shortage of a good, it is safe to say that it is a result of government incursion into the economy. In the Cipro shortfall, the likely culprits are Food and Drug Administration regulations and the patent system. FDA regulations go some distance toward explaining why our choices are limited so as to make Cipro the only drug that has been approved for the treatment of the inhaled—and the most lethal—form of anthrax. But FDA regulation—which has been streamlined in recent years in order to allow for the introduction of various AIDS drugs—does not explain why, once a shortage has occurred in an already approved drug, the self-regulating market mechanisms cannot kick in to overcome the scarcity.


In contrast, the patent system hasn’t changed significantly in terms of the length of the patent granted. As bad as FDA regulation is, patent law constitutes even more of a barrier to entry into the pharmaceutical market. In the case of Cipro, the acute scarcity of the drug is indeed a creation of the law. The anthrax panic, preceded by the events of September 11, has served to amplify the manner in which patents subvert the market and invite—even require—further central planner tinkering.


How would consumer demand have been heeded in a market unhampered by patent? The same events that have hitherto occurred would have unfolded; the sudden urgent demand for the drug would have been followed by a shortfall of supply. Large demand and short supply would initially send the price of Cipro rocketing. Profits in an unhampered pharmaceutical market would signal to the many drug makers that it’s time to enter into Cipro production.


These processes have all transpired, save one: Drug makers are not permitted to respond to one of the street signs of the free market, to profits. The law prohibits pharmaceutical companies from competing for Cipro market share, supplying the demand, and, in the process of creating competition, dealing a blow to the Bayer monopoly price tag. Because of specific patents Bayer has obtained, other companies cannot bring supply and demand into equilibrium, thus satisfying buyers.


Whether one thinks that granting to an inventor a near 20-year monopoly on the manufacture, use, or sale of a product is the right thing to do, is quite apart from acceding that a patent places a barrier on entry into the market. This barrier is the essence of monopoly. Capturing a large market share by pleasing consumers does not a monopolist make. But appealing to government for a grant of privilege that gives the rent-seeker the legal power to restrict access into the market, so that he is undeterred by competition, qualifies. Ensuring that there is only one price and that a competitive price—a function of the presence of other sellers in the market—cannot arise is also the practice of a monopolist.


While making her something of an untouchable to the international pharmaceutical kingpins, certain provisions in India’s patent law account for a thriving generics industry. Compare the monopoly price of $350 U.S. for a course of Cipro to the roughly $20 per course of treatment set by profitable Indian generic companies. The patent has survived challenges, which would explain why, in turn, the monopoly price remains unchallenged. In the absence of competition, the product’s high price does not markedly reduce sales or force a market adjustment on the seller. This patent has pretty much guaranteed that Bayer reaps a considerable profit irrespective of price or less-than-robust sales.


On how the patent holder can generate scarcity and draw a monopoly profit, the distinguished free-market economist Sir Arnold Plant wrote: “Whereas in general the institution of private property makes for the preservation of scarce goods, property rights in patents . . . make possible the creation of a scarcity of the products appropriated which could not be otherwise maintained.” In his 1974 essay “Property and Ownership,” Plant noted that the legislator enables the beneficiary of a patent to secure an income from the monopoly conferred upon him by restricting the supply in order to raise the price. A patent, in effect, allows an inventor to forcibly prevent others from practicing the patented invention, even if another inventor arrived at the invention indepen
dently, an exceedingly common occurrence. Merely arriving first at the patent office can give inventor A a legal edge over inventor B, who stumbled in five minutes later. Try as it may, the law fails to address the moral claim to practice an invention that inventor B can assert.


The moral claim of concurrent inventors notwithstanding, the fact that Bayer’s Cipro patent does not expire until December 2003, and the fact that Bayer is the only company that is allowed to produce ciprofloxacin until then, leaves us with the reality of shortages. There is no telling whether Bayer might relent and license the drug to other drug makers, thus enabling generics to fill the demand generated in the aftermath of September 11. The anthrax threat has, however, drastically altered the consumer’s tolerance.


It is the aim of the U.S. government to be able to treat 12 million people for 60 days of incubation. This is the calculus of probabilities courtesy of a central planner. But why is the government justified in facilitating access to the medication for only a fraction of the population? If every single paying American wishes to secure a course of Cipro, if only as a psychological antidote, why not? Tommy Thompson, U.S. Secretary of Health and Human Services, would like to control what American consumers access. If the rise in firearm sales in the aftermath of September 11 was anything to go by, Americans were looking out for themselves.


Not content with Bayer’s assurances to meet demand, Sen. Charles Schumer (D-N.Y.) inadvertently expressed what amounts to unease about the hampered drug market. “I’d still feel a lot better with several competitors,” said the senator, adding that “it goes without saying that if we increase the number of manufacturers producing ciprofloxacin, we are more likely to have enough on hand, should we need it.”


The fact that HHS Secretary Tommy Thompson went ahead and asked Congress to suspend the patent on Cipro is neither here nor there. It tells us nothing substantive about the patent system, but it speaks volumes about the nature of government. It tells us that government can as easily revoke monopoly privileges as it can revoke genuine liberties. It tells us that when you make the law—just or unjust—you can also break it.



©2001 By Ilana Mercer

The Ludwig von Mises Institute

October 25

CATEGORIES: Free Markets, Intellectual Property Rights, Regulation

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