Bargaining for Lives at theBargaining for Lives at theWorld Trade Organization:World Trade Organization:The Law and Economics of The Law and Economics of

Patents and Affordable AIDS Patents and Affordable AIDS TreatmentTreatment

Bradly Condon, ITAM and Bond University

and

Tapen Sinha, ITAM and University of Nottingham

Worldwide numbers The Global AIDS Crisis at a glance: World-wide: over 40 million cases Sub-Saharan Africa: over 28 million cases Spreading most rapidly

in Eastern Europe and Russia and sheer numbers are scary in India and China prevalence rate in India is estimated at 0.8%, with

some 8,000,000 if more than 1%, numbers tend to rise steeply

The Global AIDS Crisis UN considers AIDS a global security issue. Hits South harder than North. Sub-Saharan Africa and S. & S.E. Asia:

85% of total worldwide cases 84% of new infections (2001) 90% of deaths (2001)

Prevalence rate versus incidence rate Prevalence might fall with rising incidence: the

case of Uganda

Dimension of the problem in South Africa

Economics of drug pricing If it is a developing country only disease

(like tropical diseases) There is no high-income markets to pay for

R&D Supply-side or demand-side subsidies are

essential to encourage R&D There is no alternative

Differential (Ramsay) Pricing Demand for drugs is less price elastic in the

North than in the South Ramsay rule says that for profit

maximizing price discriminating monopolist should charge higher price in the North and charge lower price in the South

What is the empirical evidence?

Drug Company Reports 2001, SEC Filing Company Revenue Mkt/Adm R&D Profit Merck $47,716 13% 5% 15% Pfizer $32,259 35% 15% 24% Bristol-Myers $19,423 27% 12% 27% Abbott $16,285 23% 10% 10% Wyeth $14,129 37% 13% 16% Pharmacia $13,837 44% 16% 11% EliLilly $11,543 30% 19% 24% Schering-Plough $9,802 36% 13% 20% Allergan $1,685 42% 15% 13% Total $166,678 27% 11% 18% Source: Profiting from Pain

Are Drug Companies Evil?

Antics of PhARMA (1) The pharmaceutical giant Glaxo representatives sent a

letter to an Indian generic-drug maker, Cipla Ltd., accusing it of violating Glaxo's patent by seeking to sell low-priced versions of Glaxo's drugs in Ghana. Glaxo later conceded it had no valid patent in Ghana.

(2) Later, they repeated the warning to Cipla for allowing generic import of AIDS drugs in Uganda, only to back down once more.

(3) In a meeting with United States Trade Representative Charlene Barshefsky, industry executives insisted that the problem with AIDS in Africa was not high-priced drugs, but a lack of computers and other components of health-care infrastructure

Cost and pricing of drugs Patents encourage R&D, innovation. Pharma says average cost of developing

successful drug is $500,000,000. This overstates true R&D costs and ignores

public investment in research. Cost of AIDS cocktail in US: $10-15,000/yr African health-care budgets: $6/yr/person

Generic Manufacturers Cipla, Ltd. of Bombay, India has offered cocktail

for $350/yr. in Africa to DWB. Thus, to supply in Africa, the drugs need huge

subsidy or donation from somewhere WTO: India has until 2005 to recognize 20 year

patents on products that had no patent protection in India before 1995.

WTO allows countries to issue license to manufacture generic drugs, but not for export.

Global prices for active ingredients for HIV/AIDS drugs

Price of AZT D4T 3TC Nevirapine

1998 800 10,000 10,000 10,000

1999 750 2,500 5,000 7,000

2001 650 1,000 750 1,500

Note: Prices are expressed in dollars per kilo.

These are the ingredients for the triple therapy cocktail

Relevance of drug cocktail

2000 cohort

1985 cohort

Survival rate

10%

80%

12 months 36 months

Relevance of drug cocktail

WTO TRIPS Agreement Exhaustion of patent rights cannot be subject of a

dispute Exhaustion means once the product is sold, the

patent holder cannot prevent resale. WTO members are thus free to permit parallel

imports of patented drugs. Parallel imports of generic copies of patented

drugs prohibited in countries that implement TRIPS.

WTO TRIPS Agreement: Exceptions Necessary to protect public health and nutrition,

provided consistent w TRIPS. Necessary for protection of essential security

interests. Compulsory license after negotiations; can be

waived in emergency, extreme urgency or non-commercial public use.

License must predominantly supply domestic market; this prohibits large-scale exports

AIDS, Anthrax and Patents Brazil threatened to issue compulsory license in

negotiations with Merck (US) and Roche (Swiss). US filed WTO complaint against Brazil

(withdrawn). US and Canada used similar strategy with Bayer

(German) during Anthrax scare. In the case of Anthrax, there were exactly five

deaths in the US and none in Canada US/Canada actions against Bayer weakened their

negotiating position at Doha.

WTO TRIPS Agreement: Doha Declaration Brazil, India and 38 African countries joined

together to fight US, Canada and Switzerland position at Doha, resulting in Doha Declaration on TRIPS.

Members have right to grant compulsory licenses and determine grounds for granting

“Public health crises, including those relating to HIV/AIDS, tuberculosis, malaria and other epidemics, can represent a national emergency…”

TRIPS and Bargaining Power TRIPS exceptions enhance bargaining power of

governments in price negotiations. Brazil used threat of compulsory license to reduce

Roche price to 30% of U.S. price. U.S. used same threat to reduce Bayer price to

25% of normal retail price. Note that the threat is only credible if country has

generic manufacturing capability.

Parallel Imports of Patented Drugs WTO rules permit members to allow parallel

imports of patented drugs. If allowed, price discrimination strategy not

sustainable -- if drug is cheaper in Brazil, U.S. consumers would import from Brazil.

Developed country markets not threatened by price cuts in developing country markets if former prohibit parallel imports.

Imports of Generics WTO rules prohibit imports and exports of

generic copies of patented drugs: 1995, 2005, 2016.

Developing countries should be allowed to import generics if they have no manufacturing capability.

To give them same bargaining power as those who can issue compulsory license.

Can prohibit resale in developed countries to preserve research incentives.

Doha Declaration, Paragraph 6 Para 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.”

Paragraph 6 Negotiations Dec 2002: 143/144 WTO members agree

on solution United States disagrees because Pharma

disagrees Pharma donated $60m to Republicans Problem of regulatory capture Decision finally reached just before

Cancun meeting on Aug 30, 2003

Paragraph 6 Decision WTO members can issue compulsory license for export to

countries that lack generic manufacturing capacity. Exporter pays compensates patent owner (litigation risk). Importer must also issue license (paperwork). All except least-developed must notify WTO, specify

names and quantities of drugs (limits competition), and duration of license (hard to determine).

Must prevent parallel imports and diversion (extra cost). Manufacturer must use special labels and post info on

website re quantities and destination (extra cost).

Paragraph 6 Decision: 4 categories of country Least-developed (UN index) Countries that (voluntarily) agree not to use system to

import: EU, US, Canada, Japan, Oz, NZ, Switzerland, and E. Europe after accession

Countries that agree to use system only in emergency or extreme urgency (ie not for non-commercial public use): Hong Kong, Israel, Korea, Kuwait, Macao China, Mexico, Qatar, Singapore, Taiwan, Turkey, United Arab Emirates

Remaining members (developed and developing) Problem: UN index not appropriate

Implications for Global Pharmaceutical Industry Profits come mainly from rich markets. 1975-1999: 16/1393 of new chemical entities marketed

were for tropical diseases and tuberculosis. 0.2% of annual health-related R & D worldwide iss for

pneumonia, diarrhoeal diseases and tuberculosis yet these account for 18% of the global disease burden.

Price reductions or compulsory licenses for AIDS drugs in developing countries do not remove research incentives.

Differential pricing strategy not affected as long as resale in rich countries prohibited.

Brazil’s move in Sept 2003 Threatened to import generics from India, China or

Thailand in further price negotiations. Brazil wants 40% price reduction; companies offered

6.7%. Brazil can do this until 2005 without using Para. 6

system; plans to manufacture in Brazil later. After 2005, India, China, Thailand must implement

TRIPS After 2005, only least-developed can produce for export

without using Para. 6 system.

Stephen Lewis, UN Special Envoy for AIDS, Sept 25, 2003 “the rich world, annually, spends 600 times as much on

defense as Africa has for AIDS, and 350 times as much on subsidies as Africa has for AIDS. My use of the phrase ‘grotesque obscenity’ ...may sound strong, but it wilts in the face of those numbers.”

“It’s time for one of the major industrial countries, in particular, one of the G7 countries, to announce the manufacture and export of generic drugs to Africa. I would wish it to be my country, Canada...”

Canada’s move Canadian generic industry asked govt to change law to

permit exports at cost. Can. govt expressed concern over possible US reaction After Lewis statement, Can. govt announced plans to

change Canadian patent law to permit generic exports under the Paragraph 6 system.

Representatives of the multinational pharmaceutical companies first criticized Canada, then decided to participate in negotiations with the government regarding

the content of the proposed legislation.

Nelson Mandela “The world must do more, much more on every front in

the fight against AIDS. Of course, it means dramatically expanding our prevention efforts, but the most striking inequity is our failure to provide the lifesaving treatment to the millions of people who need it most. The single most important step we must now take is to provide access to treatment throughout the developing world. There is no excuse for delay. We must start now. If we discard the people who are dying from AIDS, then we can no longer call ourselves decent people.”