The economic value of plantbased drugs

Ideally, what is required for economic valuation purposes is some idea of the ruling prices for plant genetic material and elasticities of demand by drug companies for that material. Given the availability of synthetic substitution as an alternative technology for some drugs, it seems clear that the demand elasticity will be high for those drugs, but fairly low for plant-based material that cannot, so far anyway, be synthesised. Drug companies today tend to use specialist plant gathering agencies (botanical gardens in USA and a private company, Biotics, in the UK). In turn the gathering agencies use local institutions and people to engage in actual collection and shipping. Payment to the gathering companies is by contract or weight of material, but there are examples of agreements involving royalties in the event of successful exploitation. Thus, Biotics has royalty agreements with the companies it supplies and, in turn, those royalties are divided between the company and the source countries. To this end, these agreements already provide for the sharing of rents in the way clearly intended by the Biodiversity Convention negotiated at the Earth Summit conference in Rio in 1992. Findeisen (1991) reports that royalties are usually negotiated on the basis of the value of the drug to the drug company, with royalty figures being in the range 5-20%. Royalties, however, are more readily negotiated for plant material to be used in a drug that is near to being marketed. Material that is destined for screening for longer term development is likely to attract low royalty agreements or simple once-off fees. Other companies have straight retainer agreements with botanical gardens and no royalty agreements. In the model used later, we therefore assume that a royalty rate of 5% is applied to any plant material that results in the development of a successful drug.

Economic valuation to date has been fairly speculative but illustrative of the orders of magnitude involved (Farnsworth and Soejarto, 1985; Farnsworth et al, 1985; Principe, 1989,1991). There are several ways in which to approach valuation:

1. by looking at the actual market value of the plants when traded;

2. by looking at the market value of the drugs of which they are the source material;

3. by looking at the value of the drugs in terms of their life-saving properties, and using a value of a 'statistical life'.

If we do not take into account the prevailing institutional capability to capture the values in discoveries as implied in 2 and 3, the result will be exaggerated valuations for the host country. As Ruitenbeek (1989) notes, the economics of invention reveals that income realized by inventors is considerably less than the ultimate value to society of the product, because the traits associated with the ultimate products have a very low degree of appropriability. This is true with respect to the countries providing niches to the diverse flora and fauna where the discoveries have to be made. This aberration in rent appropriation becomes even more blurred when the assumptions of ignorance, uncertainty, essentiality and substitutability about medicinal plants enter the analysis. This implies that a factor representing the institutional framework should be applied to the ex-post discovery valuation. This factor will depend on the existence of the licensing structure in the host countries; whether research conducted in the host country causes other leakages in the economy; and whether the ability exists domestically to carry out the research. Thus this factor is expected to be low in tropical low income economies. In Ruitenbeek's terms:

CPV = a x EPV, where CPV is capturable production value, EPV is expected production value, that is the patent value of one discovery. The fact that a tends to be low explains why developing nations feel that the benefits of their efforts to conserve biodiversity is captured more by others, that is, a can be thought of as a coefficient of rent capture. One purpose of the Rio Biodiversity Convention is to raise the value of a.

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