Challenges in IP
Ioana Vatavu
Medicines shouldn’t be a Luxury!
Table of Contents
Part I: Double Crisis in the Developing World 3
Part II: Pharmaceutical Production and the Patent Regime 4
Part III: TRIPS, the Doha Declaration and the August 30th Agreement 6
Part IV: Merits and Demerits of the Waiver Solution 9
Part V: Canadian Legislation to Implement the August 30th WTO Decision: the Jean Chrétien Pledge to Africa Act 14
Part VI: TRIPS-plus Rules and FTAs 22
Part VII: Price Differentiation–the Answer? 25
Part VIII: Conclusion 29
Appendix A 32
Table of Authorities 35
Part I: Double Crisis in the Developing World
Pharmaceutical products serve to treat human diseases around the globe; however, billions of people around the world do not have access to life-saving medication.[1] There is currently a crisis of access to essential medicines in developing and least-developed countries (LDCs), which are currently faced with a range of diseases. To further exacerbate the problem, there is also a scarcity of innovation of new pharmaceuticals to treat conditions primarily affecting people in poor countries (called neglected diseases).[2] This lack of innovation is due to the fact that pharmaceutical companies cannot recover their high research and development costs for drugs used to treat neglected diseases since only a small portion of the population in poor countries can afford the medicines.[3] Therefore, the vast majority of innovation occurs in the diseases affecting developed countries, where the sale of medicines provides a sufficient return on investment to make the business profitable for pharmaceutical companies.[4] Although poverty is at the base of both the crisis of access and the crisis of innovation, there are other factors that serve as barriers to accessing life-saving medication in developing countries, including stringent intellectual property rights, international trade, drug registration, lack of infrastructure and financing.[5] Although it is only one of the factors restraining access, international pharmaceutical patent laws can be a significant barrier to accessing essential medicines.
Part II of this paper illustrates the steps involved in pharmaceutical discovery and production and the rationale behind patents. Part III discusses current international legislation on intellectual property, with an emphasis in pharmaceutical products, and recent developments whose aim is to facilitate access to essential medicines. Part IV examines the positive and negative aspects of the World Trade Organization (WTO) 2003 Decision on remedying the problem of importing generic drugs under compulsory licenses by developing countries. Part V illustrates how the 2003 Decision was implemented in the Canadian context, critically analyzes the Canadian legislation, and offer several recommendations on how to improve it. Part VI describes the threat posed by TRIPS-plus rules which are being introduced in developing countries through bilateral and regional free trade agreements. Part VII offers possible solutions to the crisis of access to essential medicines, which include price differentiation, strategies to prohibit international arbitrage, generic substitution, bulk purchasing and donor financing. Part VIII offers a conclusion to the entire paper.
Part II: Pharmaceutical Production and the Patent Regime
Pharmaceutical companies incur large amounts of costs on researching and developing new drugs, which are then recouped from the high monopoly prices charged by the originating company through patenting of the drug.[6] The process of researching and developing a new drug consists of four main stages: drug discovery, preclinical testing, clinical trials, and Food and Drug Agency (FDA) review.[7] The entire process takes, on average, 15 years to complete, and
only one in 10,000 compounds for will be found safe and effective and will pass FDA approval.[8]
Intellectual property protections, in particular patents, serve as incentives for pharmaceutical companies to engage in research and development efforts, and thus increase innovation, by providing the patent owner with “the right to exclude others from making, using or selling an invention for 20 years”.[9] This system allows patent owners to charge monopoly prices since there is no competition, thereby recouping their research and development costs. During 1993 and 2004, the pharmaceutical industry reported a 147 percent real increase in annual research and development expenditures, but only a 38 percent increase in the number of new drug applications (which consist of modifications to existing drugs) and a 7 percent increase in the new molecular entities applications.[10] This indicates that pharmaceutical companies are investing more money into research and development but obtaining fewer new drugs.
Patents are considered by the industry to provide incentives for innovation and economic growth because it allows the patent holder to exclude others from the right to manufacture and sell its invention, and therefore charge monopoly prices.[11] According to this rationale, without the granting of patent rights, there would be little or no private investment into research and development of new pharmaceutical compounds.[12] In this way, the ends–the benefit to consumers and society in general that comes with new innovation– justify the means–the high monopoly prices.[13] Although the patent system has been effective at generating new pharmaceuticals to treat conditions in the developed world, this system has failed to create medicines for neglected diseases in the developing world.[14] In most developing countries there is little incentive for innovation for pharmaceutical companies because potential customers would not have the resources to pay for the new drugs, which explains why so little money goes into researching and developing new drugs for neglected diseases.[15]
According to Morgan, “the logical level of [intellectual property] protection of a given country is related to its level of economic development and its level of indigenous technological capacity, with stricter protection becoming rational over time as innovative capacity evolves”.[16] Therefore, in developing countries with underdeveloped technological sectors, it is logical to have lenient protection because consumers benefit from new products and imitator industries spur industrial development.[17] In fact, as Morgan suggests that “imposing strict IP protection in many developing countries under current conditions can actually be an impediment, rather than a catalyst, for economic development”.[18]
Part III: TRIPS, the Doha Declaration and the August 30th Agreement
Nevertheless, under the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, which was negotiated as part of the WTO Uruguay Round, Western patent protection was extended to developing countries, which created an additional significant barrier to accessing essential medicines in these countries because of the high prices charged by the originating pharmaceutical company.[19] Even though least-developed country members of the WTO were given a 10-year extension on the time during which they had to comply with the provisions of the TRIPS agreement, namely until January 2016[20], many of these countries are voluntarily granting patents for all inventions and adopting TRIPS-plus protection.[21] This is having enormous negative consequences and is discussed in more detail in Part VI of the paper.
Despite the fact that TRIPS imposes strict intellectual property protection, the latter affords member countries some flexibility, including allowing parallel importation of patented products sold abroad and the right of governments to grant compulsory licenses.[22] However, compulsory licenses, although appealing, have proven to be unworkable due to the cumbersome procedures and bureaucracy associated with them.[23] Compulsory licenses are governed by Article 31 of the TRIPS Agreement, and they permit an entity (such as a generic manufacturer) to produce and sell a patented pharmaceutical without the patent holder’s consent.[24]
Although the TRIPS Agreement appeared to grant broad rights to grant compulsory licenses, there are certain procedural requirements that are mandated by TRIPS when granting a compulsory license.[25] Prior to issuing a compulsory license, the prospective user must negotiate a voluntary license from the patent holder which must be on reasonable commercial terms, and such negotiations must fail within a reasonable period of time.[26] This language is ambiguous and has not been clarified by the WTO.[27] In addition, the TRIPS Agreement mandates that compulsory license be used “predominantly for the supply of the domestic market of the Member authorizing such use”[28], which renders them ineffective for countries with insufficient manufacturing capacity.[29] Moreover, even if a country had the required manufacturing capacity, it may be “economically inefficient to require domestic production for every medicine a country may need.”[30] This issue was address in paragraph 6 of the Doha Declaration (and became known as the “Paragraph 6 Issue”), and on August 30th, 2003 the WTO Council adopted the Decision on the Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health (“August 30th Agreement”).[31] The August 30th Decision waived the condition set out in Article 31(f) of the TRIPS Agreement, thus allowing countries to export generic drugs to countries with insufficient domestic manufacturing capacity.[32] This may seem, at first glance, to be the solution for which developing countries have been waiting; however, there are significant problems associated with such export/import compulsory licenses, in particular the onerous conditions imposed on Members who decide to make use of such compulsory licenses.
First, as with local compulsory licenses, prospective importing Members must first attempt to negotiate a voluntary license from the patent owner.[33] If this attempt fails, an entity can apply for a compulsory license to manufacture the pharmaceutical domestically.[34] Where the Member country does not have sufficient manufacturing capacity to manufacture the medicine locally, it must notify the TRIPS council and must explain and justify its determination that it has insufficient capacity.[35] The decision left unclear whether or not economic efficiency could be considered a grounds for determining a lack of manufacturing capacity in the importing country.[36]
Furthermore, the importing Member must identify and notify a willing exporter who is capable of manufacturing the needed drug, and the latter must obtain a compulsory license from its own government. Exporting countries have numerous obligations to fulfill, including paying “adequate remuneration” to the patent holder[37], taking adequate measures to prevent diversion of the drug, produce only the amount necessary to meet the needs of the eligible importing Member, export the entirety of the drug production to the importing Member, clearly identify the products produced under the system through specific labelling or special packaging, and finally, post on a website the quantities being supplied and the distinguishing features of the product.[38] The advantages and disadvantages of this decision are considered in Part IV below.
Part IV: Merits and Demerits of the Waiver Solution
Compulsory licenses have the potential of being used as a negotiating tool to acquire concessions or voluntary licenses from patent holders[39]; however, the success of such a tactic is dependent upon whether or not the country threatening to use compulsory licensing has sufficient domestic manufacturing capacity.[40] For instance, Brazil was successful in negotiating with Merck & Co., Inc.[41] low-price antiretroviral (ARV) drugs for its national treatment program, but this was due to the fact that Brazil possessed sufficient manufacturing capacity to make its threat to use compulsory licenses credible.[42] However, only a few other developing countries have similar manufacturing capacity, which illustrates the need for a workable system of import/export compulsory licensing in order for developing countries with insufficient manufacturing capacity to possess any bargaining power at all.[43]
In addition, there are numerous problems associated with the currently existing compulsory license system under the Doha Declaration and the August 30th Decision. First, it requires the issuances of two compulsory licenses when the system is implemented[44], which creates excessive red tape before any official action can be taken. Second, although the waiver provides “speed and simplicity”[45], it offers only a temporary solution and carries with it a lot of legal uncertainty.[46] The TRIPS Council currently has the authority to review the use of compulsory licenses and may interfere with a country’s decision to grant a compulsory license if either 1) the Member country has not satisfactorily justified its determination that it has insufficient domestic manufacturing capacity, or 2) whether the importing or exporting countries have not satisfactorily met the obligations imposed by the August 30th Decision.[47] In addition, the Decision appears to create a “non-binding moratorium [on dispute resolution]”[48] by stipulating that “Members shall not challenge any measures taken in conformity with the provisions of the waivers contained in this Decision”.[49] This means that the final decision rests with the TRIPS Council, which determines whether or not measures have been taken in compliance with the August 30th Decision.[50]
Ewelukwa expressed concern that “[d]eveloped countries could use covert threats of economic sanctions and other forms of political pressure to compel developing countries to respect the intellectual property rights of patent holders”.[51] Indeed, the director of the Consumer Project of Technology[52], James Love stated in a memorandum to WTO TRIPS Negotiators that the notification requirements under the August 30th Decision could be used to “increase bilateral pressure on weak importing and exporting countries.”[53]
Moreover, the August 30th Decision stipulates that both the importing and exporting countries must take stringent preventative measures in order to safeguard against abuses and trade diversion.[54] As already mentioned, the exporter must identify the products produced under the system through specific labelling or special packaging, which includes different pills size, shape and colour from the originator pharmaceutical. These procedures could ultimately prove too costly and slow for developing countries or generic manufacturers, and could thus render the whole system of compulsory licenses ineffective.[55] Furthermore, many non-governmental organizations (NGOs) have argued that the August 30th Decision “introduced an extra layer of uncertainty by stating that the system should not be an instrument to pursue industrial and commercial policy objectives, creating uncertainty over the role that will be played by the
businesses that manufacture and sell generic drugs”.[56]
Although compulsory licenses have the potential of being used as a negotiating tool to acquire concessions or voluntary licenses from patent holders[57], compulsory licenses are most appropriately labelled as “a ‘gift’ bound in red tape”[58] since each condition stipulated in the August 30th Decision must be performed for every drug and every country to which the drug will be exported, creating unnecessary delays.[59] Moreover, the overly burdensome conditions of the August 30th Decision could discourage the emergence of a robust generic pharmaceutical industry.[60]