International Trade, Generic Drugs and the Developing World

© 2002, Deeth Williams Wall LLP. All Rights Reserved. By: Heather Watts (April 12, 2002)

AIDS and Africa

Since the Uruguay Round of the GATT in 1994, patented drugs, and access to them, in the developing world have become major discussion points. Nowhere is the issue more important, than in Africa, the continent facing one of the worst health crises in history, and which is also the continent with the highest number of Least-Developed Countries (or LDCs) in the world.

In 2001, the severity of the AIDS crisis in Africa hit an all-time high, with over 30 million HIV-positive individuals. While it is important to note that, in reality, malaria is a greater scourge on Africa's people, the issues surrounding patented HIV anti-retroviral drugs are more acute due to the fact that unlike for malaria, the investments in, and development of, treatments for AIDS have been monumental in the last decade. However, all of the progress made in recent years has also occurred at a time when the intellectual property rights of Western-based multinational companies have been stronger than ever.

Since 1996, AIDS patients in the developed world have benefitted substantially from combinational anti-retroviral drug therapy (or HAART), and while the therapy is not a cure, it has significantly extended and improved the lives of those living with HIV and AIDS. However, the therapy is not cheap. At about $15,000 (U.S.) per person per year, it is beyond the reach of most patients in the developing world, particularly Africa, where health expenditures per citizen can be as low as $10 (U.S.).¹

The Trade Related Intellectual Property Rights Agreement and Developing Countries

The United States was forceful in its aim to include Intellectual Property in the Uruguay Round and succeeded in accomplishing its goal: to achieve an international set of rules which would ensure that patent protection throughout the member countries of GATT would be as long as, and as effectively enforced, as that granted in the United States.² The vehicle for the initiation of these changes is the Trade Related Intellectual Property Rights (or TRIPS) Agreement.

Many developing countries afford shorter terms of protection for intellectual property rights, or define such rights very narrowly. These countries' patent granting and patent protection regimes can also often suffer from corruption, can be unreliable or difficult for western-trained lawyers to use and understand. The TRIPS Agreement seeks to impose international norms for patent protection and strengthen mechanisms by which patent-holders may collect royalties. When countries become members of the World Trade Organisation (WTO) (which is the body responsible for overseeing the implementation of, and adherence to, the TRIPS Agreement), they must commit to providing a minimum of 20 years of protection to patent holders under Article 33 of TRIPS. This requirement was placed in the TRIPS Agreement as a result of intense lobbying by Western-based international companies, particularly pharmaceutical companies, who see long terms of protection for their patents as a necessary tool to guarantee them income in return for the investment they have made in the development of their drug products. Such companies seek to prevent the establishment of, or to dismantle regimes of compulsory licensing or parallel importing in all countries who are members of the WTO.

Compulsory Licensing and Parallel Importing

Compulsory licensing is a regime under which patent-holders are required to license their technology and are to be compensated for the resulting reduction in market share by royalties paid by the licensee(s). It can be structured in various ways, depending on the goal, to be achieved. For example, in Canada, a regime of compulsory licensing was introduced for the first time for pharmaceuticals in 1923, but did not allow compulsory licensees to import patented substances, thereby limiting the regime's usefulness.³ However, in 1969, the Canadian Patent Act was amended because of a belief that Canadian drug prices were too high when compared with those paid in other countries. The regime was extended to include the right to import ingredients, and through judicial interpretation, to include chemical intermediates (substances intended for, and necessary to the synthesis and production of medicines, but which are not the medicines themselves).⁴ Also, under the expanded regime, a compulsory licence could not be refused unless the Commissioner of Patents could find a "good reason" not to grant one, and apparently such refusals were rare. As a result, compulsory licence applications increased greatly, competition between licensors and licensees was stimulated, the generic drug industry in Canada grew and drug prices were kept down as a result. However, in 1987, the Canadian government questioned the value of compulsory licensing and decided that the regime had encroached too far into the patentees' sphere of exclusivity. They also concluded that this had resulted in a decrease in research and development of new products because the 4% royalty typically awarded was insufficient to cover the costs of such activities. In 1987 the regime was altered so that while compulsory licences could be granted immediately, the use of such licences would be deferred for a period ranging from 7 to 20 years after the issuance of the patent, thereby ensuring a period of exclusivity in the marketplace for the patentee. In this time period the Patented Medicine Prices Review Board was established to ensure that patentees did not charge excessive prices during the deferral period; this Board collected information on drug company expenditures and monitored prices for the following six years. But in 1993, even this regime was considered to be too controlling and was seen to impact adversely on Canada's involvement in GATT and NAFTA negotiations. Because Canada was the only industrialised nation to have a compulsory licensing regime at that point, it was felt that it should bring its regime into line with other industrialised nations. The result is the current Notice of Compliance system in Canada; one in which patentees have market exclusivity for the entire duration of their patents, and in which generic drug companies are limited to proceeding with product development for the limited purpose of enabling them to enter the marketplace on expiry of the patent.⁵

Parallel importing involves purchasing drugs from a third party in another country, rather than from the manufacturer, in order to take advantage of lower prices charged by pharmaceutical companies to certain countries. Geographical price fluctuations for the same product can be influenced by factors such as different intellectual property rules, local incomes and competition from other pharmaceutical companies in the region.

Also an option, is the parallel importation of generic drugs, which is frequently the most effective way to improve access to drugs for developing countries which generally lack the technology, know-how and access to raw materials needed to produce the drugs themselves.

Parallel Importing of Anti-Retroviral Drugs in South Africa

The use of compulsory licensing and parallel importing by developing countries has made them the target of trade sanction threats by developed nation members of the WTO. For example, India, Brazil and Egypt are notorious for allowing or supporting compulsory licensing and parallel importing and have each been threatened for failing to strengthen patent rules as dictated by the PhRMA (Pharmaceutical Research and Manufacturers of America).⁶ But it is South Africa, also a member of the WTO, which has received the most publicity recently for its position on generic drugs. In the late 1990s, under the banner of the International Federation of Pharmaceutical Manufacturers' Association, the 39 largest pharmaceutical companies in the world, took the South African government to court over its 1997 Medicines and Related Substances Control Amendment Act (the "Medicines Act"). Paragraph 15c of this Act gives wide powers to the Health Minister to override patent rights in the interest of public health. Despite the fact that such actions are allowed under Article 27(2) of the TRIPS Agreement itself,⁷ the circumstances in which a government is justified in taking such actions are hotly debated by the countries and the multinational companies. While the South African government insisted that it would interpret these powers narrowly, and did not declare its high level of HIV infection (11% of the country's 43 million people) a national emergency, the pharmaceutical companies saw this act as a violation of the TRIPS Agreement and took the South African government to court. The three year court case ended on April 23, 2001 with the government agreeing to abide by the terms of TRIPS and to set up a working committee with the pharmaceutical companies involved in order to draw up regulations under the 1997 Medicines Act. In return for this concession, the pharmaceutical companies agreed to supply the country with drugs at drastically reduced prices ($600 to $700 USD per year rather than the $15,000 noted above). However, even these drastically reduced prices are still too expensive for most infected persons in South Africa.

Despite these actions, parallel importing is still actively being used by humanitarian health workers in South Africa. Frustrated at the government's refusal to generally legalise cheap copies of such drugs, Medecins Sans Frontieres began buying generic versions of three AIDS medications from Brazilian companies in December 2001 and distributing them to a pilot project in the poor Cape Town suburb of Khayelitsha. The group has the approval of South Africa's Medicines Control Council, but not its government, and thus its actions still violate the country's patent laws. The group cites costs as the sole motivation for their actions. Despite the reductions made by the pharmaceutical companies as the result of the court case, the daily supply of the reduced combinational treatment regime still costs $3.20 per day in South Africa, versus the $1.55 per day cost of Brazilian copies⁸ and for those living in extreme poverty, this cost difference is very significant. The patent holders of drugs being imported into the country have not yet taken action and have generally remarked that they are still deciding how to respond to such actions on a case-by-case basis.⁹

Many activists in South Africa believe that, given the unprecedented crisis in their country, the government should have taken an even stronger position in the law suit, and demonstrated the same political will of countries like Brazil and pressed for the production of such copies locally. They cite the fact that Brazil has been one of the most successful developing countries in cutting its HIV and AIDS infection rates via invoking the emergency measures provisions of TRIPS and its own liberal Industrial Property Act (1996) in order to allow local companies to manufacture cheap copies of anti-retroviral drugs. Since 1996, it has halved its AIDS death rate and cut the number of patients confined to hospital by 80%. But again the U.S., on behalf of pharmaceutical companies, is taking Brazil to the WTO Dispute Resolution Panel because of its production or import of drugs patented after the Brazil's TRIPS compliant law came into force in 1997.¹⁰

Unilateral Action Against Developed Nations by the United States

But it is not only the countries of the developing world which are the target of the aggressive approach of the United States. Developed countries such as Canada which, at one time, implemented compulsory licensing regimes which strongly favoured generic drug companies, have also come under attack. For example, in September 2000, the WTO Appellate Body upheld a dispute resolution panel decision in favour of the United States. Article 33 of the TRIPS Agreement provides for patent terms of 20 years, and while the Canadian Patent Act was amended to incorporate this term, patents based on applications filed before October 1, 1989, continued to receive only 17 years of protection (such patents are known as "Old Act" Patents). The Canadian patent office estimates that when the TRIPS agreement took effect in Canada in 1996, there were 236,431 Old Act patents, of which 142,494 had terms that would not, assuming that all fees were paid, expire until after the 20-year period. Conversely, 93,937 Old Act patents then in existence had terms which, assuming all fees were paid, would expire in less than 20 years.

The U.S. argued that, pursuant to Articles 33 and 70.2 of the TRIPS Agreement, Canada must make available a minimum 20 year term of protection, retroactively to patents issued prior to January 1, 1996 and the Dispute Resolution Panel agreed. It ruled that Article 33 does apply retroactively to Canada's Old Act patents, and required Canada to bring its patent term into conformity with the TRIPS Agreement. On September 18, 2000, the Appellate Body upheld the Panel's retroactive application of the TRIPS Agreement.¹¹

The U.S. Position and International Trade Theory

While U.S. pharmaceutical and other companies estimate losses in the billions of dollars from weaker intellectual property regimes throughout the developing, or even the developed world, basic theories of international trade theory and economic efficiency do not support their position that all countries should be required to maintain similarly high levels of protection. For example, when the theory of comparative advantage is spliced onto the concepts of intellectual property, we see that innovation itself can be stifled by onerous regimes of intellectual property protection. The basic theory of comparative advantage dates back to 1817 and the publication by David Ricardo of the book The Principles of Political Economy and while the theory has been refined and expanded upon by subsequent economic scholars, it still constitutes the underpinnings of conventional international trade theory: that each country (or group of private economic actors therein) should specialise in producing and exporting the goods in which its comparative advantage is the greatest, or its comparative disadvantage is the smallest, and should import goods in which its comparative disadvantage is the greatest.¹²

Modern scholars have applied this theory in the context of an analysis of intellectual property regimes. For example, Michael Trebilcock has noted that while patent protection provides important incentives for innovators, if it is excessive, it can also cause short-term consumer welfare losses and discourage imitation and adaptation by competitors, which themselves constitute valuable economic activities. Thus, the level of intellectual property protection each country affords should be rationally related to whether its comparative advantage resides more in innovation or imitation and adaptation of innovations made elsewhere, and the relative weight the country places on the interests of consumers, imitators and innovators.¹³ The benefit of increasing patent protection to 20 years across the board, as the U.S. has attempted to do through the TRIPS Agreement must be weighed against the economic effects of creating a monopoly on knowledge: such as higher cost products and the exclusion from the market of competitors who may be able to imitate or adapt an invention in a way which increases its social value.¹⁴ For a country where innovation is not a major source of economic activity or growth, it is in its best interests to choose a less stringent regime of protection, than would a country whose economy is highly dependent on innovation (such as the U.S. whose exports contain a higher percentage of domestically-generated technologies than those of any other country in the world).¹⁵ These principles do not apply only to developing countries. Many developed countries, including Canada and Japan can trace economic growth or stability to their unique abilities to find, imitate and adapt technologies developed elsewhere, often aided by the strategic use of weak intellectual property protection to stimulate imitation in some sectors and stronger protection to stimulate innovation in others. While neo-classical trade theory suggests that further liberalisation will, with certain defined exceptions, always be beneficial to both the domestic economic welfare of the liberalising state and the global economic welfare (in terms of global allocative efficiency and/or the aggregate of the domestic welfare of all states included), this is not the case in the realm of intellectual property because strengthened intellectual property protection, by its very structure, will inevitably lead to increased economic welfare in some countries, and reduced welfare in others. It is also questionable whether the increased welfare of some countries would outweigh the reduced welfare of the other countries in the aggregate. Some scholars suggest that global aggregate welfare may be maximised if certain countries, particularly those in the developing world, were exempted completely from the requirements of intellectual property protection. This is because the additional money paid by developing nations to large corporations in developed nations in the form of royalties are unlikely to be substantial enough to contribute significantly to encouraging further innovation.¹⁶

Clearly, when developing countries are forced to implement excessively strong intellectual property protection for patented medicines, not only are their poor at risk of being deprived of drugs they desperately need, but the effect of the increased protection can be to shift productive resources from activities in which the country has a comparative advantage (imitation or adaptation) to those in which it has a less comparative advantage (innovation), thereby reducing global allocative efficiency in the aggregate.

Endnotes

Contact Heather Watts for more information on issues relating to Protection of Intellectual Property Rights and International Trade.