The World Trade Organization’s treaty on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires all nations to make patent protection available for pharmaceuticals. This has raised concerns about the future prices of medicines in developing nations. This paper examines several strategies to make patented medicines affordable in the developing world under TRIPS.

One of these strategies is called compulsory patent licensing. Here, under certain substantive and procedural conditions, pharmaceutical companies are required to license patented medicines to companies in developing nations at so-called "reasonable" royalty rates. Past cases of compulsory licensing show that manufacturers were forced to accept actual royalty rates far lower than those they would receive, for example, as compensation for infringement under U.S. patent law. The paper argues that if compulsory licensing of drug patents is to succeed in keeping medicines affordable, TRIPS must include streamlined mechanisms to ensure that licensing and royalties decisions are taken expeditiously, despite these large differences. In addition, TRIPS currently requires that compulsory licensing be used predominantly for satisfying domestic needs. This, too, must be changed, as many developing nations lack the technological resources to produce their own licensed drugs and rely heavily upon imports.

When a pharmaceutical company patents a new drug in a wide array of nations, it must decide how the drug should be priced in each market. This is another area where policy changes can make patented drugs more widely available. The pricing scheme that best balances low-income access with coverage of R&D costs is a variant of "Ramsey pricing." Under this strategy, prices are much lower in nations with low ability to pay, or in nations where demand is highly price-sensitive. Comparing the prices of fifteen AIDS drugs in eighteen low- and medium-income nations, the paper finds little evidence that drug manufacturers used Ramsey pricing. One problem with this strategy is that tends to spawn "parallel trade," a practice where drugs sold in some countries at low prices are then resold on the gray market in higher-income jurisdictions. Price controls imposed by wealthy nations can also undermine the system. To promote Ramsey pricing, the paper argues, low-income nations and nations using price controls should bar parallel exports. High-income nations should also agree not to use so-called "reference price" controls, whereby the prices allowed in these markets are based upon the prices charged in less wealthy nations.

Another way to make drugs affordable in developing nations facing major health crises is through outright donation. A quantitative analysis shows that when the marginal cost of producing a drug is low, donating drugs to low-income nations may in fact increase a drug producer's after-tax profits thanks to the deductibility provisions of U.S. tax laws. Minor changes in these provisions would make the strategy more attractive to pharmaceutical companies. Though outright donation would decrease tax revenue in wealthy nations, the paper suggests that this loss may prove an acceptable sacrifice in the interest of improved world health.

A concluding section reviews policy recommendations and calls on developing nations to take greater advantage of the many generic drugs available on the world market in addition to on-patent drugs. Although this does not concern TRIPS per se, the authors point out that trade authorities can aid poor nations by ensuring that trade barriers do not restrict access to generic drugs.