By Kevin E. Noonan —

There is a growing trend in developing countries (such as Brasil, China, India, and Thailand) for their governments to avail themselves of the ability under prevailing international trade agreements to grant compulsory licenses or permit so-called "parallel imports" of generic drugs in the face of national patents procured by the innovator drug company.  This tendency threatens to overturn progress in intellectual property protection and harmonization hoped to be achieved by passage of the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

TRIPS implementation by GATT signatories required each country to adopt as part of its national law intellectual property protection commensurate with the protections available in the U.S. and in Europe.  The changes intended to be effected by TRIPS implementation included recognition in several developing countries (including Brasil, China, and India among others) of patents on pharmaceuticals.

In practice, however, an increasing number of developing nations have promulgated laws permitting compulsory licensing of patents granted to Western drug companies in favor of indigenous (and in some cases nascent) generic drug companies.  These laws have been used to threaten innovator drug companies to obtain drugs at reduced prices.  More significantly, developing countries were instrumental in the adoption by the World Trade Organization (WTO) of the Doha Declaration at a meeting in 2001 at Doha, Qatar.  The Declaration permits WTO member countries, in instances of national emergency, to grant such compulsory licenses without running afoul of TRIPS.  In addition, the Doha Declaration left it to the member states’ discretion to determine whether to permit parallel imports of patented drugs.

These provisions have been invoked in recent years by Brasil and Thailand to obtain anti-AIDS drugs at reduced prices (up to 80% reductions).  AIDS is at epidemic levels in these countries (said to be greater than a half million infected individuals in both Brasil and Thailand), and Brasil in particular has used the Doha Declaration, as well as provisions of its own laws, to coerce reduced anti-AIDS drug prices from Western drug companies including Merck, Abbott, Roche, and Gilead Sciences.

It is clear that this trend is almost certain to continue, in view of the strong economic and political pressures faced by developing countries facing AIDS, malaria, and other epidemic diseases.  Should avian influenza develop the capacity to be transmitted from human-to-human, the resulting pandemic will only exacerbate these pressures.  Thus, it is clear that Western drug companies, and their governments, would benefit from proactive steps to address the perceived inequities that follow from imposing a Western-style intellectual property regime on developing and poor countries as the price for WTO participation and economic development.

Acknowledging these pressures suggests a method for addressing both the political and economic issues.  There is a certain element of fairness in requiring individuals and governments in developing countries to pay a royalty amount for a patented drug that is adapted to local economic conditions.  Thus, since the cost of producing a drug (but not, of course, its development) is usually not a significant factor in ultimate drug prices, it would be possible to adjust drug prices in each country based on an economic indicator such as per capita income.  The aim being to normalize drug costs to fit local economic conditions, metrics like gross national product may be less useful as they do not correct for income distribution disparities.  More sophisticated economic formulations that take into account income, industrial capacity, income distribution inequality, and other factors can obviously be performed to more accurately relate local costs and capacity to pay.

Academic commentators have shown that increased drug prices positively correlate with increased income distribution inequality (see "Observations on the Structure of International Brand-Name Pharmaceutical Prices," by Keith E. Maskus), and that under the current regime, branded drug costs do not track very well with per capita income, presumably due to such income distribution inequalities.  Proposals for differential drug pricing are known in the literature (see, e.g., "Differential Pricing of Drugs: A Role For Cost-Effectiveness Analysis?" by Lopert et al.).  However, these studies do not take into account either the pressures arising from AIDS-like epidemics nor government-sponsored programs for providing drugs to their citizens for little or no cost.

However, a comparison of the types of compulsory licenses negotiated by developing countries and the estimated costs adjusted for per capita income shows that the resulting drug costs are similar.  For example, the ratio of per capita income between Brasil and the U.S. is about 0.13 ($5,717 to $44,190).  Brasil has "negotiated" yearly drug costs that are reduced by about 80% from the cost of the same drugs in the U.S.  Similarly, the ratio of per capita income between Namibia and the U.S. is about 0.07; Abbott recently agreed to provide its anti-AIDS drug Kaletra to Namibia and other African countries for $500 per year, compared to a cost of $7,700 per year in the U.S.  These adjustments have the advantage of avoiding broad-stroke categorizations of countries, such as "low income" or "middle income," which have resulted in real or perceived inequitable pricing (see, e.g., the AIDS Healthcare Foundation’s campaign relating to atazanavir and didanosine pricing in Mexico; "’AIDS Drug Prices to Die For’ – AHF Targets Bristol-Myers Squibb on Pricing in Mexico").

There are obvious political benefits of such a pro-active approach.  The reduced costs would diminish the real economic challenges faced by poor and developing countries in providing drugs for their people.  Unilaterally adopting an adjusted pricing policy would blunt the political rhetoric used by poor and developing country governments, and Western non-governmental organizations hostile to pharmaceutical companies and the patent regime, to stigmatize these companies and justify compulsory licensing.  Finally, the reduced profit expectations of the suggested pricing schedule could change the dynamic in favor of promoting investment in local industries without the threat of creating additional generic competition.  All, or indeed any, of these consequences would improve the current worldwide situation regarding both drug delivery and patent protection for pharmaceuticals, and could avoid or forestall more draconian outcomes prompted by worsening of current epidemics or the onset of future ones.

Information regarding per capita income was obtained here.

This is the second in a series of articles exploring the issue of compulsory licensing in developing countries.  For additional information on this topic, please see:

• "Not Getting It about Patented Drug Prices at The Wall Street Journal" – May 6, 2007

• "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries" – May 1, 2007

    By Kevin E. Noonan —

In just the latest in a series of developments unwelcomed by Western drug companies, Brasil has threatened to distribute a generic version of Merck & Co.’s anti-AIDS drug efavirenz (Stocrin®).  This action is consistent with earlier steps taken by Brasil, as well as Thailand, that thwart the intentions of the provisions of the TRIPS agreement regarding intellectual property protection, while paradoxically being in full compliance with WTO policies and practices.

Brasil’s actions have two bases:  the first is Article 78 of Brasilian Law 9279/96, the national implementing statute for the TRIPS agreement:

In cases of national emergency or of public interest, declared in a decision of the Federal Executive Power, and where the patent owner or his licensee do not satisfy such need, a temporary non-exclusive compulsory license to exploit the patent may be granted ex officio, without prejudice to the rights of the owner of the patent.

This statute is particularly relevant to therapeutics for treating AIDS, which is or is becoming a national emergency in Brasil as well as a number of important countries in the developing world.  The latest estimates (from 2005) indicate that more than half a million of Brasil’s citizens are infected with HIV, and as a consequence the Brasilian government is providing anti-AIDS drugs to about 180,000 of these individuals at no cost.

The other aspect of Brasil’s latest declaration of its intentions to act against the intended consequences of TRIPS is its warning that it will obtain the generic efavirenz not from its own, robust generic pharmaceutical industry, but from India.  Brasil can do this without risking WTO sanctions because it is permissible to do so under the WTO’s Doha Declaration, adopted at a meeting of the WTO in Dohar, Qatar in 2001.  Specifically, the Declaration provides:

        Article 4. The TRIPS Agreement does not and should not prevent Members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO Members’ right to protect public health and, in particular, to promote access to medicines for all.
    In this connection, we reaffirm the right of WTO Members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose.

        Article 5. Accordingly and in the light of paragraph 4 above, while maintaining our commitments in the TRIPS Agreement, we recognize that these flexibilities include:
        (a) In applying the customary rules of interpretation of public international law, each provision of the TRIPS Agreement shall be read in the light of the object and purpose of the Agreement as expressed, in particular, in its objectives and principles.
        (b) Each Member has the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted.
        (c) Each Member has the right to determine what constitutes a national emergency or other circumstances of extreme urgency, it being understood that public health crises, including those relating to HIV/AIDS, tuberculosis, malaria and other epidemics, can represent a national emergency or other circumstances of extreme urgency.
        (d) The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of intellectual property rights is to leave each Member free to establish its own regime for such exhaustion without challenge, subject to the MFN and national treatment provisions of Articles 3 and 4.

        Article 6. We recognize that WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement. We instruct the Council for TRIPS to find an expeditious solution to this problem and to report to the General Council before the end of 2002.

Brasil has interpreted the Doha Declaration, and Article 71 of its own TRIPS implementation law, as authorizing its planned importation of generic efavirenz from Indian generic companies.  And in view of Brasil’s track record with Western drug companies, it is likely to prevail.

Brasil has given Merck one week to negotiate a "discounted" price for efavirenz, a strategy the Brasilian government has used successfully before.  For example, Roche reduced the price to the Brasilian government of neflinavir by 40% in response to the threat of compulsory licensing.  Brasil has also used the threat of compulsory licensing against Abbott (lopinavir/ritonavir) and Gilead Science (tenofavir), with the Brasilian Health Minister giving these companies a 21-day ultimatum for a "voluntary" license to patented anti-viral drugs.

For now, the situation has been limited to anti-AIDS drugs, since these clearly fall within the scope of the type of "national emergency" envisioned by the Doha Declaration.  However, Brasil has other provisions of its national patent law, specifically Article 68(1)(I) of Law 9279/96, that permit the Brasilian government to grant compulsory licenses for any pharmaceutical protected by a Brasilian patent that is not manufactured in Brasil.  Although the legality of these provisions is questionable under TRIPS, in 2001 the U.S. filed and then withdrew a complaint against Brasil before the WTO relating to this provision of Brasilian law invoked to support a compulsory license for anti-AIDS drugs (although Brasil agreed to "consult" with Washington prior to granting compulsory licenses under Article 68).

Brasil’s actions are clearly part of a trend, in view of Thailand’s grant last December of a compulsory license under Merck’s Thai patent for efavirenz.  Both the economics and politics of the situation almost compel developing countries to follow Brasil’s lead in using compulsory licensing to obtain generic versions of patented drugs from its own or another country’s generic drug industry.  Brasil’s success in its compulsory licensing regime necessitates Western governments and pharmaceutical companies to fashion a more effective approach to protecting intellectual property in developing countries in a manner consistent with these economic and political realities.

This is the first in a series of articles exploring the issue of compulsory licensing in developing countries.  For additional information on this topic, please see:

• "Not Getting It about Patented Drug Prices at The Wall Street Journal" – May 6, 2007

• "A Modest Proposal Regarding Drug Pricing in Developing Countries" – May 2, 2007