Drugs as intellectual property

The enforcement of patent laws in developing countries limits the availability of generic alternatives.

The worldwide HIV–AIDS crisis is stretching a familiar Catch-22 for the pharmaceutical industry to enormous proportions. On the one hand, pharmaceutical investments in R&D have produced lifesaving drugs that can make this once-fatal illness a manageable condition. On the other, the high cost of the drugs often exceeds a developing country’s ability to pay for them. More than 32.5 million people in the developing world are infected with HIV. But in many developing countries, the cost of treating AIDS patients far surpasses their annual health care budgets, which are commonly much less than $100 per patient.

Pharmaceutical companies, including Merck and Bristol-Myers Squibb, have recently slashed prices for AIDS drugs in sub-Saharan African countries, selling them below-cost to help stem the tide of the epidemic (1). But the pharmaceutical industry remains a lightning rod for critics who claim that it stifles overseas competition by attempting to block distribution of less expensive generic alternatives.

At the heart of the controversy is the industry’s use of international patent law to protect its overseas markets. “Patents enforce monopolies over drug distribution in developing countries and allow companies to charge whatever price they want,” says Anne-Valerie Kaninda, a New York-based medical adviser to the international aid organization Doctors Without Borders. “Usually, the price targets a small proportion of the population that can afford to pay.”

Charges like these are fueling a barrage of negative publicity, putting the industry and the U.S. trade officials who promote patent laws on the defensive. “Many of the anti-retrovirals used to treat AIDS aren’t patented in the countries where limited access is an issue,” said a senior official with the Office of the U.S. Trade Representative (USTR). “So there’s no way patents influence affordability in these areas. The cause of limited access to drugs in developing countries isn’t patents so much as it is lack of infrastructure to deliver them to the sick.”

The legal instrument driving international patent protection is the Agreement on Trade-Related Aspects of Intellectual Property Rights (referred to as the TRIPS), signed in Uruguay in 1994 under the auspices of the World Trade Organization. The TRIPSsets out minimal standards for intellectual property protection—generally modeled after those in developed nations—with which all World Trade Organization members must comply. Patent law is already well established for industrialized countries, so most of the efforts to comply with the TRIPS are concentrated in the developing world. Under the TRIPS, least-developed countries have until January 1, 2006, to set up systems for reviewing patent applications and enforcing patented innovations. World Bank economist Michael Finger estimates that the cost of TRIPS compliance will exceed $150 million per country.

In the meantime, patent protection for pharmaceuticals is sprinkled here and there throughout the developing world. It’s least common in the poorest countries, including most of sub-Saharan Africa, where AIDS prevalence rates are also the highest. In the absence of patent protection, developing countries can make and buy generic alternatives at a fraction of the brand-name price. India, one of the world’s leading providers of generic AIDS drugs, is home to a manufacturer called Cipla Ltd., which provides a year’s worth of triple anti-retroviral therapy at a cost of $350 per person. In contrast, patented triple therapy in the United States can exceed $15,000 (2). Granting a patent for a particular drug eliminates generic competition for the product. Patents provide the manufacturer market exclusivity over the formulation and the right to set its own price. Countries that import less expensive generic alternatives to the patented formulation are in violation of the TRIPS.

Recently, this issue came up when Cipla tried to sell a generic version of the AIDS drug Combivir to health officials in Ghana. India has no patent protection for Combivir, a GlaxoSmithKline product, and produces a generic version for about one-tenth of the price. GlaxoSmithKline negotiates patents in some African countries through a regional organization that it believes extends to Ghana. When the company discovered that the sale was taking place, it warned Cipla of a possible patent infringement, and the transaction was halted (2). (When asked about the incident, a GlaxoSmithKline spokesperson insisted that the company did not threaten Cipla and claimed that the drugs are currently warehoused in Ghana because Combivir has not been approved by the country’s national health agency.)

Why would a poor country grant a patent if doing so stifles competition from the generics industry? “Because granting patent protection makes countries better positioned to attract business and entrepreneurial investment,” said Nancy Pekarek, a spokesperson for GlaxoSmithKline. “When countries join the TRIPS, they become members of a broad, business-based community that encourages protection for intellectual property.”

Jim Keon, president of the Canadian Drug Manufacturers Association in Toronto, phrased his answer differently. “These countries are under a tremendous amount of trade pressure,” he said. “Developed countries offer them cheaper tariffs for their exports in exchange for patent protection. It’s a trade-off that ends up hurting them in the pharmaceutical arena.”

Countries that have granted patents for pharmaceuticals (or any other invention, for that matter) do have options for buying or making generics under the TRIPS accord. Article 31 of the TRIPS allows countries to issue what is known as a “compulsory license” enabling them to break a patent under certain conditions, such as during a national emergency. The only stipulation is that they try to negotiate acceptable commercial terms with the patent holder, and if that fails, to “adequately” compensate the holder for use of the invention.

Remarkably, no developing country has ever issued a compulsory license for a patented drug. “Compulsory licenses carry grave risks to trade and threats of litigation,” says James Love, who runs the Consumer Project on Technology, a Washington, DC-based advocacy group affiliated with Ralph Nader. Several recent cases illustrate the hazard: Thailand has been under extreme pressure from the USTR to refrain from issuing a compulsory license allowing it to make a generic version of AZT. And, in 1998, when South Africa tried to strengthen compulsory licensing in its own legal system, it was sued by a group of 39 pharmaceutical companies. (The suit was dropped on April 18, 2001.) Brazil has a patent on a Merck AIDS drug called Stocrin, but it began importing a generic version made in India called efavirenz. When the Brazilians threatened Merck with a compulsory license for Stocrin unless Merck lowered its price, the company threatened to punish Brazil in the World Trade Organization (3). But on March 29, 2001, Merck relented and agreed to lower the drug’s price by 59%.

For years, the most worrisome consequence of issuing a compulsory license could be placement on the USTR’s “Special 301 Watch List”, a precursor to trade sanctions and a red flag for foreign investors. In a recent article (3), Tina Rosenberg wrote that appearing on the list “turns a country’s business sector and commerce ministry against generic production, and with such powerful opposition local [generic manufacturers] lose.”

But a USTR official said that it is now extremely unlikely that compulsory licensing for an AIDS drug will land a developing country on the watch list. In May 2000, President Bill Clinton issued an executive order stating, in effect, that compulsory licensing for AIDS drugs in sub-Saharan countries (most of which do not have patent protection anyway), would not be discouraged by the United States if it enhanced “access to HIV–AIDS pharmaceuticals or medical technologies for affected populations in that country” (4). Also in May 2000, the USTR adopted a flexible approach to intellectual property protection as it pertains to health care in developing countries. Specifically, under the flexible approach, the United States will not object to a country “availing itself of the flexibility of the TRIPS agreement [that includes compulsory licensing] to address a health care crisis” (5). In evaluating these situations, the USTR will rely on the advice of the U.S. Department of Health and Human Services, which will review the health considerations involved.

Speculation that the Bush administration might reverse the flexible policy approach has been rampant, especially considering, according to the Center for Responsible Politics, that 69% of the $23 million donated by the pharmaceutical industry during the last election went to the Republican Party. But Robert Zoellick, Bush’s choice for heading the USTR, recently said the USTR’s flexible approach would be upheld.

Ultimately, intellectual property protection for pharmaceuticals will grow worldwide.But it is also clear that the pharmaceutical industry is under increasing pressure to structure these protections in ways that do not impede access to lifesaving drugs in countries that can least afford them. Meanwhile, an industry trend to lower drug costs through preferential pricing mechanisms appears to be growing steadily. Says Vicki Ehrich, who works with GlaxoSmithKline’s Global Community Partnership group in London, “With preferential pricing, we get our returns in the countries that can afford to pay and then we commit to making the products available in the developing world, where we don’t expect to make a profit.”

But Ehrich also says that lower drug prices are only part of the war against AIDS and other diseases in developing countries. The key to winning, she says, is to develop comprehensive and coordinated strategies that include appropriate pricing; partnerships between organizations that work together to expand health care infrastructure; and perhaps most importantly, political will and determination on the part of the national governments to provide health care to the people.

1. HIV Drug Price Cut for Some in Africa. The Washington Post. www.washingtonpost.com/.
2. McNeil, D. G. Indian Company Offers To Supply AIDS Drugs at Low Cost in Africa.The New York Times, Feb 7, 2001.
3. Rosenburg, T. How to Solve the World’s AIDS Crisis. The New York Times Magazine, Jan 28, 2001, p 26.
4. Kaiser Daily HIV/AIDS Report, Africa Trade Bill: Clinton Issues Executive Order Relax-ing Intellectual Property Rights. http://report.kff.org/archive/aids/2000/05/kh000511.1.htm.
5. Office of the U.S. Trade Representative. 2000 Special 301 Report. www.ustr.gov/.