Patents are not the constraint!

vaccine patents

There’s been a lot of public outcry about patents for the COVID vaccine. About how the US needs to forcibly waive IP rights of the pharma companies. As the rationale goes, this will help other countries manufacture the vaccines faster, and help us defeat COVID-19.

Sorry folks, but this is a waste of time.

Yes, there are things we can do (and we are morally obligated to do) to save millions of lives. But waiving vaccine IP is – quite fundamentally – not one of those things.

Revisiting the Theory of Constraints.

I wrote about the Theory of Constraints in The Grand Unified Theory of Management.

The Theory of Constraints is a set of three simple statements, in a tightly connected chain of logic:

#1: Every system has one bottleneck tighter than all the others.

A limiting factor more limiting than the others. A weakest link in the chain.

#2: The performance of the system as a whole is limited by the output of this one bottleneck.

If you increase the throughput of this one bottleneck, the throughput of the entire system increases.

#3: Therefore, the only way to improve the performance of the system is to improve the output at the bottleneck.

What does this mean? It means that any improvement not at the constraint is an illusion. For the same reason there’s no way to strengthen a chain without strengthening its weakest link.

You can do your best to increase capacity of all the non-bottleneck steps. Or, when you realize there’s actually excess capacity at all these steps (by definition – when the bottleneck is at full capacity, all other steps have excess capacity) you can do your best to fill them up.

But it will make no damn difference at all.

Stated even more simply, this is the Theory of Constraints:

Any system with a goal has one limit. Worrying about anything other than that limit is a waste of resources.

So, is Vaccine IP the bottleneck to worry about?

To answer this question, we must first ask another one. “If we open-source the vaccine patents, will it increase the near-term supply of vaccines to the world?”

Unfortunately, it won’t. Because the critical constraint, the “rate limiting step”, is elsewhere.

Derek Lowe talks about the real manufacturing bottlenecks, in Waiving IP:

An obvious first problem is hardware: you need specific sorts of cell culture tanks for the adenovirus vaccines, and the right kind of filtration apparatus for both the mRNA and adenovirus ones… A good proportion of the world’s supply of such hardware is already producing the vaccines, to the best of my knowledge.

Second, you need some key consumable equipment to go along with the hardware. Cell culture bags have been a limiting step for the Novavax subunit vaccine, as have the actual filtration membranes needed for it and others. These are not in short supply because of patents, and waiving vaccine patents will not make them appear.

Third, you need some key reagents. Among others, there’s an “end-capping” enzyme that has been a supply constraint, and there are the lipids needed for the mRNA nanoparticles, for those two vaccines. Those lipids are indeed proprietary, but their synthesis is also subject to physical constraints that have nothing to do with patent rights, such as the availability of the ultimate starting materials…

Fourth, for all these processes, there is a shortage of actual people to make the tech transfer work… Moderna, for one, has said that a limiting factor in their tech-transfer efforts is that they simply do not have enough trained people to go around.

Don’t believe me? Moderna has open-sourced its patents, and committed that it won’t enforce them. So where’s my generic mRNA vaccine?

Pharma patents spell out everything you need to create the vaccine. The “recipe” is online, there are no “secrets”. Why then are China and India not producing them? Did they suddenly develop “scruples”, in the most urgent crisis of our time?

Astra Zeneca, Novavax, J&J, and others have licensed their technology to other manufacturers (albeit not for free). Why are these other players struggling to manufacture enough?

Taking one more step back: forget COVID vaccines. Why is even manufacturing of generics and other vaccines concentrated in a few countries? India manufactures 60% of all vaccines. Why do other countries not manufacture their own?

Maybe, just maybe, patents are not the constraint?

Say it with me:

Any improvement not at the constraint. Is. An. Illusion.

What is the bottleneck then?

I’m not an expert, but these are four prime candidates (from Alex Tabarrok’s Patents are Not the Problem!:

  • Raw material availability. If there’s anything we need public outcry on, it’s this. The US has been hoarding raw materials, crippling global vaccine manufacturing capacity.
  • Manufacturing capacity. This one will be harder to resolve in the medium-term.
  • Supply Chains.
  • Plastic bags. Yes, plastic bags are a bigger constraint than patents.

Once we resolve the above manufacturing bottlenecks, a new one will likely crop up – people’s ability to pay for the vaccine.

So let’s think about that.

How do we make vaccines cheap enough for everyone?

This is not yet the constraint, but it could be once there’s enough vaccines to go around. So how do we make them accessible?

There is an economic cost to producing these vaccines. Raw materials, capital equipment, manpower, and yes, licenses too. Who bears the cost?

It’s very easy to say, “these big pharma cos are evil capitalist profiteers”. Pfizer, for instance, expects to make USD 26B in sales (not profits, mind) on the vaccines.

But the question to ask isn’t, “How are pharma cos allowed to make so much money?”

The question to ask is, “USD 26 Billion? That’s all?!”

The economic cost of COVID-19 in the US alone is USD 16.2 trillion. The Economist says the GDP impact on the world will be USD 10 trillion+. Long-term health impairment and deaths will be over and above that.

And there are tons of other risks to worry about – geopolitical, societal, etc.

So, the right question to ask is this: “If the cost of not vaccinating is 1000x the cost of vaccinating, then why aren’t governments stepping up and making vaccines free?”

“But Jitha, some governments can’t afford it!”

Red herring. What they can’t afford, is the cost of not vaccinating, which is 1000x more. But they’re paying that cost anyway.

Let me put it more bluntly. The cost of a vaccine is much lower than the cost of an oxygen concentrator. Sometimes, it is that simple a tradeoff.

Governments of the world: Stop making people and pharma cos pay for the vaccine. Do it yourself – it’s an amazing deal. The best deal you’re getting this year. Hell, it’s even better than buying bitcoin for your treasury.

Counterfactual – what if vaccine patents did eventually become the bottleneck?

I don’t think vaccine IP will become the bottleneck for the next two years at least. But let’s say I’m wrong. If it does, then does waiving the IP make sense?

A cardinal principle of economics is: Don’t silence prices in order to transfer incomes. (link)

Don’t steal the patents from pharma cos and destroy their incentives. Remember, they are among our heroes of the pandemic. They’ve developed vaccines at unbelievable speed.

I won’t even go into the logic of it.

I won’t talk about how Moderna wouldn’t even have existed as a loss-making company for so many years, investing in mRNA tech, if it weren’t for the potential returns on investment from a market system.

I won’t talk about how this incentive is all that’s needed, for pharma cos to take risks. Governments don’t have to compensate Sanofi, Merck, etc. for their failed vaccine efforts.

No, please don’t steal the patents and leave us unarmed for the next pandemic.

Instead, buy out the patents and then open them up. As Caleb Watney says in How the US can solve the global vaccine shortfall, the US government can and should buy out the patents of the pharma companies. And then open them up to the world.

Why should they do it? Again, because it’s such an amazing good deal!

Pay USD 100 billion, and save USD 16 trillion. 160x return. Really? We’re even debating this?

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