Welcome to BIG, a newsletter on the politics of monopoly power. If you’d like to sign up to receive issues over email, you can do so here. This piece was co-authored by David Barclay and Matt Stoller.

One of the main arguments from the pharmaceutical industry against waiving certain intellectual property rights in the pandemic is that supply chain shortages, not patents, are the limiting factor in vaccine production. In a piece titled “Patents are Not the Problem!”, for instance, libertarian economist Alex Tabarrok popularized the line “Plastic bags are a bigger bottleneck than patents.” And Steven Pinker cited that piece, arguing that waiving IP rights on vaccines is ‘virtue-signaling’ because the real bottlenecks are in materials and manufacturing.

Steven Pinker @sapinker

Relaxing patent protection on vaccines is virtue-signaling and won’t increase the supply. The bottlenecks are in materials & manufacturing capacity.

marginalrevolution.comPatents are Not the Problem! - Marginal REVOLUTIONFor the last year and a half I have been shouting from the rooftops, “invest in capacity, build more factories, shore up the supply lines, spend billions to save trillions.” Fortunately, some boffins in the Biden administration have found a better way, “the US supports the waiver of IP protections o…

The idea behind this argument is to frame the problem as a set of physical natural limits holding up vaccine production, rather than monopolistic legal structures.

First, it’s important to recognize these industry commenters are certainly correct when they identify supply chain shortages as a significant barrier limiting production. But these libertarians and pharmaceutical industry defenders don’t attempt to explain why these shortages are so pervasive. Vaccine manufacturing supplies, including single use bioreactor bags, are not only in short supply because of exceptionally high pandemic demand, but also because there’s been a classic monopoly rollup of the bioprocess supplies industry in recent years. That consolidation is fortified by extensive intellectual property barriers that prevent new entrants from manufacturing these now crucial bioreactor bags and filters.

There are now four dominant firms in the space, as permitted by the Federal Trade Commission and the European Union competition authorities.

The Single Use Bioreactor Bags and Filtration Monopoly

Single Use Bioprocessing Equipment is the category name for the set of tools that are helpful in biopharmaceutical manufacturing. To oversimplify, in order to make certain types of medicine, you can either use big metal containers that must be cleaned each time, or plastic bioreactor bags that can be thrown away. Stainless steel equipment can be reused, but it takes a long time to set up, it has to be cleaned and validated after every batch, and it risks cross-contamination. SUB equipment allows continuous manufacturing and flexibility in production. SUB isn’t just plastic bags, but includes “polymer based disposable bioreactors, containers, purification columns and others.” There’s a lot more in this space, a good rundown of supply chain bottlenecks is here.

There are four dominant players: Merck, Danaher, Sartorius, and Thermo Fisher. The current industry structure is a result of a systemic roll-up in the industry, largely so conglomerates could have a full integrated suite of products to offer to pharmaceutical buyers, as well as the pricing power in doing so, in addition to extensive intellectual property thickets. Merck acquired Millipore in 2010 and Sigma-Aldrich in 2015, Thermo Fisher merged with Life Technologies Corporation in 2013, Danaher bought the Pall Corporation in 2015 and GE’s giant Healthcare biopharma business, and so forth.

So what happened? Four years ago, specialists in the industry were already warning of “significant increase in supplier bargaining power” and “price hikes.” There was also service and capacity degradation. “Personally I think this type of consolidation is horrible for the end-user,” said Bioprocess Technology Consultants Susan Dana Jones. Such acquisitions lead to inefficiencies and integration challenges. Arvilla Trag at Midwest Consulting services noted that these big firms have “uber-strata of bureaucracy to cut through, and have a lot more difficulty thinking outside the box.”

There were other problems. The idea of an integrated suite of products sounds nice, but it’s really a euphemism for locking in your customers through product design, which is a classic sign of monopoly. If you use one kind of bioreactor bag, you can’t easily switch out to another, because the industry refuses to standardize. As this International Federation of Pharmaceutical Manufacturers Associations noted, “the high degree of specificity and the lack of standardisation of these items represent a hurdle to short-term supplier switches and thus flexibility.” Another hurdle to entry is IP, with 2,800 patents granted on single-use bioreactor bags over the last couple of decades.

In its annual report, Sartorius admitted that the consolidation in the industry has dramatically raised entry barriers.

Last May, the Federal Trade Commission also found that Danaher’s 2020 purchase of GE’s health care division would lead to monopoly power, but, as usual, the libertarian Republican FTC Commissioners (Christine Wilson, Joe Simons, and Noah Phillips) voted to let the deal go through. The vote was 3-1-1, because while Democrat Rohit Chopra voted against the deal, current acting Chair Rebecca Kelly-Slaughter did not vote.

At any rate, now we have a concentrated and excessively bureaucratic industry, in the midst of a pandemic with massive demand. The government needs to go on an emergency trust-busting spree using every tool in its arsenal. Waiver and compulsory licensing of monopoly patents throughout the supply chain could potentially address bottlenecks, which is why India and South Africa included the entire supply chain as part of their waiver proposal to the WTO.

More than that, the government needs to begin the process of unwinding these mergers, and forcing standardization of equipment. Finally, public agencies should aggressively finance new entrants.

So yes, we need to waive IP for vaccine production. We also need to do a lot more, and we don’t have time to waste.

(Here’s a bioreactor bag, in case you’re interested…)

BIG by Matt Stoller

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