Medicines for the Developing World: Promoting Access and Innovation in the Post-TRIPS EnvironmentBy Max Morgan

I. Introduction

The world market for pharmaceutical products is marred by two separate yet related failings. The first can generally be described as a crisis of access, the second a crisis of innovation. Underlying both is an issue that transcends the recent heated debates surrounding the implementation of the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and its impact on pharmaceutical prices. This issue is poverty.

The world’s current system of pharmaceutical innovation is driven by the demand of consumers in developed markets such as North America, Europe and Japan. This system has and continues to provide new and effective treatments against conditions prevalent in these markets, including cancer, heart disease, and diabetes.1 Yet, these diseases are not limited to patients in the developed world. Despite concurrent need in developing countries, a dearth of resources nonetheless limits access to medicines to a small fraction of privileged consumers who can afford them. According to the WHO, at the beginning of the 21st century an estimated one-third of the world population still lacked regular access to essential drugs, with this figure rising to over 50% in Africa and Asia.2

A corollary problem with the current system of pharmaceutical innovation is that diseases entirely or predominantly afflicting the poor in the developing world (so-called “neglected” diseases) are ignored. Incentives to innovate new treatments for these conditions are sub-optimal as monopoly rents that could plausibly be collected under forms of intellectual property or market-exclusivity protection would be insufficient to recoup the high costs and justify the high risk associated with pharmaceutical research and development. Illustrative is Africa, which accounts for only 1.3% of the world pharmaceutical market by sales.3 Innovator pharmaceutical companies have been unwilling to focus their attention on new R&D for conditions localized to such a small market, when the allocation of resources towards developing treatments for ‘global’ diseases promises a far more substantial return on investment through sales in the developed world. Empirically, only 10% of the world’s expenditure on pharmaceutical research is directed to health conditions that account for 90% of the global disease

1 Jean O. Lanjouw, “A Proposal to Use Patent Law to Lower Drug Prices in Developing Countries”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG2:11, available at www.chhealth.org, at 4. [hereinafter Lanjouw]2 WHO. WHO medicines strategy 2000-2003: framework for action in essential drugs and medicines policy. (Geneva: WHO, 2000), available at www.who.int/medicines/strategy/MedicinesStrategy2000_2003.shtml, at 2.3 Carlos Correa, “Patent Law, TRIPS, and R&D Incentives: A Southern Perspective”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG2:12, available at www.cmhealth.org, at 9. [hereinafter Correa]

burden.4 Further, of 1,233 new drugs registered worldwide between 1975 and 1999, only 13 were indicated for the treatment of tropical diseases endemic to the developing world.5

Though the crisis of access and the crisis of innovation are united by the common cause of poverty, each warrants unique solutions. The aim of this paper is to introduce the reader to various policy initiatives, both current and hypothetical, with promise for effectively addressing each issue, particularly in the context of continued implementation of intellectual property protection in the developing world. Absolutely essential to solving either problem is greater political and financial commitment from both developed and developing world governments and institutions. Persuasive arguments can and have been advanced that such commitment is economically, morally and legally imperative.

The World Health Organization (WHO) Commission on Macroeconomics and Health has concluded through economic modeling that sustained and adequate donor financing of initiatives to improve the health of the world’s poor, in part through improving access and innovation in pharmaceuticals, would create sustained economic growth in developing countries and would repay donor investments several times over in the form of expanded gains from international trade and increased global political stability.6 The economic logic of global concerted action on international health problems is made clear by a particularly compelling example: the campaign to eradicate small pox. The total estimated cost of worldwide vaccination was $25 million, but economists estimate the direct global savings to be approximately $275 million annually, and $168 billion cumulatively.7

Beyond the promise of reciprocal economic benefits, governments have a legal duty to combat global public health problems. The human right to access to medicines in the context of epidemics such as HIV/AIDS, tuberculosis and malaria has been recognized by the international community as a core element of the right to health guaranteed in the International Covenant on Economic, Social and Cultural Rights.8 This right creates duties under international law on both developed and developing world

4 Global Forum for Health Research (2000), The 10/90 Report on Health Research 2000 (Geneva, Switzerland: World Health Organization), available at www.globalforumhealth.org. [hereinafter 10/90 Report].5 Bernard Pecoul, Pierre Chirac, Patrice Trouiller, and Jacques Pinel, “Access to Essential Drugs in Poor Countries: A Lost Battle?” J.A.M.A. 281(4), Jan. 27, 1999, 361-67, at 362. [hereinafter Pecoul and Chirac].6 Commission on Macroeconomics and Health, Macroeconomics and Health: Investing in Health for Development, Report of the Commission on Macroeconomics and Health, (WHO, Geneva 2001), available at www.cmhealth.org, at 12-14.7 S.K. Stansfield, M. Harper, G. Lamb, and J. Lob-Levyt, “Innovative Financing of International Public Goods for Health”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG2:22, available at www.cmhealth.org, at 1. [hereinafter Stansfield].8 International Covenant on Economic, Social and Cultural Rights 26 December 1966, 993 U.N.T.S. 3, 6, I.L.M. 360 (1967) (entered into force 3 January 1976); Committee on Economic, Social and Cultural Rights, “General Comment No. 14 (2000):The right to the highest attainable standard of health (article 12 of the International Covenant on Economic, Social and Cultural Rights)” E/C.12/2000/4, 11 August 2000.

governments to address the current failings observed in the international pharmaceutical market, and to prevent third parties from unduly limiting access to required treatments.

Finally, the current lack of initiatives to foster access to and innovation of new pharmaceutical products for the world’s poor can only be described as a moral failure of the highest degree. If the global community continues to allow people in developing countries to die in unimaginable numbers where effective treatments exist and to allocate enormous resources towards innovating new medicines for lifestyle illnesses while completely ignoring diseases that are deadly to the world’s poor, one can only conclude that “history will not judge us kindly.”9

However, even assuming that the requisite international political and financial commitment can be garnered, it will need to be focused on concrete strategies that have strong potential for success. This paper reviews and assesses various proposals to address both the crisis of access and the crisis of innovation in pharmaceuticals. Part II introduces the reader to some statistical and anecdotal evidence regarding pharmaceutical access and innovation for both global and neglected diseases, attempting to divide particular diseases into one of the two categories. Such categorization has important consequences for implementing specific policies discussed later in this paper.

As background, Part III introduces the debate around extending pharmaceutical patent protection to the developing world, lays out the universal requirements contained in the WTO TRIPS Agreement, and highlights certain flexibilities available in the Agreement that are important for mitigating the potential negative consequences of universal patenting on pharmaceutical access. Part IV discusses the various factors which act to constrain developing world access to currently existing pharmaceutical products, situating price and patenting issues in the broader context of limited financing, infrastructure, political commitment and other problems. Part V then directly addresses the current and future link between pharmaceutical patenting and the gap in access to medicines.

Part VI reviews and critically assesses several mechanisms aimed at achieving differential pricing of pharmaceutical products to promote access in the developing world. Part VII discusses so-called ‘TRIPS-plus’ intellectual property protection under bilateral and regional free trade agreements (FTAs) and how it may create future roadblocks to implementing differential pricing strategies. Part VIII then reviews and critically assesses proposals and programs to stimulate R&D into neglected diseases, and to ensure future access to the fruits of such R&D in the developing world.

Part IX concludes, and proposes a global bulk pharmaceutical purchasing fund that would procure and deliver pharmaceuticals to the developing world and that would be financed jointly by the developed and developing world through government

9 Amir Attaran, “How Do Patents and Economic Policies Affect Access to Essential Medicines in Developing Countries?”, Health Affairs, Volume 23, Number 3 (2004), 155-166, at 166. [hereinafter Attaran 2004].

contributions, as well as private donations. The promise of such an entity in solving both the crisis of access and the crisis of innovation is highlighted.

II. Pharmaceutical Access and Innovation

The Drugs for Neglected Diseases Initiative (DNDi) separates global disease burden into three separate categories.1 The first category, which is comprised of ‘global’ diseases such as cancer, and cardiovascular, metabolic, bone and joint diseases, affects people in all countries and constitutes a major focus of the R&D-based pharmaceutical industry. The second category consists of ‘neglected’ diseases, including malaria and tuberculosis, which mainly affect people in developing countries, although minor demand in wealthy countries has ensured that some R&D efforts exist. The third category, which DNDi describes as the “most-neglected” diseases, is comprised of diseases that almost exclusively affect people in poor countries who do not represent a viable market. This category is outside the scope of the drug industry’s R&D efforts, and includes diseases such as sleeping sickness, Chagas’ disease, dengue fever, leishmaniasis, intestinal parasitic diseases, leprosy, lymphatic filariasis, schistosomiasis, trachoma, and onchocerciasis (river blindness).

For simplicity of analysis, this paper will define two broad categories: ‘global’ diseases, for which the primary policy concern is promoting access to drugs in the developing world; and ‘neglected diseases’, which will include malaria and tuberculosis as well as the ‘most-neglected’ diseases identified by DNDi. In this latter category, though fostering access to currently existing medicines is imperative, the primary policy concern is stimulating R&D into new and improved treatments appropriate for resource-limited settings.

HIV/AIDS is somewhat anomalous in that it has characteristics of both a global disease and a neglected disease. A substantial developed world market has incentivized the creation of new and effective treatments by the pharmaceutical industry for which there is still limited access in poor countries. At the same time, the lack of purchasing power of the vast majority of its victims, who overwhelming reside in the developing world, has meant that little attention has been focused on developing treatments tailored to their needs. Appropriately addressing HIV/AIDS treatment issues will thus require both access-improving and innovation-inducing strategies.

Global Diseases and the Crisis of Access

For global diseases, incentives for pharmaceutical R&D from sales in the developed world alone are likely optimal and perhaps supra-optimal. Empirical economic evidence to support this claim is not offered here, and is difficult to surmise. However, anecdotal evidence suggests at least a degree of validity to this assertion. For example, the enormous proliferation of ‘me-too’ drugs (new drugs that are similar but not

1 Drugs for Neglected Diseases Initiative introductory brochure, DNDi: An Innovative Solution, (April 2004), available at www.dndi.org, at 6. [hereinafter DNDi Brochure].

the same as already existing medicines and that do not represent a therapeutic advance)2 to treat a plethora of global diseases suggests a vibrant and competitive R&D environment. Additionally, between 1975 and 1999, a total of 1,393 new drugs were registered worldwide, 1,377 of which were for the treatment of global diseases and HIV/AIDS.3 These figures suggest that adequate capital resources are currently being allocated to R&D on these conditions.

Yet there is an alarming inequity in who has access to the fruits of these R&D efforts. For example, 50% of the world’s population lives in countries constituting almost the entire global demand for drugs to treat cardiovascular disease4, suggesting that the other 50%, comprised of citizens of low-income and least-developed countries (LDCs), has almost no access. Further, though amazing advances have been achieved in child vaccination worldwide, only a small fraction of children in poor countries receive newer and important on-patent vaccines, which remain too expensive for widespread dissemination.5 Solutions must be found and implemented to remedy this crisis of access. One study estimates that delivering currently existing essential medicines reliably to the developing world could save up to ten million lives per year, representing 18% of the world’s mortality rate.6 However, in solving the current inequity, policy makers must be careful to maintain the current incentive structures that have ensured innovation of new and better drugs to treat global diseases, and which will undoubtedly continue to do so into the future.

Neglected Diseases and the Crisis of Innovation

Though many of the medicines created for global diseases are very important for citizens in developing countries, these countries also have unique disease epidemiology and very different drug needs that are not taken into account in pharmaceutical R&D expenditures.7 Neglected diseases can broadly be defined as seriously disabling or life-threatening diseases for which treatment options are inadequate or do not exist, and for which the potential market is insufficient to attract a private sector response.8 For most neglected diseases, other than perhaps tuberculosis, 99% of the global disease burden is localized to low-income developing countries and LDCs.9 Treatments for some of these diseases do exist and are included on the WHO Model List of Essential Medicines, but are often antiquated, very difficult to administer, ineffective due to drug resistance,

2 Correa, supra note 3, at 9.3 P. Trouiller, P. Olliaro, E. Torreele, J. Orbinski, R. Laing, N. Ford, “Drug development for neglected diseases: a deficient market and a public-health policy failure”, Lancet, Vol. 359, June 22, 2002, 2188-2194, at 2189. [hereinafter Trouiller].4 Lanjouw, supra note 1, at 5.5 M. Kremer, “Public Policies to Stimulate Development of Vaccines and Drugs for the Neglected Diseases”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG2:8, available at www.cmhealth.org, at 12. [hereinafter Kremer]6 Attaran 2004, supra note 9, at 163.7 Correa, supra note 3, at 19.8 C. Milne, K. Kaitlin, E. Ronchi, “Orphan Drug Laws in Europe and the US: Incentives for the Research and Development of Medicines for the Diseases of Poverty”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG2:9, available at www.cmhealth.org, at 2. [hereinafter Milne]9 Lanjouw, supra note 1, at 3.

and/or cause severe side effects.10 R&D is urgently needed to offer a wider range of safe and effective treatments, yet current efforts are paltry.11 As of 2001, only 3 pharmaceutical companies worldwide were undertaking any R&D for malaria, and only 2 for all other tropical diseases.12 Research from the 1990’s indicated that, while $3,800 was being spent on research per cancer-related death and $1,000 per heart disease death, only $84 was being spent per malaria death, which was by far the best funded of tropical diseases.13 In 2001, total worldwide health R&D funding was $60 for malaria and $19-33 million for tuberculosis, compared to approximately $985 million for HIV/AIDS.14 This has led to an appalling dearth in new drug development, with only 13 of 1,393 new drugs registered worldwide between 1975 and 1999 being indicated for the treatment of tropical diseases (including malaria), and an additional 3 being indicated for tuberculosis.15 What makes this more frustrating is that public sector R&D has generated a substantial amount of basic knowledge about these diseases, which could be used for promising drug development leads.16

The gravity if this crisis of innovation is made concrete with a few examples. Malaria kills 1 to 3 million people annually and accounts for 300-500 million new infections each year17, almost 90% of which are in Africa.18 Interest in the development of medicines for malaria has been primarily due to the existence of a market for chemoprophylaxis among wealthy travelers19 and has led to the creation of some important medicines such as chloroquine and mefloquine. However, these drugs are not well suited to treating those infected in the developing world, and widespread resistance is rendering them ineffective. New artemisinin derivatives offer the most promise, but are urgently needed in fixed-dose combinations (FDCs) to ensure adherence and prevent resistance. So far, Coartem (produced by Novartis) is the only FDC in existence, but is expensive, has serious side effects, and must be taken with a fatty meal (impossible for many patients in developing countries).20 A further problem is that new artemisinin-based treatments continue to be as much as twenty times more expensive than chloroquine.21 Though outdated, this means many African countries continue to rely on chloroquine for their treatment programs. New drugs and an effective vaccine are in high need yet R&D continues to be insufficient.22

10 DNDi Brochure, supra note 10, at 7.11 Kremer, supra note 14, at 10.12 Milne, supra note 17, at 14.13 Ibid, at 18.14 Ibid, at 35.15 Trouiller, supra note 12, at 2189.16 Bernard Pecoul, “New Drugs for Neglected Diseases: From Pipeline to Patients”, PloS Medicine, October 2004 Vol. 1(1), available at www.plosmedicine.org, at 19. [hereinafter Pecoul].17 Milne, supra note 17, at 39.18 Kremer, supra note 14, at 10.19 Milne, supra note 17, at 42.20 Drugs for Neglected Diseases Initiative, FACT Sheet: The Drugs for Neglected Diseases Initiative (DNDi) Fixed-dose Artesunate Combination Therapy (FACT) Project, available at www.dndi.org. [hereinafter DNDi FACT Sheet]21 MSF “Will the lifeline of affordable medicines for poor countries be cut?”22 Milne, supra note 17, at 41.

Tuberculosis kills 1.7 million people each year, 98% of them in the developing world.23 The accepted regimen, directly-observed-treatment-short-course (DOTS), involves a cocktail of old, off-patent drugs that were developed 40 to 60 years ago, and which need to be administered over a period of months with supervision to ensure compliance.24 Despite being cheap (typically costing in the range of $10 per patient)25, only 21% of patients received DOTS worldwide as of 1998.26 This highlights the need to find innovative access solutions for drugs that do currently exist to treat neglected diseases. However, DOTS is also very poorly suited for the developing world and is becoming increasingly ineffective due to resistance. An alarming number of infectious strains, “multi-drug resistant tuberculosis” (MDRTB), are resistant to all the major anti-tubercular drugs.27 New drugs are urgently needed in fixed dose combinations, yet no new drugs for MDRTB are even in the pipeline.28 A vaccine does exist but is largely ineffective.29

African sleeping sickness, which is entirely confined to tropical Africa, kills 150,000 annually, with 60 million people at constant risk.30 There are only 4 drugs in existence to treat this disease, and only 10% of patients have access.31 The first-line treatment, melarsoprol, induces fatal reactive encephalopathy in 5% of patients, and 30% of patients do not respond to it at all.32 There is widespread resistance to all 4 of these drugs33, and yet the current research pipeline is entirely empty.34 A final example, leishmaniasis, is fatal without treatment and affects 12 million worldwide, with 200 million at risk.35 The most widely prescribed drug, pentavalent antimony, was discovered a century ago, has serious side effects, requires prolonged treatment, and is losing efficacy due to widespread resistance.36 New therapies are urgently needed, as are FDCs of existing drugs.

23 Kremer, supra note 14, at 10.24 Medicines Sans Frontieres, R&D System is Failing to Meet Health Needs in Developing Countries, MSF Briefing Note, (MSF Campaign for Access to Essential Medicines 2005) available at www.accessmed-msf.org, at 8. [hereinafter MSF R&D System Failure].25 Harvey E. Bale, Jr., “Comsumption and Trade in Off-Patented Medicines”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG4:3, available at www.cmhealth.org, at 5. [hereinafter Bale].26 Milne, supra note 17, at 37.27 Ibid.28 Ibid, at 38.29 Kremer, supra note 14, at 10.30 Milne, supra note 17, at 43.31 Ibid, at 44.32 Ibid, at 43.33 DNDi Brochure, supra note 10, at 18.34 Drugs for Neglected Diseases Initiative, DNDi’s R&D Portfolio: 2003-2004 (First Quarter), available at www.dndi.org. [hereinafter DNDi R&D Portfolio].35 DNDi Brochure, supra note 10, at 18.36 DNDi R&D Portfolia, supra note 43.

HIV/AIDS: Concurrent Problems in Access and Innovation

UNAIDS estimates that 40 million people are currently living with HIV/AIDS worldwide. Of these, 25 million live in Sub-Saharan Africa.37 The adult prevalence rates in some countries, such as Botswana and Swaziland, are approaching 40%.38 The advent of potent antiretroviral therapy (ART) has led to a revolution in the care of patients with HIV/AIDS in the developed world. Though it is not a cure, ART has dramatically reduced rates of morbidity and mortality, has substantially improved quality of life, and has converted HIV/AIDS from a death sentence to a manageable chronic illness.39 However, though modest improvements in ART coverage in the developing world have been realized through increased funding from sources such as the Global Fund to fight AIDS, Tuberculosis and Malaria (GFATM) and through concerted policy action from the WHO 3-by-5 Initiative, a substantial access gap remains. Of the 5.8 million people needing ART in developing and transitional economies, only 700,000 (12%) were actually receiving it as of December 2004. The numbers are worse in Africa, where only 310,000 (8%) of the 4 million people in need are being covered.40 Urgent action is needed to continue to increase access, but it is important to ensure that any strategy maintains the incentives to innovate new medicines for HIV/AIDS. The number of new AIDS drugs in development has declined in recent years (from 250 in 1998 to 173 in 2001), which may in part be due to the enormous pressure on and backlash against pharmaceutical companies involved in HIV/AIDS-related R&D.41

Though HIV/AIDS is not a neglected disease in terms of the magnitude of either public or private sector investment in R&D, Milne argues that it is in terms of the types of products that have ultimately resulted from that investment.42 The $5.3 billion global market for HIV-related medicines43 has ensured that HIV/AIDS receives at least 80 times the investment per fatal case compared to malaria44 and has led to the development of 20 highly effective ARVs in the past 17 years.45 However, though fixed-dose combinations (FDCs) are urgently needed in resource-poor settings to improve adherence and prevent the emergency of drug resistance46, the research-based pharmaceutical industry has paid little or no attention to developing them. The dwindling number of pediatric AIDS cases in rich countries has meant that no appropriate pediatric formulations exist to treat the

37 UNAIDS, 2004 Report on the Global AIDS Epidemic: 4 th Global Report, UN Doc UNAIDS/04.16E (June 2004), available at www.unaids.org, at 1. [hereinafter UNAIDS Report 2004]38 UNAIDS at Country Level: Progress Report.39 WHO, “Scaling UP Antiretroviral Therapy in Resource-Limited Settings: Treatment Guidelines for a Public Health Approach, 2003 Revision”, (WHO Geneva 2004), available at http://www.who.int/3by5/publications/documents/arv_guidelines/en/, at 5. [hereinafter WHO Treatment Guidelines].40 See WHO 3 by 5 Initiative website, coverage and need for antiretroviral treatment at http://www.who.int/3by5/coverage/en/. 41 Kristine Novak, “The WTO’s balancing act”, J. Clin, Invest. 112:1269-1273(2003), at 1271. [hereinafter Novak]42 Milne, supra note 17, at 32.43 MSF R&D System Failure, supra note 33, at 3.44 Trouiller, supra note 12, at 2190.45 MSF R&D System Failure, supra note 33, at 3.46 WHO Treatment Guidelines, supra note 48, at 12.

growing number of children with HIV/AIDS in the developing world.47 Further, current HIV vaccine research is almost entirely oriented towards HIV strains common in rich countries, rather than Africa and Southeast Asia where a vaccine is most needed.48

Despite the fact that ARVs were developed according to the needs of patients in rich countries, the WHO, as part of its strategy to have 3 million people on ART in the developing world by the end of 2005, has been able to develop a set of ARV treatment guidelines that are appropriate and effective for use in resource-limited settings.49 Because of simplicity in terms of numbers of pills per day, dietary requirements, and monitoring, and because of low incidence of side effects, the WHO recommends a first-line regimen composed of two nucleoside reverse transcriptase inhibitors (NRTIs): stavudine (d4T) or zidovudine (AZT), and lamivudine (3TC); plus a non-nucleoside reverse transcriptase inhibitor (NNRTI): nevirapine (NVP) or efavirenz (EFV).50 It also suggests that countries adopt a second-line regimen for those who cannot tolerate, or who develop resistance to, the first-line regimen.51 This second-line regimen should include two NRTIs: tenofovir (TDF) or abacavir (ABC), and didanosine (ddI); plus a protease inhibitor (PI): ritonavir (RTV)-enhanced lopinavir (LPV/r) or ritonavir-enhanced saquinavir (SQV/r).52 Thus, as a minimum, all countries should have access to at least 11 (5 first-line and 6 second-line) ARVs.

III. Patents and International Trade: An Overview

Can Pharmaceutical Patenting in Developing Countries be Rationalized?

The world’s primary model for developing new medicines is through the use of the patent system to create incentives for private sector investment in R&D. As discussed in Part II, this system has been quite effective at developing new treatments for global diseases but has been a dismal failure at generating medicines for neglected diseases.

A patent is generally granted to the inventor of a product or process and gives its owner the right to exclude others from making, using, selling, offering for sale or

47 MSF R&D System Failure, supra note 33, at 3.48 Kremer, supra note 14, at 1449 See WHO Treatment Guidelines, supra note 48.50 Ibid, at 13.51 Ibid, at 11. Note: the WHO Treatment Guidelines for people living in developing countries differ from accepted HIV treatment guidelines in developed countries. A standard first line HIV treatment protocol in Canada (and the U.S., and the EU) would consist of a fixed dose combination of two NRTIs, e.g. Combivir (AZT+3TC), plus a fixed dose combination protease inhibitor, e.g. Kaleestra (ritonavir/lopinavir). The cost of this standard protocol is approx. $1300 CAD per person for 28 days of treatment. The WHO first line protocol is similar to the first line therapy used in the developed world before the advent of protease inhibitors. Today, NRTIs are not used alone in wealthy countries because they are less effective alone than when combined with a protease inhibitor, and the likelihood of drug resistance developing is high. The WHO Guidelines have been developed to promote the best possible therapy given limited drug availability and extremely limited resources.52 Ibid, at 28.

importing products that derive from or incorporate the protected invention.1 In exchange for this temporary grant of monopoly (usually 20 years from the date of filing), the patent holder must make full disclosure of his or her invention such that others skilled in the same art are able to put the invention into practice once the patent expires.2 Additional important requirements for the grant of a patent are that the invention must be new, non-obvious, and useful (otherwise described as ‘capable of industrial application’ in some jurisdictions).3 With respect to new medicines, patent claims can be filed for new pharmaceutical products, new processes to make pharmaceuticals, new formulations of pharmaceuticals, new combinations of separate pharmaceuticals, and new uses of known pharmaceutical compounds.4

Though some authors treat patents under the rubric of natural rights5, this paper takes the position that patents are and ought to be viewed as instruments of economic and social policy aimed at providing incentives for innovation and thus at generating long-term dynamic efficiency and economic growth. This rationale claims that without the patent system, private investment into R&D would be sup-optimal or non-existent.6 Because it is difficult to prevent others from copying information, free-riders, in the absence of a patent, could easily copy a new invention and market it. Under such conditions, rational investors would not devote sufficient private resources to innovative activity because they would not be able to recoup the substantial fixed costs associated with R&D and because they would not be adequately compensated for assuming the inherently high risks involved.7 By allowing owners to collect monopoly rents through excluding competitors, patents create the incentives for such private investment into R&D. Essentially, a bargain is struck between the patent owner and society. In return for a limited period of monopoly granted to the patent holder, society gains full disclosure of the new invention, which anyone can then copy upon patent expiration. In theory, the resultant dynamic efficiency and economic growth that comes over time with new innovation and with new information in the public domain justifies the static deadweight loss to consumers as a result of monopoly pricing and reduced access to new products.8

An implication of this instrumentalist justification is that patents and particularly their scope of exclusivity ought to be open to scrutiny for success in achieving the social and economic policy objectives outlined above. Where incentives to innovate are already optimal or supra-optimal, additional patent protection is economically wasteful as

1 Yolanda Taylor (ed.), Battling HIV/AIDS: A Decision-Maker’s Guide to the Procurement of Medicines and Related Supplies, (The World Bank, Washington, D.C. 2004), available at www.worldbank.org, at 106. [hereinafter World Bank Procurement Guide]2 Integrating Intellectual Property Rights and Development Policy: Report of the Commission on Intellectual Property Rights, (CIPR, London 2002), available at www.iprcommission.org, at 12. [hereinafter Integrating IP Rights].3 Ibid.4 Correa, supra note 3 at 10-12.5 Michael J. Trebilcock and Robert Howse, The Regulation of International Trade, 2nd Ed. (Routledge, New York 1999), at 308. [hereinafter Regulation of International Trade].6 Integrating IP Rights, supra note 63, at 14.7 Ibid, at 14.8 Ibid, at 14.

consumer deadweight loss is increased without any concomitant increases in dynamic efficiency (innovation). In fact, an extension of the scope of patent protection is only rational where the dynamic welfare gain from additional incentives to innovate outweighs the static welfare loss to consumers from monopoly pricing.9 This revelation calls into question the appropriateness of granting patents in developing countries for new pharmaceuticals to treat global diseases, for which incentives to innovate are already likely optimal because of patent protection in rich countries. Additionally, where patenting fails to create sufficient incentives for innovation because potential consumers would be unable to pay for the resultant new product (or someone else would be unwilling to pay on their behalf), other policy tools to encourage innovation must be devised. This is a particularly important with respect to neglected diseases, and must inform policies that aim to induce R&D for new treatments for these conditions. Finally, policy-makers ought to be cognizant of situations where patents create a so-called ‘tragedy of the anti-commons” by blocking further R&D.10 Where separate individuals own patents over distinct elements of a hypothetical new product, and where no cross-licensing arrangement can be devised, each owner can block such a product’s development. This partially explains the failure of originator pharmaceutical companies to create fixed-dose combinations (FDCs) of drugs for the treatment of HIV/AIDS, malaria and other conditions.

Typically, patents are granted on a country-by-country basis; although, in some cases, such as the Organisation Africaine de la Proprieté Intellectuelle (OAPI), which comprises 16 French West-African countries, and the African Regional Intellectual Property Office (ARIPO), which comprises 15 English-speaking, African countries, they are granted or at least reviewed on a regional basis.11 The implication is that an invention may be patented in one country and not another, depending on various factors such as an owner’s decision not to apply for a patent in a given country, or differing standards of patentability across jurisdictions (though the latter will become less of a factor once the WTO TRIPS Agreement is fully implemented).

Though the value of the patent system generally is often questioned, strong evidence suggests that patenting makes an important contribution to stimulating R&D in the developed world pharmaceutical sector.12 However, it is far from clear that extending first-world level patent protection to developing world economies can be justified. Those in favour of such extension often argue that higher levels of intellectual property protection in developing countries will attract greater amounts of foreign investment and technology transfer, and will spur on local innovative activity.13 However, the empirical evidence to support this claim is unconvincing.14 Underlying it is the assumption that

9 Regulation of International Trade, supra note 66, at 309.10 Integrating IP Rights, supra note 63, at 4.11 World Bank Procurement Guide, supra note 62, at 106.12 E. Mansfield, “Patents and Innovation”, Management Science, vol. 32:2 (1986), 173-81. See in Regulation of International Trade, supra note 66.13 Regulation of International Trade, supra note 66, at 310.14 ‘Global Intellectual Property Rights Issues in Perspective’, in M.B. Wallerstein, M.E. Mogee and R.A. Shoen (eds) Global Dimensions of Intellectual Property Rights (National Academy Press, Washington, D.C. 1993), at 366. See in Regulation of International Trade, supra note 66.

there is a latent supply of innovative capacity in a particular country’s private sector waiting to be unleashed by the grant of IP protection.15 This is unlikely to be the case in many developing countries where insufficient infrastructure and resources and the lack of an educated work force tend to be more significant bottlenecks to innovative activity.

Trebilcock argues that the rational level of intellectual property protection that a country decides to afford is determined by whether it has a comparative advantage in innovation or rather imitation and adaptation of innovations made elsewhere.16 A country where innovation is not a major source of economic growth will rationally choose a less stringent intellectual property regime.17 Lax protection can lead to two desirable outcomes: increased consumer welfare through access to new products, and industrial development in the form of imitator industries, while causing little or no loss in dynamic economic efficiency.18 In fact, many studies conclude that the most important single factor determining the success of technology transfer to developing countries, a key ingredient for economic growth, is the early development of indigenous technological capacity through the emergence of imitator industries adapting innovations from elsewhere.19 Both India and China have to an extent successfully employed such a strategy, and in particular India has developed a flourishing domestic generic pharmaceutical industry in response to lax IP protections.20 Even developed countries such as Japan and Canada have very successfully used lax IP protection to promote domestic economic growth.21 Particularly interesting is that many of today’s most-developed countries excluded pharmaceutical products from patent protection until quite recently: Germany until 1968; Switzerland until 1977; Italy until 1978; Spain until 1992, Norway until 1992; and Finland until 1995.22 The logical level of IP protection for a given country is thus 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. Viewed in these terms, imposing strict IP protection in many developing countries under current conditions can actually be an impediment, rather than a catalyst, for economic development.

Others have attempted to justify the extension of intellectual property rights to the developing world through global rather than domestic dynamic efficiency arguments. In some form or another, these arguments state that the worldwide protection of intellectual property rights will increase global revenues to innovators and thus yield greater amounts

15 Integrating IP Rights, supra note 63, at 15.16 Regulation of International Trade, supra note 66, at 308.17 Ibid, at 309-310.18 Ibid, at 310.19 S. Radovesic, “International Technology Transfer and Catch-up in Economic Development”, Elgar, Cheltenham (eds.), at 242. Also K. Saggi, “Trade, Foreign Direct Investment and International Technology Transfer: A Survey”, (World Bank, Washington D.C. 2000). See in Regulation of International Trade, supra note 66.20 Integrating IP Rights, supra note 63, at 3.21 Regulation of International Trade, supra note 66, at 311.22 F.M. Sherer and J. Watal, “Post-TRIPS Options for Access to Patented Medicines in Developing Countries”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG4:1, available at www.cmhealth.org, at 3. [hereinafter Sherer and Watal].

of innovation, which will in turn benefit consumers everywhere.23 This type of argument is overly simplistic for at least two reasons. First, where the optimal level of innovation has already been achieved or exceeded through incentives from sales in developed world markets, increased intellectual property protection in the developing world may actually cause a global misallocation of productive resources toward R&D.24 Second, marginally increased monopoly rents to innovators through sales in many developing countries are often unlikely to make any significant contribution to global R&D incentives25, while the social costs of reduced access can be enormous. For example, the African continent in its entirety accounts for 1.3% of global pharmaceutical sales26, which is unlikely to contribute to incentives for multi-national pharmaceutical companies to conduct R&D, while reduced access to medicines to treat deadly diseases such as HIV/AIDS can and has proven to be enormously costly in economic and humanitarian terms. Thus, not only can the expansion of IP protection to developing countries be domestically costly, but it can also reduce welfare globally. Where diffusion of new technologies such as essential medicines to the developing world is being compromised by patents, we should not allow arguments about threats to further innovation to deter us from taking action to remedy this situation, particularly given the weak and unsubstantiated nature of such claims.

The TRIPS Agreement: Politics Defeats Economics

Despite the soundness of such concerns, the WTO Uruguay Round negotiations were successful in concluding the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement), which set minimum uniform standards of IP protection and enforcement in all Member States27, and which entered into force on January 1, 1995. Instead of being based on sound economic principles, the conclusion of TRIPS is better understood as the product of global political forces.28 Powerful producer interests such as the brand name pharmaceutical industry and powerful Western countries with comparative advantage in innovation, such as the United States, were a significant driving force behind the adoption of TRIPS. The overall American goal in negotiating TRIPS was clear: to obtain rules that would ensure that US innovators’ IP rights were as extensively protected abroad as domestically.29 Despite strong opposition among developing country Members to the negotiation of IP rights within the WTO Global Agreement on Tariffs and Trade (GATT), they eventually succumbed to the pressure of American and other Western governments, in part because of promised concessions on agricultural and textile tariffs, which to date have not materialized.30

23 Regulation of International Trade, supra note 66, at 310.24 Ibid.25 Ibid, at 312.26 Correa, supra note 3, at 21.27 World Bank Procurement Guide, supra note 62, at 108.28 Integrating IP Rights, supra note 63, at 7.29 Regulation of International Trade, supra note 66, at 320.30 Integrating IP Rights, supra note 63, at 7.

TRIPS sets out the standard international trade law obligations of National Treatment31 and Most-Favoured Nation32 and imposes a variety of procedural and substantive obligations on all Members with respect to various forms of IP protection including, but not limited to, patents, copyrights, trademarks, and undisclosed information. With respect to patents, TRIPS requires that all WTO Member states provide patent protection for any inventions, whether products or processes, in all fields of technology, including pharmaceuticals, provided they are new, involve an inventive step (non-obvious) and capable of industrial application (useful).33 Patents must be made available without discrimination as to the place of invention and to whether the products are imported or locally produced. Protection must be granted for a minimum of 20 years from the date of filing34 and must confer on the patent holder the exclusive right to prevent third parties from making, using, offering for sale, selling or importing for such purposes a product that is the subject of his or her patent.35 Each Member is further obliged to ensure the availability of enforcement procedures to remedy any act of infringement36, and must authorize the issuance of injunctions37 and damages38 by its judiciary.

A separate requirement of the TRIPS Agreement is that Members, when requiring the submission of undisclosed study data as a condition of granting regulatory approval to a drug which incorporates a new chemical entity, must protect study data against “unfair commercial use.” Further, Members must protect data against disclosure, except when protecting the public, or unless steps are taken to ensure that the data are protected against unfair commercial use.39 The extent to which this provision prevents national drug regulatory authorities (NDRAs) from registering generic drugs on the basis of bio-equivalence is unclear, though negotiators directly rejected proposals to include concrete pharmaceutical data exclusivity provisions, which would have completely prevented the use of originator clinical trial data in registering generics during a period of 5 to 10 years.

Finally, international monitoring and enforcement of the TRIPS Agreement is achieved by two separate mechanisms. First, the WTO dispute settlement procedure can be used to resolve disputes under TRIPS40, and can result in the authorization of retaliatory trade sanctions. Second, TRIPS created a new institution, the Council for TRIPS, charged with monitoring domestic compliance.41 The Council also provides a forum for consultations on IP issues.42

31 Agreement on Trade Related Aspects of Intellectual Property Rights, article 3, text available at www.wto.org. [hereinafter TRIPS].32 Ibid, article 4.33 Ibid, article 27(1)34 Ibid, article 33.35 Ibid, article 28(1).36 Ibid, article 41(f).37 Ibid, article 44.38 Ibid, article 45.39 Ibid, article 39(3).40 Ibid, article 64(1).41 Ibid, article 68.42 Ibid, article 68.

TRIPS, the Doha Declaration and the August 30th Agreement

Despite these uniform standards, TRIPS does provide certain flexibilities in an attempt to balance conflicting national perspectives with respect to intellectual property protection.43 Article 7, which sets out the objectives of the Agreement, acknowledges that a balance of competing interests must be struck. According to that article, “the protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.” Particularly relevant to pharmaceuticals, the Principles articulated in Article 8 recognize that “Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health … provided that such measures are consistent with the provisions of this Agreement”.

In concrete terms, TRIPS allows Member states to grant compulsory licenses and to permit parallel importation of patented products sold abroad. Compulsory licensing, which is defined as an authorization permitting a third party to make, use, sell, or import a patented invention without the patent holder’s consent44, is governed by Article 31. Though Members theoretically have unlimited scope to make use of compulsory licensing, TRIPS imposes certain procedural and substantive requirements. Prior to issuing a compulsory license, the proposed user must have made efforts to negotiate authorization from the patent holder on reasonable commercial terms, and such efforts must have not been successful within a reasonable period of time.45 This requirement can be waived in the case of national emergency of other circumstances of extreme urgency or in cases of non-commercial public use.46 This language is ambiguous and its precise meaning has not been settled in WTO dispute settlement resolution. Article 31 further requires that the permitted use must be limited in scope and duration to the purpose for which it was authorized47, and must be liable to termination when the circumstances which led to it cease to exist and are unlikely to recur.48 In all cases, the patent holder must be paid adequate remuneration, taking into account the economic value of the authorization.49 Finally, and perhaps most controversially, Article 31(f) requires that use authorized under a compulsory license must be “predominantly for the supply of the domestic market”. Though again the precise legal meaning of this language has not been settled through adjudication, much attention was paid in the context of essential medicines to its potential to limit the capacity of countries without domestic manufacturing capacity to make use of compulsory licensing to import generic drugs from abroad.

43 Regulation of International Trade, supra note 66, at 322.44 Sherer and Watal, supra note 83, at 13.45 TRIPS, article 31(b).46 Ibid.47 Ibid, article 31(c).48 Ibid, article 31(g).49 Ibid, article 31(h).

Interestingly, some of the conditions of Article 31 are relaxed where a Member determines that a compulsory license is required to remedy an anti-competitive practice.50

The requirements of prior negotiation with the patent holder in Article 31(b) and predominantly supplying the domestic market in Article 31(f) are not applicable in such a circumstance, and the need to correct the anti-competitive practice may be taken into account in determining the amount of remuneration required under Article 31(h). The use of competition policy to address problems with access to essential medicines has some promise and is briefly discussed below in Part VI.

Another concrete flexibility is that Article 6 of TRIPS allows countries to permit parallel importation, which occurs when a patented product is sold abroad by the patent holder and then imported without his or her consent.51 Incentives for this sort of trade materialize when there is a sufficient price differential between two countries. The effect of Article 6 is that any country may adopt the doctrine of international exhaustion of rights, which prevents a patentee who has sold a product from exercising any determination over the conditions of resale of the same product abroad.52 Whether or not parallel importation and international exhaustion of rights are desirable for sustainable solutions to increase access to medicines is controversial and will be addressed below in Part VI.

TRIPS Article 2 recognizes the continuing applicability of the Paris Convention for the Protection of Industrial Property, which created the so-called right of priority for patent applications. Under this regime an inventor who files for a patent in one Member country has one year to file for patents in all other Members before the subject matter of his or her patent application will be considered publicly disclosed and thus not eligible for protection in those other Members.53 The effect of this regime is that recently invented drugs that are under patent in some countries, but not in others, are unlikely to be eligible for patenting in the latter set of countries, except in the relatively small set of cases where mailbox applications, discussed below, were filed.

TRIPS further permitted certain transitional arrangements with respect to its implementation.54 All Members were given one year following the entry into force of the Agreement to apply its provisions domestically (until January 1996), with developing country and transition economy Members being given an additional 4 years (until January 2000).55 Further, to the extent that a developing country Member was obliged to extend product patent protection to areas of technology that could not previously be protected in its territory, it was permitted an additional 5 years to implement provisions related to product patents for such areas of technology (until January 2005).56 In practice, this extension was of little value as most developing countries already granted pharmaceutical

50 Ibid, article 31(k).51 Sherer and Watal, supra note 83, at 30.52 Ibid, at 31.53 Paris Convention for the Protection of Industrial Property, article 4, available at www.wipo.org. [hereinafter Paris Convention] 54 See TRIPS, supra note 92, Part VI.55 Ibid, article 65.56 Ibid, article 65(4).

product patents. One key exception is India, whose full use of the extension has ensured access to low cost generic ARVs both domestically and in other developing countries up until now.57 The Indian Parliament is currently in the process of implementing pharmaceutical product patenting. This continues to be a central focus of advocates for access to essential medicines who are concerned that the developing world’s primary source of cheap generic versions of on-patent medicines will be cut off.58

Of further concern, where a developing Member such as India decided to avail itself of the flexibility to delay the implementation of pharmaceutical product patent protection until 2005, that Member was required to provide a means by which patent applications for such inventions could be filed (so-called “mailbox” patent applications) after TRIPS entered into force in 1995.59 Upon implementation of pharmaceutical product patenting, the Member would then be required to review these mailbox applications, and grant patents where warranted from the date of filing until the remainder of the patent term expired.60 Once India fully implements its new patent law, it will have to begin reviewing these mailbox applications, which could potentially render illegal certain generic drugs already being produced and exported.

An additional extension was also granted for least-developed country Members (LDCs).61 These countries were granted a blanket 10 year exemption from the TRIPS Agreement from the date of its entry into force, with the understanding that the Council for TRIPS could extend this period upon request by an LDC Member.62 Despite this arrangement, most LDCs already grant patents for all inventions, including pharmaceutical products.63

In response to concerns from developing world Members over the potential for the TRIPS Agreement to impede effective responses to public health problems such as HIV/AIDS, tuberculosis and malaria, the WTO 4th Ministerial Conference in Doha, Qatar issued the “Doha Declaration on the TRIPS Agreement and Public Health”64 in November 2001. In it, Members affirmed that “the TRIPS Agreement does not and should not prevent Members from taking measures to protect public health” and 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.”65 It further resolved some ambiguities with respect to some of the flexibilities available under TRIPS. First, it affirmed that Members have the right “to grant compulsory licenses and the freedom to determine the grounds upon which such

57 Health Gap Global Access Project, Fact Sheet: Changes to India’s Patents Act and Access to Affordable Generic Medicines After January 1, 2005, available at www.healthgap.org. [hereinafter Health Gap India] 58 Ibid.59 TRIPS, supra note 92, article 70(8)(a).60 Ibid, articles 70(8)(b) and (c).61 For a list of least developed countries, see www.wto.org.62 TRIPS, supra note 92, article 66.63 Correa, supra note 3, at 20.64 Draft Declaration on the TRIPS Agreement and Public Health, Ministerial Conference, Fourth Session, Doha, 9-14 14 November 2001, WT/MIN(01)/DEC/W/2, available at www.wto.org. [hereinafter Doha Declaration]65 Ibid, paragraph 4.

licenses are granted.”66 Second, it clarified that Members have the right “to determine what constitutes a national emergency or other circumstances of extreme urgency, it being understood that public health crises … can represent a national emergency or other circumstances of extreme urgency.”67 This clarification is important in that it allows Members, in dealing with public health problems such as HIV/AIDS, tuberculosis and malaria, to take advantage of the TRIPS Article 31(b) exception to the obligation to negotiate with the patent holder prior to issuing a compulsory license. Third, Paragraph 7 of the Doha Declaration extended the exemption from TRIPS implementation for pharmaceutical products until 1 January 2016 for LDCs, though the practical value of this concession is limited since most LDCs already grant such patents.

Finally and perhaps most importantly, in recognition of the difficulties that WTO Members with insufficient or no domestic manufacturing capacities could face in making effective use of compulsory licensing due to Article 31(f) of the TRIPS Agreement, the Doha Declaration instructed the Council for TRIPS to find a solution and report to the General Council before the end of 2002.68

Despite significant delay caused by disagreements over the details of the solution, the General Council finally adopted a compromise text on August 30th 2003.69 The compromise solution takes the specific form of a waiver from the obligations set out in paragraphs (f) and (h) of Article 31 of the TRIPS Agreement with respect to pharmaceutical products (i.e. the obligations to only issue compulsory licenses that are predominantly for the supply of the domestic market, and to pay adequate remuneration to the patent holder when such licenses are issued). The obligations of a potential exporting Member under Article 31(f) are waived to the extent necessary to produce pharmaceutical products and export them to eligible importing Members so long as certain procedural requirements are met.70 Any Member is eligible to be an exporter under this Agreement, but limitations were placed on which countries are eligible to import pharmaceutical products. Eligible importers include any LDC Member, and any other Member that has made a notification to the Council for TRIPS of its intention to use the system.71 However, such a Member must confirm in its notification that it has established that it has insufficient or no manufacturing capacities for the pharmaceutical product in question.72 At first glance, it appears that non-LDC importing Members would be free to make a determination of insufficient or no manufacturing capacities on their own, so long as they notify. However, the Chairperson’s statement clarifies that such notifications are subject to review by the Council for TRIPS.73 This seems needlessly onerous, but given this limitation, it will be important for the Council to interpret 66 Ibid, paragraph 5(b).67 Ibid, paragraph 5(c).68 Ibid, paragraph 6.69 Implementation of paragraph 6 of the Doha Declaration on the TRIPS Agreement and public health, Decision of the General Council of August 30th 2003, WT/L/450, 1 September 2003, available at www.wto.org. [hereinafter August 30th Agreement].70 Ibid, paragraph 2.71 Ibid, paragraph 1(b).72 Ibid, paragraph 2(a)(ii).73 General Council Chairperson’s Statement, 13 November 2003, WT/GC/M/83, available at www.wto.org.

“insufficient manufacturing capacities” broadly to include situations where it is economically infeasible to produce the pharmaceutical products in question, instead of limiting the scope of this provision to situations where the technical capacity is insufficient.74 Finally, many developed countries explicitly agreed not to use the August 30th Agreement as importers.75

Though the Agreement is not limited to specific diseases or pharmaceutical products, it imposes several procedure hurdles, which may prove to render it ineffective. The procedure envisaged under the Agreement is as follows. A Member desiring to import under the system must first examine the pharmaceutical product in question to determine its patent status and, in the case of a non-LDC Member, to determine that there is insufficient or no domestic capacity to manufacture it. If a patent does exist on the product, the Member must first negotiate with the patent holder to seek a voluntary license on reasonable commercial grounds unless it declares a public emergency or other situation of extreme urgency, or intends to make only public non-commercial use of the product in accordance with TRIPS Article 31(b). If this negotiation is not successful within a reasonable time, it must then issue a compulsory license for importation of the pharmaceutical product. The potential importer must then submit a notification to the Council for TRIPS listing the name and expected quantity of the pharmaceutical product needed, declaring its assessment of insufficient or no manufacturing capacity, and confirming either the non-existence of a patent in its territory or the issuance or intention to issue a compulsory import license.76

A potential exporting Member must then seek a voluntary license from the patent holder, and if this fails within a reasonable time period, must issue a compulsory license for export to an interested generic manufacturer within its borders. Such a license must be limited to production of the amount necessary to meet the needs stipulated by the eligible importing Member, and must require the entirety of the amount produced to be exported to that Member.77 An exporting Member must then provide notification to the Council for TRIPS of the conditions of this license.78 Further, it must ensure adequate remuneration to the patent holder in accordance with Article 31(h) of the TRIPS Agreement, though this requirement is waived in the eligible importing Member to prevent duplication of royalty fee payments.79

To prevent potential trade diversion, the product produced under an export license must be clearly identifiable through distinguishing packaging, colouring or shaping of the product. Further in this regard, eligible importing Members must take reasonable measures to prevent re-exportation of such products80, and other Members must ensure 74 It is undesirable from a global efficiency standpoint to require poor countries lacking comparative advantage in pharmaceutical manufacturing to invest scarce resources in producing generic drugs domestically as this is economically wasteful and inhibits the realization of economies of scale through trade.75 For the list of countries, See August 30th Agreement, supra note 130, Note 3.76 Ibid, paragraph 2(a).77 Ibid, paragraph 2(b).78 Ibid, paragraph 2(c).79 Ibid, paragraph 3.80 Ibid, paragraph 4.

the availability of effective legal means to prevent importation into, and sale in, their territories of products produced under this system81.

Implementation of the August 30th Agreement requires substantial amendment to patent legislation in most potential exporters and many potential importers. Several potential exporting Members have begun to enact legislation in this regard, including Canada, the European Union, Norway, the Netherlands and Korea.82 Some have criticized these legislative initiatives at length for having created even more onerous conditions than those set out in the Agreement.83 To the extent that these criticisms hold water, new legislation ought to be amended. It is of critical importance that India implements pharmaceutical product patenting in a manner that fully incorporates the permitted August 30th flexibilities so that it can continue to be a source of cheap generic substitutes for patented medicines in the developing world. As India moves to do so this year, several civil society groups fear that draft legislation now under consideration contains TRIPS-plus provisions that could curtail its ability to continue to supply cheap generic drugs abroad.84

In conclusion, given the significant flexibilities in TRIPS, now reinforced and expanded by the Doha Declaration and the August 30th Agreement, it is essential that developing countries frame their patent legislation in a way that fully incorporates these flexibilities so as to minimize the potential adverse affects of universal IP protection. This will require unbiased technical assistance from developed countries and institutions such as the World Intellectual Property Institute (WIPO), which MSF reports is currently not the case.85 Some have called for the WHO or WIPO to develop a model TRIPS-compliant law that makes maximum use of TRIPS flexibilities to achieve public health goals.86 Where procedural barriers prove too burdensome, which could be the case with the mechanism outlined in the August 30th Agreement, WTO Members should move to improve flexibilities. To date no notifications have been made to the TRIPS council under the August 30th framework87, suggesting that real problems exist that must be addressed going forward. August 30th was conceived as a temporary solution, which would be replaced by an eventual amendment to the TRIPS Agreement.88 This eventual amendment must compensate for any observed shortcomings in the current ad hoc August 30th regime.

81 Ibid, paragraph 5.82 See http://www.cptech.org/ip/health/cl/cl-export-legislation.html. 83 See “Update: Canadian Patent Act amendment and generic pharmaceutical exports”, Canadian HIV/AIDS Legal Network, 7 June 2004; and R. Elliott, “Generics for the developing world: a comparison of three approaches to implementing the WTO decision”, available at www.aidslaw.ca. 84 Health Gap India, supra note 118.85 Medicines Sans Frontieres, Drug Patents Under the Spotlight: Sharing Practical Knowledge About Pharmaceutical Patents, May 2003, available at www.accessmed-msf.org, at 11. [hereinafter MSF Patents]86 Access to Medicines in Underserved Markets: What are the Implications of Changes in Intellectual Property Rights, Trade and Drug Registration Policy?, (DFID Health Systems Resource Center, London 2004), available at www.healthsystemsrc.org, at 28. [hereinafter Underserved Markets].87 See http://www.wto.org/english/tratop_e/trips_e/public_health_e.htm. 88 August 30th, para 10.

IV. Factors Constraining Access

Many factors can constrain access to medicines in developing countries. Pharmaceutical patenting is only one such factor, others include inadequate infrastructure, drug regulatory hurdles, insufficient financing and high drug prices.1 In the context of neglected diseases, the central factor is that appropriate medicines often do not exist. This dearth of innovation requires special policy initiatives, which is addressed in Part VIII. This Part will address the factors underlying the gap in access to currently existing medicines, including those for the treatment of global diseases and HIV/AIDS, as well as the limited options currently available for neglected diseases.

Infrastructure

One central problem, broadly defined, is that developing countries and LDCs often lack the requisite infrastructure to deliver medicines to those in need. Problems of infrastructure can include a lack of distribution and supply systems, inadequate access to health care generally (including a lack of access to appropriately trained medical personnel who can diagnose and prescribe proper treatment), and insufficient laboratory facilities (which are particular important for monitoring the administration ART for HIV/AIDS). Improving infrastructure will be a key component of any strategy to scale up access to medicines in developing countries and will entail significant costs. For example, even assuming access to the lowest cost first-line ART regimen, currently $140 per person per year, the World Bank projects the total cost of scaling up ART in Burkina Faso to be $620 per person per year due to additional costs associated with biological monitoring, personnel and equipment.2 However, at least in the context of HIV/AIDS, poor infrastructure has been shown in some pilot studies to be a less significant impediment to scaling up access to ART than initially suspected, with sustained treatment and good adherence being demonstrated in several resource-poor settings.3

Drug Registration

Drug registration refers to the process by which a national drug regulatory agency (NDRA) confirms a medicine’s safety, quality and efficacy, in order to approve its use domestically.4 Each country typically has a national drug regulatory authority (NDRA), which is responsible for ensuring that drugs entering the domestic market are safe, high quality and effective. Originator pharmaceutical companies must submit clinical trial data to prove safety and efficacy, though many regimes allow potential generic substitutes to be registered after patent expiry on demonstrating bio-equivalence to the originator product.

The extent to which TRIPS creates an additional hurdle to the use of compulsory licensing to promote generic substitution of patented medicines by requiring the protection of originator company clinical test data is unclear and potentially a 1 World Bank Procurement Guide, supra note 62. at xii.2 Ibid, at 97, Table A.3.3 Ibid, at 2.4 Underserved Markets, supra note 147, at 7.

disincentive to generic companies contemplating entering the market. MSF data suggests that generic ARV registration status is a significant hurdle to accessing these drugs in several countries.5 This paper takes the position that developing countries ought to make full use of originator pharmaceutical test data in order to register generic substitutes on the basis of bio-equivalence. The drafting history of TRIPS, as well as the pro-public health interpretive mode evidenced in the Article 8 Principles and adopted by the Doha Declaration, weigh strongly in favour of interpreting “unfair commercial use” in Article 39(3) narrowly, particularly where pressing public health concerns exist, suggesting that TRIPS would not be an impediment to such an approach. However, TRIPS-plus provisions in bilateral and regional Free-Trade Agreements (FTA), addressed in Part VII, threaten to create more barriers to NDRA generic drug approval in developing countries.

Another regulatory hurdle is that seeking NDRA approval in each and every country that a drug producer seeks to supply is extremely inefficient, unnecessarily duplicative, and likely to often either increase drug costs or reduce incentives to register in the first place. This has led to calls for initiatives to harmonize drug regulation at various regional levels6, and to the extent that such initiatives would improve access to medicines they ought to be supported. At the least, NDRAs can make generic entry more attractive by offering fast track registration to suppliers qualified under the WHO Pre-qualification Project.7 Currently, this project only covers generic suppliers of medications for HIV/AIDS, tuberculosis and malaria, but ought to be expanding to support greater access to other essential medicines in poor countries.

One potential roadblock to using WHO Pre-qualification in this manner comes from donors who require more onerous regulatory oversight before their funds can be used to purchase generic drugs. As an example, the US President’s Emergency Plan for AIDS Relief (PEPFAR) requires that any generic drug purchased with its funds be granted US Food and Drug Agency (FDA) approval. By contrast, the World Bank and Global Fund to Fight AIDS Tuberculosis and Malaria (Global Fund) strongly recommend the use of the WHO Pre-qualification Project.8 PEPFAR ought to rethink this unnecessarily onerous approach as it will unnecessarily create inefficiencies and deter market entrants because of duplicative and costly regulatory approval requirements.

Financing

Inadequate financing is at present an enormous barrier to accessing medicines in the developing world. Addressing this will require greater resource allocation from developing countries themselves, but it is clear that they cannot bear the costs associating with scaling up access alone. In Africa, average annual drug spending per person is less

5 Medicines Sans Frontieres, Surmounting Challenges: Procurement of Antiretroviral Medicines in Low- and Middle-Income Countries, available at www.accessmed-msf.org. [hereinafter MSF Procurement]6 Trouiller, supra note 12 at 2192.7 WHO, Prequalifying Priority Medicines: Ensuring the Quality, Safety and Efficacy of HIV/AIDS, Tuberculosis and Malaria Medicines and Diagnostics, WHO/EDM/QSM/2004.2, available at www.who.org. 8 World Bank Procurement Guide, supra note 62, at 73.

than $2 per person.9 Thus, even if all drugs could be delivered at marginal variable production costs, they would be out of the price range of most developing world consumers. Significantly greater resources must be brought to bear through donor funding sources such as bilateral aid, multilateral organizations, development banks and private donors. Though funding from Global Fund, the World Bank, PEPFAR and other sources has increased recently, there is still an enormous gap to be filled.10 Further, international funding must be deployed through free public sector treatment roll-out programs.11 Currently, 80-90% of drugs in Africa and South Asia are paid for out-of-pocket12, whereas 60% of total pharmaceutical expenditure in wealthy countries comes from public sources13, running as high as 80-100% in European countries.14

Prices

Access to low priced drugs is essential to scaling up access in developing countries. Price can range anywhere from being the most significant factor restricting access15, to being irrelevant. As an example, Boehringer Ingelheim (BI) has offered to supply nevirapine (NVP) for free for use in the prevention of mother-to-child transmission (MTCT) of HIV, yet has been largely unable to give it away because of the lack of public MTCT programs in developing countries.16 Where price is a substantial barrier, it is sometimes self-imposed by developing countries. For example, many poor countries still apply duties and tariffs to imported pharmaceutical products. These can be as high as 10 to 30% in countries such as Kenya, Nigeria, Ghana, India and Burkina Faso.17 Such hurdles ought to be removed swiftly. Further, final end prices paid by consumers are often elevated due to domestic distributor mark-ups18, a practice which ought to be prevented in developing countries through regulation and in practice might be adequately controlled through greater public sector involvement in treatment scale up.

Finally, it is clear that an absence of competition can be a key barrier to accessing cheap drugs, particularly where patents block generic entry. The World Bank describes three pharmaceutical product categories: single-source, limited-source and multi-source.19

Multi-source products are often off-patent and cheap because vigorous generic competition tends to force prices down to close to the marginal variable cost of production.20 Products may be single-source or limited-source for a number of reasons including patents, but also due to technical production difficulties, problems with NDRA

9 Attaran 2004, supra note 9, at 159.10 Cheri Grace, “Equitable Pricing of Newer Essential Medicines for Developing Countries: Evidence for the Potential of Different Mechanisms”, WHO, available at www.who.org, at 11. [hereinafter Grace].11 Report of the Workshop on Differential Pricing and Financing of Essential Drugs, WTO/WHO, 8-11 April 2001, Hobsjor, Norway, available at www.wto.org, at 8. [hereinafter Hobsjor Report]12 Milne, supra note 17, at 22.13 Sherer and Watal, supra note 83, at 1.14 Trouiller, supra note 12, at 2191.15 Grace, supra note 159, at 57.16 Bale, supra note 34, at 10.17 Ibid.18 Grace, supra note 5.19 World Bank Procurement Guide, supra note 62, at xvii.20 Ibid.

registration, and a lack of economic incentives to induce production by generic manufacturers.21 Where this latter problem is determinative, the only means by which to induce generic substitution is to increase purchase funding and improve drug delivery infrastructure. For example, eflornithine, a drug for the treatment of African sleeping sickness, was discovered in 1990 by Aventis, who then granted an open license to the WHO. The WHO sought to license generic manufacturers worldwide but could not find a single supplier because of the lack of potential sales. Today, Aventis has also discontinued production meaning that there is not a single current source of the drug.22 In cases like these, creating markets through donor funding is the appropriate policy solution to inducing generic entry. However, where a particular limited-source drug is patented, additional measures need to be taken to achieve low prices in developing countries. The following section takes a closer look at pharmaceutical patent protection and its impact on current and future prices.

V. Pharmaceutical Patents and Access

It is clear that vigorous generic competition leads to substantially lower pharmaceutical prices. For example, MSF reported that generic entry for first-line ARV triple combination d4T, 3TC and NVP led to a reduction from $10,000-15,000 per patient per year in May 2000 to a best price offer of $201 per patient per year in April 2003.1 Prices continue to fall, with a current low price offer of $140 per patient per year brokered by the Clinton Foundation from four Indian and one South African generic supplier.2 As predicted by economic theory, this phenomenon of sharply falling prices is generally observed in all pharmaceutical product categories with generic entry following patent expiration.3 The extent to which pharmaceutical patenting blocks or will block generic substitution of medicines for use in the developing world in the future remains unclear. This question has been the subject of recent vigorous debate due to the implementation of TRIPS pharmaceutical patent protection, with R&D-based pharmaceutical companies and several scholars arguing that impact will be minimal, while many treatment advocates claim the contrary.

What is not debatable is that access to off-patent drugs is not hindered by the patent regime. This category included 302 of 319 medicines on the WHO Model List of Essential Medicines, or Essential Drug List (EDL), as of the date of a study conducted by Dr. Amir Attaran in 2004.4 Bale points out that access to these off-patent essential drugs remains poor, attributable to inadequate financing and infrastructure.5 Where these medicines are effective, appropriate measures need to be adopted to foster access. However, the EDL is replete with antiquated, increasingly ineffective drugs. Despite the 21 Ibid.22 Milne, supra note 17, at 44.1 Medicines Sans Frontieres, Trading Away Health: Intellectual Property and Access to Medicines in the Free Trade Area of the Americas (FTAA) Agreement, (MSF August 2003), available at www.accessmed-msf.org, at 2. [hereinafter MSF FTAA]2 See Global Fund Observer Newsletter, Issue 22, 6 April 2004, available at www.aidspan.org/gfo/archives/newsletter. [hereinafter GFO Newsletter].3 Sherer and Watal, supra note 83, at 5.4 Attaran 2004, supra note 9, at 155.5 Bale, supra note 34, at 3.

fact that all 16 drugs indicated for neglected diseases registered between 1975 and 1999 are currently on the EDL, less than 2% (21) of the 1,377 drugs indicated for global diseases during that same period have been included.6 This exclusion is suspect given that global diseases are a significant source of morbidity and mortality in poor countries and that developing country patients are equally deserving of the most current and effective therapies available in rich markets. It is likely that a large number of these drugs (any patented after 1984) are on-patent in many countries, and strategies need to be implemented to prevent their patent status from curtailing access in poor countries.

With respect to currently existing, on-patent medicines, the patent situation can be quite complicated. Medicines can be patented in some countries and not others due to a host of factors including originator company decisions not to seek patents in non-lucrative markets, differing standards of patentability across jurisdictions, and whether or not pharmaceutical products were actually patentable in particular countries at the time of filing. Attaran conducted a study in 2004 of the patent status (including pending TRIPS mailbox applications) of the 17 on-patent medicines included on the WHO EDL (of which 12 are ARVs, including 10 of the 11 drugs recommended by the WHO as first- and second-line regimens appropriate for resource-poor settings) in all of Africa and in various other developing countries.7 Finding that these 17 drugs are infrequently patented in developing countries, Attaran concluded that patents are an insignificant limitation on access to currently existing medicines.

His conclusions are suspect for several reasons. First, his analysis fails to take into account the lack of local manufacturing capacity that exists in most developing countries and LDCs. The domestic consumption of pharmaceuticals in such countries is entirely dominated by imports8, and thus the most that can be said is that there is no patent barrier in many poor countries to importing many of these 17 drugs. However, these countries, if desiring to make use of generic substitution, must seek a potential generic exporter. Very few developing countries have the requisite domestic manufacturing capacity, and this is likely limited in practice to Argentina, Brazil, China, India, Thailand and South Africa, with the possibility of a few others being included as well.9

I used Dr. Attaran’s data to directly assess the patent situation of the 12 ARVs on the WHO EDL in key potential developing world exporters (China, Thailand, Brazil, Argentina and India), and where possible compared his data to that reported by MSF in “Drug patents under the spotlight: sharing practical knowledge about pharmaceutical patents”10, a study conducted in May 2003. The patent data from the two studies are generally in accord and paint a very different story from that portrayed by Dr. Attaran. Of the 12 ARVs currently on the EDL, 10 are patented or have patents pending in China, 10 in Thailand, 8 in Brazil, 9 in Argentina, and all 12 in South Africa. In India, which has to date been the primary exporter of affordable generic ARVs to developing 6 Trouiller, supra note 12, at 2189.7 Attaran, supra note 9.8 Sherer and Watal, supra note 83, at 8.9 Ibid.10 MSF Patents, supra note 146.

countries, the data is slightly more promising. As noted above in Part III, India took advantage of the TRIPS flexibility to delay pharmaceutical patent protection until 2005, but was required to grant mailbox applications for the filing of patents between 1995 and 2005. Of the 12 ARVs on the EDL, Attaran reported that only 5 have pending mailbox applications. These, however, do include 2 of 5 important first-line ARVs (3TC and NVP) and 3 of 6 important second-line ARVs (ABC, SQV/r, and LPV/r). The relatively new compound TDF, a WHO-recommended second-line ARV, was excluded from the data in both the Attaran and MSF studies. Assuming it is the subject of a pending mailbox application, 4 of 6 WHO-recommended second-line ARVs could become patented in India this year when it reviews mailbox applications. As of January 2005, 6 Indian generic companies are producing 3TC, 6 are producing NVP, 3 are producing ABC, 1 is producing SQV/r, 1 is producing LPV/r, and none are producing TDF.11 All of these companies could potentially be enjoined from producing these generics after full TRIPS implementation.

Further, important first-line FDCs such as 3TC/EFV/ddI, 3TC/d4T/NVP, and 3TC/AZT/NVP are only produced by Indian generic companies12 as originator firms have not developed them due to blocking patents and inability to cross-license.13 All 3 of these FDCs contain at least one ARV that may become patented in India once mailbox applications are reviewed. This threatens to dry up their supply should pharmaceutical patent holders decide to enjoin them by suing for patent infringement, unless India implements legislation consistent with the August 30th Agreement and quickly issues compulsory licenses for export.

Indian TRIPS compliance may also poses a serious threat to continued scale up of cheap and effective generic ART in developing countries when these countries need to begin importing generic versions of second-line ARVs. As of January 2005, even the cheapest second-line ARVs are 2 to 12 times more expensive than first-line drugs.14 MSF data shows that the substantial price differences can at least partially be attributed to the number of generic manufacturers that have entered the market for these drugs worldwide. Vigorous competition is observed for first-line ARVs (EFV: 6 producers, AZT: 10, NVP: 11, 3TC: 14, d4T: 16), whereas few entrants exist for second-line ARVs (TDF: 0, LPV/r: 2, SQV/r: 2, ABC: 4, ddI: 9).15 This further highlights the need for India to fully take advantage of the flexibilities in TRIPS and the August 30th Agreement as it implements pharmaceutical patenting, so as to permit future vigorous generic competition for second-line ARVs.

One potentially positive factor is that of the 12 ARVs on the EDL, all have basic patent priority dates from before 1994 (the year in which priority patent applications were

11 Medicins Sans Frontieres, Untangling the web of price reductions: a pricing guide for the purchase of ARVs for developing countries 7th edition, (MSF January 2005), available at www.accessmed-msf.org, at 10-12. [hereinafter MSF Prices]12 Ibid, 10-12.13 MSF Patents, supra note 146, at 7.14 MSF Prices, supra note 182, at 4.15 Ibid, at 8.

eligible for mailbox applications in India) except LPV/r16 and EFV17 (the priority date for TDF is not known but may also be post-1994), suggesting that the pending mailbox applications may be for newer drug formulations rather than chemical compounds. Attaran’s data confirms that even the LPV/r mailbox application is a formulation application. Such patents, if granted, may not act as absolute blocks to generic production in the same way that the patent on the original molecule would because generic companies can attempt to work around potentially infringing formulations.

Dr. Attaran’s conclusion that patenting is not a significant barrier to accessing ARVs in developing countries is also called into question by the fact that 3 important first-line ARVs are widely patented throughout Africa. 3TC is patented in 33/53 African countries, NVP in 25/33, and AZT in 17/53. The 3TC/AZT combo is blocked by a patent on one of the two compounds in 37/53 Africa countries.18 Thus, patents could at least in theory pose a significant barrier even for countries seeking to import generic ARVs from abroad. For example, MSF has documented how Kenyan implementation of TRIPS through the Kenyan Industrial Property Act 2001 could prevent it from importing generic drugs from India for use in its local ARV treatment programs.19 Further, the fact that 12 of 12 ARVs on the EDL are patented in South Africa is particularly troublesome given that it has the world’s highest burden of HIV/AIDS.20 MSF reports that access to low cost generic ARVs is still severely lacking in South Africa due to this widespread patenting.21

I also analyzed Attaran’s data for the 5 other currently on-patent medicines on the WHO EDL, which include the anti-malarial drugs Coartem and Mefloquine, Flucoanazole for the treatment of opportunistic fungal infections associated with HIV/AIDS, and the antibiotics Ciprofloxacin and Azithromycin. His conclusions are likely more accurate for these drugs. None of these drugs are widely patented in potential developing world exporters or developing countries generally. Coartem is perhaps an exception, enjoying patent protection in the following potential exporters: China, Thailand, Argentina and South Africa. Ciprofloxacin and Azithromycin have priority dates of 1980 and 1981 suggesting they may have since gone off-patent.

Despite the current complexity and debate surrounding the patent status of currently existing medicines, it seems rather clear that, for new medicines developed from 2005 onward when pharmaceutical product protection is offered in virtually all Member states of the WTO, widespread patenting will threaten to prevent the supply of low-cost generic versions of such new products in developing countries by virtually eliminating any possibility of generic substitution during the life of the patent.22 This will 16 MSF Patents, supra note 146, at 30.17 Joan-Ramon Borrell and Jayashree Watal, “Impact of Patents on Access to HIV/AIDS Drugs in Developing Countries”, Harvard Center for International Development Working Paper No. 92, May 2002, available at www.cid.harvard.edu, at 15. [hereinafter Borrell]18 “Do Patents Prevent Access to Drugs for HIV in Developing Countries?”, J.A.M.A., February 20, 2002, Vol. 287, No. 7, at 840-843.19 MSF Patents, supra note 146, at 8.20 UNAIDS Report 2004, supra note 46.21 MSF Procurement, supra note 154, at 39.22 Grace, supra note 159, at 12.

pose difficulties for countries wishing to promote generic production domestically, but particularly for countries seeking to import generics as well as countries willing to export them. Thus, for the plethora of new medicines to treat global diseases (most of which are not included on the WHO EDL), for the ARVs that are currently blocked by patents in many potential exporters and will potentially be blocked by patents after mailbox applications are reviewed in India, and for medicines that are developed from now on once TRIPS is fully implemented worldwide, strategies must be put in place to ensure affordable prices are accessible to developing countries. Further, even where patenting is not a barrier, such as for the majority of drugs on the EDL, strategies need to be developed to overcome the access gap. The following section will describe and evaluate some proposed strategies for achieving these goals.

VI. Mechanisms to Increase Access

Because it is extremely unlikely that sufficient finances will be deployed to purchase drugs for developing countries at developed world prices, the central goal of any strategy to promote widespread access to new, on-patent medicines must be to achieve differential pricing between rich and poor markets. As argued in Part III, differential pricing is economically efficient because the collection of developed world monopoly prices in poor markets contributes negligibly to incentives to innovate new drugs while entailing significant deadweight consumer loss. This section highlights the potential of 4 strategies to achieve differential pricing: 1) voluntary price discounts by originator pharmaceutical companies, 2) generic substitution in developing world markets, 3) bulk procurement, and 4) pharmaceutical price controls. Though all aim at achieving differential prices for patented medicines, it is recognized that access to older, off-patent medicines must also be fostered. This is best achieved by attracting the interest of generic producers through greater financial commitment, but can also be partially addressed with bulk purchasing strategies, discussed further below. Notably, the South African government has announced plans to launch an initiative to promote the production of off-patent pharmaceuticals domestically by local generic companies.1

For on-patent drugs, it is imperative under any system of differential pricing that monopoly rents continue to be collected by patent holders in rich countries so that incentives to innovate are protected. The goal is then to provide on-patent medicines in poor countries at close to the marginal variable cost of production, while effectively segmenting the rich markets. Differential pricing is otherwise not possible because arbitrage will undercut monopoly prices in developed countries. Thus, appropriate legal means ought to be adopted in order to promote effective segmentation. One particularly important tool is for rich countries to exercise their discretion under Article 6 of TRIPS to disallow parallel importation of medicines from abroad. The world’s two most important pharmaceutical markets, the US and the EU, have both adopted such a policy.2 Other means of promoting segmentation of developed and developing world markets are addressed below. By contrast, parallel imports between poor countries would cause negligible if any harm to incentives to innovate while potentially reducing prices in some

1 Underserved Markets, supra note 147, at 25.2 Lanjouw, supra note 1, at7; Sherer and Watal, supra note 83, at 33.

cases. Thus, segmentation of poor markets from each other is undesirable. Notably, Argentina, Thailand and South Africa have each adopted laws permitting parallel imports of pharmaceuticals3, but most developing countries have not.4

Voluntary Price Discounts

Two forms of voluntary price discounts by originator firms are examined here: 1) Ramsey pricing, and 2) drug donations. Neither form requires any circumvention of patent rights, which is a positive attribute under worldwide TRIPS implementation.

Ramsey Pricing: Ramsey pricing theory predicts that, if appropriate conditions are created, pharmaceutical companies will spontaneously adopt a differential pricing strategy. In industries where fixed costs are high relative to variable costs, it is rational for a monopolist to sell its product at different prices across markets with different demand elasticities, so long as arbitrage of the low price product can be effectively prevented. In the pharmaceutical industry, R&D and other fixed costs can account for up to 85% of the total costs of producing a drug.5 These fixed costs can be allocated arbitrarily, allowing pharmaceutical companies a large degree of flexibility in deciding where to recover up-front R&D investments.6 Further, national income differences translate into national drug markets in poorer countries having higher demand elasticities than in rich countries.7 Thus, in theory, it is rationale for a pharmaceutical company owning a patent monopoly to sell at high prices in rich markets and at low prices in poor markets.8 So long as the pharmaceutical company can earn a small profit by charging slightly above the marginal variable cost of production in poor countries and can recoup its high fixed R&D costs by selling at prices well above marginal costs in rich countries, such a strategy can actually be Pareto-optimal by maximizing the firm’s global profits, ensuring greater access for the poor, and at the same time having no impact on prices paid by consumers in rich markets.9 By contrast, where firms are confronted with the potential for international arbitrage, it is rationale to protect monopoly prices in developed countries by charging a uniform global price close to that which developed world markets can bear.10 Additionally, increasing volume by selling at close to marginal cost is likely to be adopted only where a substantial portion of consumers who could not afford the drugs at developed world prices would be able to afford them at the discounted rate11, which is unlikely to be the case in low-income countries and LDCs. This highlights the necessity of rolling out public treatment programs in poor countries using donor-financed drug purchases.

3 Sherer and Watal, supra note 83, at 33.4 Underserved Markets, supra note 147, at 15.5 Grace, supra note 159, at 1.6 Ibid, at 7.7 Sherer and Watal, supra note 83, at 34.8 Hobsjor Report, supra note 160, at 10.9 Sherer and Watal, supra note 83, at 35.10 Lanjouw, supra note 1, at 7.11 Kremer, supra note 14, at 20.

In practice, a strong pattern of voluntary Ramsey pricing based on national income differences has only been observed in rare cases.12 Sherer and Watal conducted a study of ARV pricing in the developing world between 1995 and 1999, when few or no generic substitutes were available.13 They found only a faint indication of any sort of systematic income-correlated pricing14, with prices habitually the same as those found in the US domestic market. In fact, in 20% of cases examined, the ARVs were priced above US levels.15 This is likely related to the high number of consumers in developing countries that pay for drugs out-of-pocket. Whereas developed world public and private medical insurance schemes have relatively strong bargaining power and can negotiate reduced prices from originator pharmaceutical companies, these consumers cannot.

Recent originator firm first-line ARV price concessions are best viewed not as voluntary, but rather as a product of successful international advocacy, vigorous generic competition from imitator firms in India, and threatened use of compulsory licensing in countries such as Brazil.16 In this environment, five major pharmaceutical firms (Boehringer Ingelheim, Bristol-Myers Squibb, GlaxoSmithKline, Merck and Hoffman-LaRoche) partnered with UNAIDS in 2001 to form the Accelerated Access Initiative (AAI), which offers differentially priced first-line ARVs to developing countries.17 Prices under this program have generally lagged behind those offered by generic manufacturers but, as of January 2005, some of the firms were making better offers than their Indian generic counterparts.18 However, where generic competition is not a threat, even the firms participating in this initiative seem unwilling to reduce prices.19 Further problems include AAI price discounts being restricted to particular countries (often excluding all middle-income countries), to public programs, to specific drug formulations, and/or being tied to commitments from recipient countries to adhere to TRIPS-plus intellectual property protection.20

Despite the experience with ARVs, voluntary Ramsey pricing (without the threat of generic competition) has been observed in some circumstances. For example, Sherer and Watal report substantial voluntary price differentials across vaccine sales in rich and poor countries.21 Another interesting example is Novartis’ marketing strategy for its anti-malarial Coartem. Using differential branding and packaging, it sells Coartem (registered as Riamet in developed markets) for 25% of the US market price in developing countries, and to WHO treatment programs for 5% of the US price.22 Though these two examples set positive precedents, it is far from clear that voluntary Ramsey pricing is likely to

12 Grace, supra note 159, at 28.13 Sherer and Watal, supra note 83.14 Ibid, at 39.15 Ibid.16 T. Sandler, D. Arse, “A Conceptual Framework for Understanding Global and Transnational Goods for Health”, Commission on Macroeconomics and Health Working Paper Series, Paper No. WG2:1, available at www.cmhealth.org, at 33. [hereinafter Sandler]17 Grace, supra note 159, at 21-22.18 MSF Prices, supra note 182, at 10-12.19 Grace, supra note 159, at 28.20 Ibid, at 26.21 Sherer and Watal, supra note 83, at 38.22 Grace, supra note 159, at 23.

become widespread in the near future. Two factors in particular act as roadblocks: international arbitrage and the existence of wealthy consumers in poor countries.

International arbitrage is broadly defined as the migration of differential prices into developed world pharmaceutical markets. This can happen in at least two ways. First, differentially priced products can be physically diverted from their intended beneficiaries and resold in developed markets at substantially higher prices. Second, low prices in developing countries can influence wealthy market prices without physical diversion through external reference pricing systems and through political processes. External reference pricing refers to the phenomenon of regulators in rich countries setting price ceilings on the basis of prices observed in other countries.23 It also occurs when drug purchasers with market power, such as public or private insurance schemes, refer to prices in other countries in their negotiations with pharmaceutical manufacturers.

Brand name pharmaceutical companies often cite physical arbitrage as a central concern, but this is likely overblown given its low potential to undercut prices in rich markets. Several mechanisms can be used to effectively segment product markets, including different branding and packaging (such as with Coartem), strict supply chain management, customs controls in both developing and developed countries, strong contractual arrangements with procurement entities, and the use of intellectual property laws in developed countries to prevent parallel importation.24 Most, if not all, major developed country markets already prohibit parallel imports.25 Moreover, national pharmaceutical markets are quite stringently regulated by National Drug Regulatory Authorities (NDRAs), whose refusal to register a particular product serves as an effective barrier to market access.26 Finally, physical arbitrage of differentially priced products is not generally observed27, except for cross-border sales from Canada to the United States. It is worth noting that Congress has not made importing drugs from Canada illegal, which at least partially explains the phenomenon. Outside of the Canada-US context, enormous price differentials exist between ARVs sold by originator firms in rich markets and those sold to a host of developing country treatment programs by Indian generic manufacturers, no reports exist of cheap generic versions ending up in Western markets.

The potential for price arbitrage through external reference pricing and political pressure has more explanatory power with respect to the general absence of Ramsey pricing strategies across. External referencing is used frequently by price regulators and drug purchasers28, leading a rational originator firm to fear that differential prices will negatively impact its prospects for charging high prices in rich countries. Further, differential prices can and have lead to the exertion of significant political pressure on brand name firms to lower prices. For example, after a Congressional hearing in which a US Senator asked a major vaccine manufacturer how it could justify charging nearly

23 Sherer and Watal, supra note 83, at 48.24 Hobsjor Report, supra note 160, at 4.25 World Bank Procurement Guide, supra note 62, at 119.26 Correa, supra note 3, at 26.27 Keith E. Maskus, “Ensuring Access to Essential Medicines: Some Economic Considerations”, 20 Wis. Int’l L.J. 563-579, at 567. [hereinafter Maskus]28 Hobsjor Report, supra note 160, at 20.

three times as much to the US government for vaccines as to foreign developing countries, it stopped submitting bids to supply vaccines to UNICEF.29 Moreover, the issue of parallel importation of lower priced drugs from abroad is constant element of US health policy debates.30

Unlike physical arbitrage, it is not immediately obvious how to prevent general price arbitrage. Some have argued that an international agreement is needed to ban the practice of external reference pricing, or at least to limit its scope to other countries of comparable wealth.31 Certainly important is strong political leadership and advocacy in rich countries to inform both politicians and the general public about the urgent need for differential pricing and to dispel the misconception that firms have to elevate prices in rich countries in order to sell cheaply in poor countries.32

Another significant roadblock to the voluntary adoption of Ramsey pricing strategies is the existence of small minorities in developing countries that enjoy developed world income levels and that tend to have comprehensive private health insurance. It is often more profitable for a monopolist to restrict volumes and sell at developed world prices to these consumers than to offer prices slightly above marginal production costs and seek to profit from increased sales volumes.33 The potential for physical arbitrage within a national pharmaceutical market poses difficulties that are not as easily addressed as in the cross-border context, and thus without the ability to segment rich and poor consumers within developing countries, firms will often not have the incentive to sell at close to marginal cost. This phenomenon is more likely to be pronounced in developing countries with large concentrations of wealth such as South Africa than in other developing countries with less substantial income inequalities. In principle, the widespread adoption of parallel importation between developing countries (but not between rich and poor countries) could help to alleviate this problem because monopoly prices would be undercut by cheaper parallel imports from other poor countries.34 Further, widespread public roll out of treatment programs could go a long way to creating a credible prospect for pharmaceutical companies to earn profits through volume sales rather than by restricting access.

Creating an environment conducive to voluntary Ramsey pricing by pharmaceutical companies is laudable and ought to be pursued. However, it is unclear to what extent the appropriate conditions can be achieved, and given the impressive track record of generic competition in inducing price discounts by originator firms, credible threats for compulsory licensing in the post-TRIPS world will likely continue to be necessary to generate appropriate price concessions.

Drug Donation Programs: In some circumstances, originator pharmaceutical companies have taken the approach of donating drugs to certain countries rather than selling them

29 Kremer, supra note 14, at 25.30 Sherer and Watal, supra note 83, at 33.31 Hobsjor Report, supra note 160, at 20; Sherer and Watal, supra note 83, at 49.32 Hobsjor Report, supra note 160, at 4.33 Sherer and Watal, supra note 83, at 31.34 Ibid, at 49.

for profit. A tremendous success story is the Merck Invermectin donation program, initiated in 1988. Merck agreed to give away its drug Invermectin to provide mass treatment for river blindness (onchocerciasis) in developing countries to whomever asked for it for as long as they needed it.35 Since 1988, nearly 25 million individuals have been treated under this program.36 Other recent drug donation programs include Malarone for the treatment of drug-resistant malaria (GlaxoSmithKline), albendazole for lymphatic filariasis (GlaxoSmithKline), and Zithromax for trachoma (Pfizer).37 Sherer and Watal report that in the US, potential tax savings afforded to drug donation programs are so large as to entail little or no out-of-pocket cost to pharmaceutical firms.38 Other developed countries should consider adopted such tax policies.

However, the key disadvantage to this approach is that the tax subsidy for drug donation programs comes directly out of the pocket of developed world taxpayers, whereas voluntary Ramsey pricing and generic substitution in poor countries improve access at no direct cost (though presumably drug purchases would still have to be in part funded from donor government budgets). Other disadvantages to relying on drug donation strategies are that they are likely unsustainable as a long term solution, and seem to have been limited to programs for tropic diseases where pharmaceutical firms have little sales to lose. By contrast, firms are unlikely to donate drugs that are indicated for global diseases because substantial sales to wealthy consumers in poor countries would be lost.

Generic Substitution

A key strategy to foster differential pricing of current on-patent medicines between rich and poor countries, which has strong theoretical and empirical backing, is to use vigorous generic substitution to supply poor markets while maintaining patent exclusivity and thus monopoly pricing in rich markets. This is particularly important where originator companies are unwilling to offer marginal prices voluntarily. As previously discussed, so long as markets can be segmented, generic supply of on-patent medicines in low income and LDC markets would entail almost no impact on global incentives to innovate. Recent experience with first-line ARVs, where the lowest available generic price for triple-combination therapy in developing countries is currently $140 per person per year and where monopoly prices continue to be successfully extracted in rich markets, provides a compelling example that this strategy can and does work and ought to be adopted on a more widespread basis. The absence of any systematically observed diversion helps to demonstrate that arbitrage concerns are overblown. To ensure prices are reduced to close to marginal production costs, it is important to encourage multiple generic entrants for any given product, as several studies have demonstrated that lowest prices are only achieved with a relatively high number of competitors.39 This is confirmed by the Indian generic ARV experience. A substantial number of generic entrants in India have ensured that first-line treatments are available at 35 Sandler, supra note 209, at 31.36 Sherer and Watal, supra note 83, at 54.37 Stansfield, supra note 7, at 21.38 Sherer and Watal, supra note 83, at 54.39 Borrell, supra note 188, at 3.

dramatically reduced prices. By contrast, second-line ARVs, produced by far fewer firms, remain 2 to 12 times more expensive.40

In any strategy to promote generic production, it is crucial to understand that generic companies, like other business entities, make investment decisions based on future market prospects. Even though front-end investments are much lower for a generic company than those associated with researching and developing new drugs, there are still substantial up-front transaction and capitals costs41, including new plant and manufacturing capacity, drug bio-equivalence testing, regulatory approval procedures, and marketing costs. Vigorous generic entry is far more likely where prospective markets are large and where sufficient sales can be anticipated to defray up-front investments. Thus, there are two possible approaches to increasing incentives for generic entry: creating certainty of long-term potential market prospects and reducing front-end expenses.42

Important means to reduce front-end costs, mentioned in Part IV, include minimizing regulatory approval hurdles by allowing the use of originator clinical test data to grant NDRA approval on the sole basis generic bio-equivalence43, by offering fast-track registration of WHO pre-qualified generics, and by eventually streamlining or regionalizing drug regulatory capacity to reduce transaction costs. With respect to improving market prospects, absolutely essential is increased donor financing and public treatment roll out in developing countries. The Clinton Foundation was only able to negotiate the current international best price of $140 per person per year for first-line triple combination therapy by promising 4 Indian generic companies and 1 South African generic company large, predictable and long term volumes and by demonstrating that governments were implementing public treatment plans.44

With the implementation of universal pharmaceutical patenting under TRIPS, a final hurdle to generic substitution in poor countries will increasingly be that medicines patented in rich markets will also be widely patented in the developing world. Where patents are blocking access, additional strategies beyond efficient regulatory procedures and increased financing are needed to foster cheap generic supply. Three such strategies are reviewed here: 1) compulsory licensing, 2) voluntary licensing, and 3) patent waiver systems.

Compulsory licensing: The TRIPS regime for compulsory licensing was reviewed in detail in Part III. Originator companies and countries with large innovation-oriented pharmaceutical industries have argued strongly against widespread use of compulsory licensing to increase access to medicines. This is particularly hypocritical given its successful use in the United States to remedy anti-competitive practices45, and to induce

40 MSF Prices, supra note 182, at 8.41 Sherer and Watal, supra note 83, at 6.42 Ibid, at 6.43 Ibid.44 Mark Schoofs, Wall Street Journal: “Clinton Program Would Help Poor Nations Get AIDS Drugs, 23 October 2003”.45 Sherer and Watal, supra note 83, at 16.

price concessions on Ciprofloxacin by Bayer in the context of the post-September 11th anthrax scare.46 A compulsory licensing regime was also widely used in Canada for both local manufacture and importation of generic versions of patented medicines up until 199147, when it was foregone in favour of government-regulated price controls. This system was extremely successful at reducing domestic prices.48 In the future, compulsory licensing will increasingly be the only viable option for fostering vigorous generic competition in developing countries as patenting of new medicines will become uniform in the post-TRIPS world.

Particularly important going forward will be the existence of a functioning system of import and export compulsory licensing so that developing countries that lack pharmaceutical manufacturing capacity have access to generic substitutes. Only a handful of developing countries at present possess the economic and technical capacity necessary to produce drugs domestically49, while the rest rely entirely on imports. This is desirable from a global efficiency standpoint, as requiring poor countries lacking comparative advantage in pharmaceutical manufacturing to invest scarce resources in producing generic drugs is economically wasteful and inhibits the realization of economies of scale through trade.

Outlined in Part III, the August 30th Agreement adopted by the Council for TRIPS in 2003 is designed to implement such a system of imports and exports. However, due to the onerous procedural obligations under this Agreement, it is far from clear that sufficient economies of scale are possible to interest generic companies in entering the market.50 The August 30th Agreement is at root an ad hoc, case-by-case, country-by-country system, which unnecessarily segments small markets. Demand from any one particular developing country that lacks manufacturing capacity will often be insufficient to induce a generic company to invest in production. Negotiation of multiple licenses and contracts on a country-by-country entails high transaction costs and thus substantial inefficiencies. Uncertainties over potential revocation of licenses and the prospect of litigation from originator firms are further disincentives to entry.51

Despite these limitations, certain steps can be taken within the current framework to make compulsory licensing more workable. First, all developing countries and potential developed world exporters need to fully implement into law the flexibilities contained in TRIPS, the Doha Declaration and the August 30th Agreement, and must make compulsory licensing procedures as simple and expeditious as possible. It is absolutely critical that India’s new patent law contains these flexibilities so that it can continue to act as a major source of cheap generic alternatives. It is equally important that other potential developing world suppliers such as Brazil and China recognize their

46 See www.forbes.com/2001/10/17/1017cipro.html. 47 Sherer and Watal, supra note 83, at 20.48 Ibid.49 Correa, supra note 3, at 23.50 Medicins Sans Frontieres, Doha Derailed: A Progress Report on TRIPS and Access to Medicines, (MSF 2003), available at www.accessmed-msf.org, at 2. [hereinafter MSF Doha Derailed]51 Correa, supra note 3, at 24.

comparative advantage as loci of generic production and thus implement compulsory licensing regimes that allow for export to other developing countries.52

Another important step is for countries to set uniform and consistent royalty rates as “adequate remuneration” under TRIPS Article 31(b) in their implementing legislation. This creates certainty for potential generic licensees by preventing potential brand name patent holder lawsuits over royalty determinations. Setting a standard uniform rate of 4% proved extremely successful under the previous Canadian compulsory licensing regime, facilitating generic entry on average only 10 months after brand name regulatory approval.53

Developing countries should also use the national emergency and public non-commercial use exceptions in the context of public health to take advantage of the simplified licensing procedures contemplated under TRIPS Article 31. This is fully consistent with the Doha Declaration, which recognized that countries retain the right to determine what constitutes a national emergency, and to make such declarations to remedy public health concerns.

Another potentially important flexibility is that broader compulsory licenses that are not restricted to domestic market supply are permissible under TRIPS if they are granted to remedy anticompetitive practices.54 The practical value is that the procedural nightmare under the August 30th agreement can be avoided if a potential exporter finds through judicial or administrative processes that an originator firm is abusing market dominance domestically. A recent complaint before the South African Competition Commission against GlaxoSmithKline and Boehringer Ingelheim was successfully launched and resulted in a settlement whereby both companies issued voluntary licenses to the South African generic manufacturer Aspen Pharmacare to produce generic versions of various ARVs, and which permitted export to other Sub-Saharan African countries.55 Though no judicial resolution was reached, the complaint, which the Commission accepted as alleging valid prima facie violations of the South African Competition Act, advanced compelling arguments under doctrines of excessive pricing, failing to supply, and denying a competitor access to an essential facility. These arguments serve as strong precedents for future competition policy-oriented action to remedy access to drugs problems. Unfortunately, most developing countries do not have robust competition policies56, but it would be sufficient if a small group of potential exporters implemented remedies for anti-competitive pricing and issued broad compulsory licenses in response to violations. A limitation to this approach is that any potential exporter would also have to experience a substantial domestic competition problem before it could participate as an exporter.

52 Sherer and Watal, supra note 83, at 29.53 Lanjouw, supra note 1, at 25.54 TRIPS, supra note 92, article 31(k).55 Jonathan Berger and Fatima Hassan “The Price of Life: Hazel Tau and Others v. GlaxoSmithKline and Boehringer Ingelheim” (2003) (available at www.alp.org.za) [hereinafter Price of Life] at 18.56 Underserved Markets, supra note 147, at 16.

A final important step that can be taken to make the current regime of compulsory licensing workable is to aggregate demand from various countries by coordinating the timing of compulsory licensing, and by approaching potential generic exporters with large enough and reliable enough potential market volume to incentivize the up-front costs associated the onerous August 30th procedure. A reasonable interpretation of the August 30th Agreement would allow a generic company to apply for a single compulsory export license to supply an aggregated list of contracts from various developing countries.57 However, there is concern that the only permissible interpretation under the Canadian implementing legislation is that individual export licenses must be granted on a country-by-country basis.58 This would be a substantial and unnecessary barrier to stimulating generic interest, and similar limitations must be avoided as other potential exporting countries implement August 30th. Strategies to aggregate demand are discussed further in the section on bulk purchasing.

In practice, though compulsory licensing has been successfully used in the US and Canada as noted above, it has rarely been used in the developing world. No developing country has yet invoked a compulsory license to import a pharmaceutical product.59 The low income countries Zimbabwe, Mozambique and Zambia, and the middle income countries Malaysia and Indonesia have recently issued compulsory licenses for local production of ARVs, while Cameroon has authorized its central procurement agency to import generic versions of ARVs for supply of the non-profit sector (though this authorization was not in the form of a compulsory license).60 More widespread and credible compulsory licensing regimes will have to be adopted in the post-TRIPS world as more and more of new medicines will be subject to patents in developing countries.

It may be that compulsory licensing will rarely need to be employed to obtain access to low price medicines. The most practical value of compulsory licensing may lie in its use as a negotiating tool to acquire price concessions or voluntary licenses from originator pharmaceutical firms.61 Brazil has used this tactic with great success to achieve low price ARVs for its national treatment program.62 However, this success derives from the fact that Brazil’s threats were credible because of its domestic capacity. As noted above, only a handful of other developing countries have similar capacity, which underscores the need for a workable system of import/export compulsory licensing in order to confer similar bargaining power on developing countries that lack domestic

57 August 30th Agreement, supra note 130, paragraph 2(b): “the compulsory license issued by the exporting Member under this Decision shall contain the following conditions: (i) only the amount necessary to meet the needs of the eligible importing Member(s)”58 Bill C-9: An Act to amend the Patent Act and the Food and Drugs Act (The Jean Chretien Pledge to Africa), Third Session, Thirty-seventh Parliament, 52-53 Elizabeth II, 2004, Statutes of Canada 2004, s.21.04(1): “the Commissioner shall … authorize the person … to sell [the product] for export to a country … listed in any of Schedules 2 to 4”.59 Grace, supra note 159, at 4.60 Medicins Sans Frontieres, Will the Lifeline of Affordable Medicines to Poor Countries Be Cut?, available at www.accessmed-msf.org; See also http://www.cptech.org/ip/health/cl/recent-examples.html#South 61 Correa, supra note 3, at 22.62 Grace, supra note 159, at 3.

manufacturing capacity.63 Experience may prove over time that the August 30th framework for import/export licensing is insufficient and/or unworkable, in which case the WTO must implement a regime that is more simplified and efficient. To date, no notifications have been made under the current system64, suggesting that reform is indeed needed.

Voluntarily licensing: Theoretically, generic substitution of patented medicines could be achieved if originator firms would agree to grant voluntary licenses to developing world generic companies for local production and export.65 Such licenses would have to be granted to firms in potential exporters such as India, China, Brazil, Thailand and South Africa and would have to be non-exclusive so as to promote the lowest possible prices through vigorous competition.

Clearly defined voluntary licenses negotiated directly with originator firms that delimit the scope of permissible importing countries would offer a degree of certainty to potential generic entrants likely not possible under the current TRIPS and August 30th compulsory licensing regime. Further, voluntary licensing has the added advantage that originator firm trade secrets with respect to production processes would presumably be transferred to the licensee.

However, the problem with relying solely on this mechanism is that firms are often unwilling to grant licenses, and where they do, their goals are often unrelated to increasing access. For example, an originator firm may wish to confer an exclusive license to one local developing country generic manufacturer (instead of multiple firms) to obtain labour cost savings, but then maintain elevated prices instead of passing savings on to consumers.66 In essence, the incentive problems are similar to those observed for Ramsey pricing and thus firms are unlikely to voluntarily adopt this strategy on a regular basis.67

In practice, widespread voluntary licensing has not been observed. Before starting to produce generic ARVs in 2001, the Indian generic manufacturer Cipla sought voluntary licenses from all 5 originator firms participating in the UNAIDS Accelerated Access Initiative, but all requests were promptly refused.68 As noted above, GlaxoSmithKline and Boehringer Ingelheim have reached voluntarily licensing agreements with South African generic manufacturer Aspen Pharmacare to produce various ARVs for local consumption and regional export, but only after the initiation of competition policy proceedings by various South African treatment advocates. The remedy for a finding of anticompetitive practices would have included damages and various administrative penalties, but also the issuance of compulsory licenses, which again underscores the absolute centrality of credible compulsory licensing threats to induce concessions from originator firms.

63 Ibid, at 56.64 See www.wto.org/english/tratop_e/trips_e/public_health_e.htm 65 Grace, supra note 159, at 33.66 Ibid, at 34.67 Ibid, at 35.68 Ibid.

Another originator firm, Pharmacia, has now taken a more cooperative approach by offering to grant non-exclusive licenses for its ARV delavirdine to generic manufacturers who agree to produce and supply the medicine to countries with a per capita GNP of less than $1,200 or an HIV infection rate of higher than 1%.69 Again, this offer comes in the particular context of strong international HIV/AIDS treatment advocacy and threats of non-consensual generic substitution. In the absence of credible threats, it is far from clear that such a cooperative approach is likely to be forthcoming from patent holders for new medicines generally.

Patent Waivers: Patent waivers, strongly advocated by Jean Lanjouw, are another potential mechanism to facilitate access to generic versions of patented medicines in developing countries.70 Using the US as an example, a patent waiver would work as follows. When a US pharmaceutical firm files a patent for a new drug, it must acquire a foreign filing license from the US Patent and Trademark Office (PTO) in order to file for patents on the same invention in other jurisdictions. Where the new drug is indicated for the treatment of a global disease, Lanjouw argues that the PTO should require the applicant to promise that permission to file abroad will not be used to restrict the sale or manufacture of the new drug in a set list of developing countries.71 This would allow for generic companies in those countries to produce the new drug for domestic consumption and/or for export to any of the other listed countries. If sued by the patent holder, the generic company could complain to the US PTO. Committing fraud or failure to deal in good faith with the PTO is clear grounds for rendering a US patent unenforceable.72 Thus, the patent holder would rationally choose not to sue in the listed countries to avoid losing patent protection in the US, where far higher profit margins are available.73

This approach offers some advantages. First, because of its transparency and predictability, it would provide a level of certainty to potential developing world generic producers that does not exist under the current compulsory licensing regime.74 Second, it is entirely consistent with TRIPS, and if implemented unilaterally by only the US, EU and Japan, it would make TRIPS implementation in developing countries almost irrelevant with respect to pharmaceuticals.75 Of course, as with other differential pricing strategies, physical and price arbitrage would have to be prevented to maintain incentives to innovate.

However, important limitations also exist. A patent waiver system could only work for drugs developed after its implementation and thus would fail to address the access gap for already-existing on-patent medicines. More importantly, though in theory very effective, patent waivers have never been used and implementing them is unlikely to be politically feasible.76 The US, EU, Japan and other Western countries, the very actors

69 Ibid, at 36.70 Lanjouw, supra note 1.71 Ibid, at 10.72 Ibid, at 11.73 Ibid, at 6.74 Grace, supra note 159, at 60.75 Lanjouw, supra note 1, at 12-13.76 Grace, supra note 159, at 3.

who would be central to a patent waiver system, are unlikely to participate given their strong stance in favour of universal patent protection during TRIPS negotiation and subsequent international debate. The relative advantage of compulsory licensing regimes is that they are administered locally by developing countries without requiring the consent or participation of countries biased in favour of brand name pharmaceutical interests.

Bulk Purchasing

The use of bulk pharmaceutical purchasing has great potential for increasing access to medicines in developing countries, particularly in combination with other differential pricing mechanisms and reliable funding of public treatment programs.77 The basic structure of a bulk procurement strategy involves pooling demand for drugs from multiple developing world sources and then using the resultant negotiating power to induce lower price offers from suppliers. Bulk purchasing benefits consumers in the developing world by giving them access to lower priced pharmaceuticals. It can also be beneficial to suppliers.78 Long-term market certainty reduces capital investment risks, increases economies of scale, and reduces demand-forecasting costs.79 It further reduces transaction costs associated with individual country-level operations80, including costs of negotiating, monitoring and enforcing of contracts.81 Where drugs are centrally procured to supply the pooled demand, bulk purchasing also reduces distribution costs82 and can increase supply chain security, an important element in preventing product arbitrage. Finally, bulk sales can be more profitable for a supplier than under a decentralized procurement system when total revenues from increased volume offset lost profits per unit.83

Bulk purchasing strategies can be used to attain low prices for developing countries for both on-patent, limited supply drugs and off-patent, multi-source drugs. For medicines currently under patent, pooled demand can act as a strong negotiating tool in dealing with originator pharmaceutical firms, and when combined with credible threats of compulsory licensing, can induce price concessions near marginal production costs. Where appropriate price concessions are not offered by an originator firm, guaranteed long-term, large volume contracts available under bulk procurement strategies can induce potential generic suppliers to undertake the inherently risky process of applying for compulsory export licenses under the August 30th Agreement and investing in up-front plant, regulatory and marketing costs. Finally, where medicines are off-patent, open tendering processes for large-volume contracts can promote vigorous price competition between potential generic suppliers.84

77 Ibid, at 3.78 Ibid, at 17.79 Ibid, at 20.80 Ibid, at 26.81 Ibid, at 30.82 Ibid, at 20.83 Kremer, supra note 14, at 20.84 MSF Procurement, supra note 154, at 12.

Several examples highlight the power of bulk procurement in inducing price concessions. Since the early 1990s, increasing use of bulk purchasing and monopsony negotiating power by American health maintenance organizations (HMOs) and government Medicaid programs has resulted in substantially lower prices for both on-patent and generically supplied medicines.85 At the international level, several programs have pooled pharmaceutical product demand on behalf of developing countries, including the UN Population Fund (UNFPA) for contraceptives, the Global Drug Facility for first-line tuberculosis drugs, and the Green Light Committee for drugs to treat multi-drug resistant tuberculosis (MDR-TB). Other international drug procurement initiatives include the Global Alliance for Vaccines and Immunization (GAVI), the International Drug Association Foundation (IDA), and the UNDP Inter-Agency Procurement Services Office. These international bulk procurement strategies regularly achieve large price reductions for both generic and single-source medicines compared to international prices.86

The Global Drug Facility was established in 2001 and procures seven first-line tuberculosis drugs, all off-patent, to supply WHO DOTS programs in various developing countries. This program has acquired a 50% price reduction on the previous differential price being offered to the WHO, which was already 1/3 of the current price generally observed for the same drugs in developing country markets.87 The goal of this program is to reach 80% of people requiring DOTS therapy globally by the end of 2005.

The Green Light Committee now purchases drugs to treat MDR-TB, some of which are on-patent, for use in WHO DOTS-plus projects. By pooling demand, this organization has been able to receive price reductions in the range of 85-99% below US levels.88 UNFPA purchases contraceptives for use in its developing world reproductive health and family planning initiatives. When products are available generically from multiple sources, UNFPA takes a competitive, open tender approach. Where products are on-patent, it seeks to foster long-term partnerships with originator firms. Both approaches have proven very successful, and in particular UNFPA receives on-patent oral contraceptives for $0.36 compared to $34 on the US market.89

The Global Alliance for Vaccines and Immunization (GAVI) was established in 1999 with major funding from the Gates Foundation in order to improve access to currently-existing vaccines in developing countries.90 Its central strategy is to create a purchase fund that bundles together the vaccine requirements of 70 nations with per capita incomes below $1,000, and to use the resultant large, reliable demand to stimulate more companies to get involved in manufacturing existing vaccines, and to use its monopsony purchasing power to push down prices from current manufacturers.91

85 Sherer and Watal, supra note 83, at 38.86 Grace, supra note 159, at 17.87 Ibid, at 18.88 Ibid, at 19.89 Ibid.90 Kremer, supra note 14, at 12.91 “The world’s richest charity confronts the health of the world’s poorest people”, The Economist, January 29th 2005, at 77.

International bulk purchasing was not employed as a strategy to increase access to ARVs in the developing world until quite recently. Drug purchasing through the Accelerating Access Initiative (AAI) and with funds from sources such as the Global Fund and World Bank was contemplated primarily at the country level, with funds being dispersed to National AIDS Programs, who were then responsible for ARV purchases.92 A similar country-level approach was adopted by the WHO “3-by-5” Initiative, whose goal is to have 3 million people on ART in developing countries by the end of 2005, though it did establish an AIDS Medicines and Diagnostics Service (AMDS) to assist countries in accessing good quality ARVs at the best available international prices.93 Though at present AMDS does not directly pool demand or purchase drugs on behalf of developing countries implementing ART programs, it does facilitate market efficiency by providing up-to-date information on forecasted demand, drug prices, patent status, and customs and regulatory information, while also linking with the WHO Pre-qualification project to ensure product quality.94 Moreover, the original 3-by-5 strategy document does envisage a future possibility of facilitating procurement of medicines and diagnostics by aggregating demand and supporting competitive and open negotiations.95 Despite this, the general absence of pooled demand strategies in the context of ARV treatment roll out lacked adherence to sound economic theory and can only be described as a foregone opportunity to foster greater access.

In recognition of the potential for bulk purchasing, the Clinton Foundation used pooled demand and long-term purchase commitments from the 16 African and Caribbean countries in which it operated in 2003 to negotiate a price of $140 per person per year for first-line triple ARV therapy from 1 South African and 4 Indian generic manufacturers, which was 50% lower than previous lowest price offers.96 By offering credible long-term volumes, this agreement allowed the companies to efficiently plan production and reduce costs. This was the first real attempt to directly remedy failures in developing world markets for ARVs, where demand tends to be low volume and uncertain, leading to inefficient production runs and high transaction costs.97

In response to the tremendous success of this Clinton Foundation initiative and to calls by various civil society organizations such as MSF for regional procurement initiatives98, the Global Fund, World Bank, UNICEF and the Clinton Foundation announced in April of 2004 that all Global Fund and World Bank funding recipients (potentially 120 countries) can now aggregate their procurement budgets and have access to the low priced ARVs and diagnostics originally negotiated by Clinton a year earlier.99 This new initiative works as follows. The Global Fund and World Bank provide funding 92 Grace, supra note 11159, at 21, 28; World Bank Procurement Guide, supra note 62, at 72.93 Treating 3 Million by 2005: Making it happen, the WHO Strategy, (WHO, Geneva 2003), available at www.who.org, at 2. [hereinafter 3-by-5 Strategy]94 Ibid, at 20.95 Ibid, at 21.96 GFO Newsletter, supra note 173.97 Ibid.98 MSF Procurment, supra note 154, at 3.99 “New Agreement Aim to Make Lowest-Priced AIDS Drugs and Diagnostics Available to Hundreds of Thousands of Patients Throughout the Developing World”, available at www.theglobalfund.org/en/media_center/press/pr_040406.asp

for purchases and alter any previous ARV procurement conditionalities that would hinder bulk purchasing, UNICEF offers a central bulk procurement facility, and the Clinton Foundation negotiates prices directly with manufacturers.100 Initially, the same Indian and South African generic companies will be used as suppliers, though Clinton will in the future open tenders to other companies producing WHO Pre-qualified products, including originator pharmaceutical firms, in order to continue to acquire reduced prices through competitive bidding.101

One limitation of this initiative is that, though demand is effectively pooled, direct procurement by governments and NGOs is still envisaged, with UNICEF as a parallel bulk procurer for countries unable or unwilling to purchase drugs on their own.102 This is a minor point, but additional efficiencies may be gained with a greater emphasis on centralized procurement through UNICEF by reducing distribution and contract monitoring and enforcement costs for both suppliers and developing world treatment programs.

The past success of international bulk purchasing initiatives strongly suggests that this approach ought to be adopted on a more widespread basis to foster access to a greater array of currently existing medications to treat both global and neglected diseases in developing countries. In particular, bulk procurement and distribution of newer malaria medications and second-line ARVs should be employed in the near future, with projects for other medicines to follow in the longer term. Currently existing international bulk purchasing initiatives, such as the Clinton program for ARVs, benefit from an environment in which the drugs they purchase are not under patent in many developing countries. As newer medications are increasingly patented because of TRIPS implementation, a credible import/export compulsory licensing regime will be absolutely essential in negotiating best prices with patent holders.

Though economic logic dictates that bulk purchasing obtains the greatest negotiating power and economies of scale when conducted on a regional scale, it is worth noting that progress can be achieved with strong national public procurement agencies. MSF’s experience with CENAME, established in 2000 as Cameroon’s national public procurement entity, confirms this.103 CENAME is able to access the lowest international price offers for ARVs by purchasing large volumes and creating competition between suppliers in its tendering process. MSF reports that it and other local distributors are able to simply, efficiently and reliably secure ARVs from CENAME.104 An additional advantage is that local distributors need not get involved with patenting and compulsory licensing issues, which are dealt with directly by the agency.105 Outside of Cameroon and a few other countries, this strategy is not widely practiced in developing and thus ought to be encouraged in the future.

100 GFO Newsletter, supra note 173.101 Ibid.102 Ibid.103 MSF Procurement, supra note 154, at 12.104 Ibid, at 16.105 Ibid, at 22.

A couple of problems with relying solely on bulk purchasing mechanisms to foster access to differentially priced on-patent medicines in developing countries are worth mentioning here. First when purchasing in bulk from single-source suppliers, it can be practically impossible to know marginal production costs in negotiating reduced prices, which highlights the importance of working in partnership with originator firms and creating bilateral dependence106, a strategy employed successfully by both UNFPA and the Green Light Committee. The availability of credible compulsory licensing opportunities is also important as generic price offers can help to reveal true marginal production costs.

Another problem is that originator companies could refuse to deal with regional initiatives and demand direct dealings with distributors at the national and sub-national levels. This was observed when 10 Latin American countries attempted to jointly negotiate ARV prices with the 5 originator companies participating in the UNAIDS Accelerated Access Initiative.107 The companies refused to deal and insisted on negotiating with each individual country, and prices were only forced down when these countries turned to various generic offers.108 Again, this highlights the centrality of credible sources of generic supply under compulsory licensing regimes.

Price Controls

Domestic regulatory price control schemes can make drugs more affordable for consumers and public purchasers109, and can be implemented in a number of ways.110 Under cost-plus pricing schemes, governments fix prices on a product-by-product basis based on production and distribution costs and a reasonable profit margin. Under external reference pricing, discussed above, price ceilings are set by reference to comparable products in other jurisdictions. Finally, profit-based price controls set ceilings on the profits that pharmaceutical companies can earn, taking into account R&D expenditures.

Price controls are used extensively in western countries, with prices controlled at approximately one half of US levels in the EU, and at one quarter of US levels in Japan.111 By contrast, price controls are infrequently used by developing world governments, likely attributable to a couple of factors. First, effective price regulation entails substantial monitoring and enforcement costs112, which may beyond the capacity of many poor countries. Second, widespread public insurances schemes that cover drug costs in developed countries make it far easier to impose price controls than would be possible under private market conditions. Such programs are often lacking in developing countries, though price control schemes may become more feasible with continued scale up of public treatment programs.

106 Grace, supra note 159, at 30-31.107 MSF Doha Derailed, supra note 243, at 3.108 Ibid.109 Sherer and Watal, supra note 83, at 49.110 Ibid, at 50.111 Kremer, supra note 14, at 17.112 Grace, supra note 159, at 49.

Price controls have the advantage of being entirely compliant with TRIPS and pharmaceutical patenting113, and of being able to induce lower prices for both on-patent and off-patent medicines.114 However, in the absence of other differential pricing strategies for newer medicines, an originator pharmaceutical company can opt to pull its product from a local market if it is unsatisfied with a particular price ceiling or as a tactic to strong-arm the local price regulators.115 Thus, increased use of developing world price controls would have to be backed by credible threats of compulsory licensing.116

The use of a form of cost-plus price regulation in developing countries, which seeks to control domestic distribution and profit mark-ups over prices of imported pharmaceuticals, may be particularly useful in future strategies to implement differential pricing on a broader basis.117 None of the other differential pricing mechanisms discussed above has similar potential to ensure that reduced prices on imported medicines are not negated by in-country distributor mark-ups118, though roll out of public treatment programs will also go some way towards preventing this practice.

Conclusion

In summary, differential pricing of medicines across developed and developing markets is economically and morally rational, as well as technically feasible. Product arbitrage is not generally observed and can be effectively prevented. General price arbitrage is best addressed by limiting external price referencing to jurisdictions with comparable wealth and by educating both politicians and the general populace in developed countries about the need for differential pricing, rather than by failing to take action. Spontaneous Ramsey pricing and drug donation programs have been observed in some circumstances, but are unlikely to provide a sustainable long-term solution to drug access problems on their own. Promoting vigorous generic competition in developing countries while maintaining patent monopolies in rich markets has proven extremely successful in generating differential pricing, particularly in the context of ARVs. As TRIPS is fully implemented in developing countries, a credible system of import/export compulsory licensing is absolutely essential both in its own right and as a negotiating tool to acquire price concessions from originator firms. Voluntary licensing and patent waivers are theoretically attractive, but unlikely to materialize on a large scale. Bulk purchasing, both at the national and regional level, is a powerful tool to generate differential prices for both on- and off-patent medicines in developing countries. Though current international initiatives to procure contraceptives, vaccines, tuberculosis drugs and first-line ARVs in bulk are laudable, a more comprehensive international bulk purchasing program to provide a wide range of cheap medicines to developing countries ought to be implemented. Finally, costly price control mechanisms are not generally well suited to developing world governments’ resource constraints, but capping local

113 Lanjouw, supra note 1, at 21.114 Grace, supra note 159, at 55.115 Lanjouw, supra note 1, at 24.116 Grace, supra note 159, at 4.117 Sherer and Watal, supra note 83, at 53.118 Grace, supra note 159, at 3.

distributor mark-ups could be an important complement to other differential pricing strategies.

VII. TRIPS-Plus IP Protection: A Future Barrier to Access

Despite hard fought battles by public health activists to secure important flexibilities for compulsory licensing and parallel importation under the TRIPS regime, the United States is effectively using a divide and conquer strategy to achieve what it could not in the multilateral WTO forum: inflexible US domestic-level intellectual property protection in developing countries. Article 1(1) of TRIPS provides that Members “may … implement in their law more extensive [IP] protection than is required by this Agreement.”1 TRIPS provisions were thus conceived as a floor rather than a ceiling. In light of this, the US Trade Representative (USTR), backed by threats of unilateral US trade sanctions under Section 301 of the US Omnibus Trade and Competitiveness Act2, has adopted a strategy of forcing the negotiation of so-called “TRIPS-plus” intellectual property provisions in bilateral and regional free trade agreements (FTAs). This process has often been conducted under a cloud of secrecy, escaping the scrutiny of international treatment activists.3 Such FTAs have already been concluded with Singapore, Chile, Morocco, the Central American countries, Australia, and Canada and Mexico under the North American Free Trade Agreement (NAFTA). The USTR is currently in the process of negotiating such agreements with Thailand, the South American Andean countries, and the Southern African Customs Union (SACU – which includes Botswana, Lesotho, Namibia, South Africa, and Swaziland). Eventually, it is seeking to conclude an FTA with all countries in the Western hemisphere: the Free Trade Agreement of the Americas (FTAA).4

The central threat of these TRIPS-plus agreements is that they undermine the ability of developing countries to make use of compulsory licensing as a means to obtain differentially priced medicines. As developed in Part VI, compulsory licensing is an essential tool in the post-TRIPS world both in its own right and to reinforce other strategies to foster increased access.

Several provisions common to the previously negotiated FTAs, and likely to reappear in future agreements, may prove particularly troublesome. First, one type of provision prevents NDRAs from registering any generic version of a patented medicine without the patent holder’s consent. This converts NDRAs, which are designed to assess pharmaceutical quality, safety and efficacy, into enforcers of intellectual property rights, a task to which they are not accustomed and for which they lack relevant expertise.5 Responsibility for enforcing patents typically rests with the patent holder, who must sue in order to enjoin allegedly infringing use. NDRA enforcement of patents vitiates this

1 TRIPS, supra note 92, article 1(1).2 Regulation of International Trade, supra note 66, at 317-318.3 Medicins Sans Frontieres, Access to Medicines at Risk Across the Globe: What to Watch Out For in Free Trade Agreements with the United States, (MSF May 2004), available at www.accessmed-msf.org, at 1. [hereinafter MSF US FTAs]4 Ibid, at 10-11.5 Ibid, at 2.

responsibility, and deprives domestic consumers of potentially beneficial patent litigation, which can serve to either invalidate or narrow the scope of overly broad or otherwise faulty pharmaceutical patents. It may further act as a substantial roadblock to compulsory licensing. A generic drug produced under a compulsory license must still pass national regulatory approval before being put on the market. If an NDRA cannot approve any generic version of a patented medicine during the patent term, compulsory licenses issued in countries subject to TRIPS-plus FTAs would be rendered nugatory.6 It is unclear whether these provisions are amenable to an interpretation that would permit compulsory licensing exceptions to NDRA patent enforcement requirements.

“Data exclusivity” provisions are a second type of FTA restriction which may unduly delay the introduction of differentially priced generic medicines in developing countries. Such provisions prevent NDRAs from using originator clinical test data to register generic drugs on the basis of bio-equivalence, typically for a period of 5 years from initial regulatory approval.7 This is a far more explicit and stringent protection of test data than contained in the TRIPS Agreement. As noted in Part III, negotiators from the US and other Western governments were unable to secure data exclusivity provisions in TRIPS, instead having to settle for the flexible “unfair commercial use” language contained in Article 39. Where compulsory licensing is an appropriate strategy to foster access to differentially priced medicines, data exclusivity can effectively block generic market access. Data exclusivity can be more restrictive than NRDA patent enforcement requirements in that it can prevent a developing country from approving potential generic competitors when the drug is not even protected by a local patent.

US-negotiated FTAs also include explicit restrictions on compulsory licensing, including by limiting their use to national emergencies and to remedy anti-competitive practices8 (TRIPS, though it has less onerous procedural obligations in these contexts, does not limit the purposes for which compulsory licensing can be employed), and by prohibiting the issuance of compulsory export licenses9 (which could undermine the August 30th framework for supplying generic medicines to developing countries lacking domestic manufacturing capacity). These FTAs further contain provisions prohibiting parallel imports, which, as noted in Part VI, can be an important tool for developing countries (though such prohibitions are desirable in developed countries to prevent international arbitrage). Finally, other overly restrictive intellectual property provisions in FTAs include patent extensions for delays in NDRA approval10 and obligations to grant patents for new use inventions.11

The possibility that these sorts of provisions will appear in the FTA currently being negotiated with SACU is particularly troubling, considering the magnitude of the

6 Ibid, at 3.7 Ibid, at 4-5.8 Ibid, at 8-9.9 Medicines Sans Frontieres, Trading Away health: Intellectual Property and Access to Medicines in the Free Trade Area of the Americas (FTAA) Agreement, (MSF 2003), available at www.accessmed-msf.org, at 3. [hereinafter MSF Trading Away Health]10 MSF US FTAs, supra note 314, at 6.11 Ibid, at 7.

HIV/AIDS epidemic in that region.12 These countries will need to make increasing use of compulsory licensing as a tool to gain access to lowest priced second-line ARVs, but may be prevented from doing so depending on the scope of restrictions contained in the final agreement. Further troubling is that potential developing world loci of generic exports such as Brazil, Thailand and South Africa will be included in future FTAs and thus may be prevented from using compulsory licensing to supply other developing countries lacking manufacturing capacity (though, importantly, India and China are not currently in FTA negotiations with the US).

On a positive note, the USTR has in the past indicated that it will not seek to enforce intellectual property rules in regional and bilateral agreements in a manner that undermines the effective utilization of TRIPS flexibilities.13 However, a more explicit guarantee is likely required before developing countries subject to FTAs would be willing to risk retaliatory US trade action14, particularly in light of its past injudicious use of such measures in the context of intellectual property disputes.15 Even outside the context of bilateral and regional FTA negotiations, the US has been able to use threats of retaliatory trade sanctions to unilaterally extract overly restrictive intellectual property policy changes in developing countries.16

An additional problem is that many developing countries and LDCs have fully implemented pharmaceutical product patenting though not yet required to do so under TRIPS.17 These laws often do not fully incorporate the increasingly important compulsory licensing and parallel import flexibilities. For example, the Bangui Agreement of the Organisation Africaine de la Proprieté Intellectuelle (OAPI), binding on 16 West African Member states, only permits parallel imports from other Member states and does not permit compulsory licensing for imports (which is particularly restrictive given the lack of regional manufacturing capacity).18 12 of the 16 Members are considered LDCs but cannot take advantage of the additional 10-year exemption from pharmaceutical product patenting contained in the Doha Declaration.19

In light of the threat posed by TRIPS-plus intellectual property protection to future prospects for widespread differential pricing of patented medicines, treatment activists and the international community more generally must mobilize against the continued imposition of inappropriately restrictive policies. In particular, in the post-TRIPS environment, it is essential for SACU Member states to retain a full range of compulsory licensing and parallel-importation options after the conclusion of the US-SACU FTA, and for potential developing world exporters to retain the flexibility to supply cheap generic medicines to other poor countries under compulsory licenses.

12 South Africa has highest number of absolute HIV cases, while Botswana and Lesotho are the two countries with the highest adult prevalence rates. See UNAIDS Report 2004, supra note 46.13 Underserved Markets, supra note 11147, at 18.14 Ibid.15 See www.cptech.org/ip/health/country/ 16 Sherer and Watal, supra note 83, at 2.17 MSF Doha Derailed, supra note 243, at 2.18 Grace, supra note 159, 42-43.19 Ibid, at 43.

VIII. Mechanisms to Stimulate Innovation

Though differential pricing strategies to increase access to currently-existing and future medicines in developing countries are urgently needed, so too are strategies to promote research and development of new drugs and vaccines for neglected diseases. The lack of appropriately tailored treatments for conditions predominantly affecting the world’s poor, and the failure of private sector incentives to remedy this problem was addressed in Part II. This Part describes and analyzes various strategies aimed at solving the current global gap in pharmaceutical innovation. Proposed initiatives can generally be divided into two broad categories: push mechanisms, which subsidize research inputs, and pull programs, which reward developers for generating a desired product.1

Push Mechanisms

Push mechanisms include: public research programmes, public or private grants to researchers, research institutions, and/or private companies, and tax credits for R&D expenditures.2 A variety of push strategies currently exist at the global level for neglected disease research. For example, the joint UNDP/World Bank/WHO Special Program for Training and Research in Tropical Diseases (TDR) was established in 1975 to address 10 tropical diseases. The Program has been involved in the development of a few new treatments for tropical diseases by partnering with private companies; however, its output has been far from sufficient to meet clinical needs.3 This is particularly true for so-called ‘most-neglected’ diseases where the complete lack of private incentives has made it difficult to develop research partnerships with private entities.

More recently, a variety of international public-private partnerships have been developed to foster innovation into HIV/AIDS, malaria and tuberculosis. The basic structure of these newer public-private partnerships comprises the use of public and private charitable funding sources as ‘social venture capital’, which is invested through subsidies and grants into projects that make use of existing research capacity in both the private and public sector.4 Examples of these partnerships include: the International AIDS Vaccine Initiative (IAVI), the Medicines for Malaria Venture (MMV), and the Global Alliance for Tuberculosis Drug Development. These are laudable initiatives and have been successful in increasing the level of R&D focused on each of these diseases.5 However, they are at least partially dependent on the existence of appreciable market prospects in developed countries to garner private interest.6

In light of this, MSF and 6 other organizations have recently launched the Drugs for Neglected Diseases Initiative (DNDi), whose primary focus is on the development of new drugs and new drug formulations for the treatment of ‘most-neglected’ diseases,

1 Kremer, supra note 14, at iv.2 Ibid.3 DNDi Brochure, supra note 10, at 8.4 Ibid.5 Milne, supra note 17, at 34.6 DNDi Brochure, supra note 10, at 8.

particularly African sleeping sickness, leishmaniasis, and Chagas’ disease.7 DNDi initiates and coordinates R&D projects in public research institutes, primarily located in developing countries, using public and private donations as sources of capital. In the short and medium-term, DNDi is seeking to adapt existing drugs for use in treating neglected diseases, and is developing fixed-dose combinations (FDCs) to improve treatment uptake and adherence in resource poor settings.8 For example, DNDi is attempted to gain regulatory approval of the drug paromomycin for use against leishmaniasis, and is developing two artemisinin-based FDCs for the treatment of chloroquine-resistant malaria. In the long-term, DNDi will attempt to move into full scale drug development projects by identifying drug targets and researching lead compounds.9

Each of these international push mechanisms offers improved drug development prospects over what was previously attainable by relying on private market incentives alone. However, these programs are patchy and currently woefully under-funded in terms of the investment levels typically required to foster optimal levels of dynamic pharmaceutical innovation. This highlights the need for greater international political and financial support of these and similar drug development initiatives.

However, it will also be important to complement public research initiatives with other strategies. Public push strategies have proven very well suited to financing basic research, but have a much more mixed record at the later, applied stages of product development.10 A division of labour has evolved in developed markets with respect to pharmaceutical innovation. Basic R&D, which uncovers disease pathology and identifies potential drug targets, is very often conducted in publicly funded laboratories and universities11, with promising leads being licensed out to private pharmaceutical firms for product development, clinical testing and marketing.12 This division of labour is economically rational. Early stages in the R&D process are inherently high risk as very few projects result in promising drug leads. Private actors are less likely to invest in high risk, long shot research projects, so public funding serves an essential function by spreading early stage research risks across society as a whole. On the other hand, later stage applied product development is less risky, but highly cost intensive. Private firms have the appropriate incentives to assume later stage high costs as large financial reward is a more appreciable eventuality.

By contrast, purely public attempts to develop pharmaceutical products have generally proven inefficient13, with so far no examples of the public sector as an applicant for a drug indicated for the treatment of a neglected disease.14 As an example, USAID created an entirely public push program to develop a malaria vaccine in the 1980s, which

7 Ibid, at 5.8 Ibid, at 9.9 Ibid.10 Kremer, supra note 14, at 2.11 Correa, supra note 3, at 17.12 Ibid.13 Kremer, supra note 14, at 33.14 Trouiller, supra note 12, at 2190.

ended up spending over $60 million but achieving almost no progress.15 Kremer argues that a central problem with public attempts at product development is that decision-making is not appropriately disciplined by market considerations.16 Thus, though it is absolutely essential to continue to scale up public subsidization of research for neglected diseases, it will also be very important to complement these initiatives with down-stream pull mechanisms that appropriately incentivize later stage pharmaceutical R&D.

Another important consideration is that generally push mechanisms do little on their own to guarantee access to newly developed products17, though theoretically by subsidizing up-front R&D costs, they enable drugs to be sold at lower prices. An interesting approach used by IAVI is to enter agreements with its private partners to share intellectual property and marketing rights over any potentially viable AIDS vaccine, with rights in developing countries being retained by IAVI while rights in developed countries remain in private hands.18 This approach is promising, but will still require the mobilization of substantial additional funds to produce, distribute and administer the vaccine widely in developing countries.

Pull Mechanisms

Pull mechanisms, which reward research outcomes, offer much potential in addressing the above-noted shortcomings of push programs. This section will primarily focus on advance purchase commitments (APCs), though other pull systems will be briefly discussed. Prior to examining APCs, two issues ought to be addressed.

First, a pet argument of brand name pharmaceutical companies is that extension of pharmaceutical patenting to developing countries will on its own act as a sufficient pull mechanism by creating the appropriate incentives for R&D on neglected diseases.19 This paper grants in principle that, in contrast to global disease research, patents in poor countries may actually be an appropriate element in creating incentives to innovate new treatments for neglected diseases, so long as access to resultant products is not restricted. However, pharmaceutical patenting certainly cannot alone be a sufficient strategy as it does nothing to address the absence of purchasing power of those who suffer from neglected diseases.20 This is confirmed by the observation that the lack of R&D for diseases such as malaria, schistosomiasis, trachoma, Chagas disease, leprosy and leishmaniasis continues to despite an environment in which most developing countries already grant pharmaceutical product patents.21 In fact, what is more likely to be observed in developing countries that grant strong pharmaceutical patents is the targeting of domestic innovative capacity towards more profitable global diseases.22 For example, several generic manufacturers in India are scaling up R&D capacity in anticipation of full

15 Kremer, supra note 14, at 30.16 Ibid, at 32.17 Ibid, at 35.18 See www.iavi.org 19 Sherer and Watal, supra note 83, at 11.20 Maskus, supra note 220, at 568.21 Correa, supra note 3, at 20; Sherer and Watal, supra note 83, at 11.22 Underserved Markets, supra note 147, at 10.

TRIPS implementation. However, their R&D efforts are focusing on conditions such as diabetes and cancer where large profits can be expected through sales in developed countries.23 In principle, global disease R&D in developing countries is not undesirable, but it does nothing to address the issue of neglected diseases.

Significantly, although mechanisms to increase access to currently existing medicines in the developing world do very little to address the lack of treatments for neglected diseases; they may in practice induce a minor pull phenomenon. Scaling up distribution and treatment infrastructure and demonstrating an international commitment to purchasing and delivering drugs to the world’s poor can act as a signal to potential drug developers that a future market will exist for products that treat diseases in developing countries. However, as with the extension of pharmaceutical patenting to developing countries, this is likely insufficient in most cases as firms will rationally choose to invest their capital resources in R&D projects with larger potential pay-offs.

Advance Purchase Commitments: From a theoretical perspective, a very attractive form of pull mechanism would be donor-financed international advance commitments to purchase and distribute drugs and vaccines for neglected diseases.24 The APC strategy at base is an attempt to replicate developed world profit signals, which have been very successful at inducing private innovation in the context of global diseases. APCs have important advantages over push programs in that the public only pays if successful products are actually developed, and that by their very nature they promote access to newly innovated products.25

In order to induce firms to invest in neglected disease research, a purchase commitment would need to be credible. If potential developers are to invest in R&D, they must believe that once they incur costs that the sponsors will not renege on their promise.26 Credibility-enhancing measures by the international community could include establishing a strong track-record in delivering drugs for neglected diseases to developing countries and investing in infrastructure for drug procurement and distribution. Given the international community’s at best mixed record in purchasing and delivering existing drugs to developing countries27, to further optimize credibility, an international APC ought to be framed in clear, legally binding language.28

An APC should also clearly specify eligibility requirements for drug purchases including the level of efficacy in treating a particular neglected disease, as well as levels of safety, quality, cost-effectiveness and suitability for use in resource poor settings.29 Kremer suggests that a drug candidate be required to gain clearance by a regulatory

23 Sherer and Watal, supra note 83, at 11.24 Kremer, supra note 14, at iv.25 Ibid.26 Ibid, at 4.27 Adrian Towse, Hannah Kettler, “Advance price or purchase commitments to create markets for treatments for diseases of poverty: lessons from three policies”, Bulletin of the World Health Organization, April 2005, 83(4), 301-307, at 303. [hereinafter Towse]28 Kremer, supra note 14, at 4.29 Ibid, at 57.

agency such as the US Food and Drug Administration (FDA) before being eligible for purchasing. More controversially, he suggests that drugs ought to pass a market test to be eligible, whereby countries wishing to use the product would be required to provide a modest co-payment tied to per capita GDP levels. He argues that co-payments would give developing countries the incentive to carefully investigate whether candidate products are appropriate for local conditions.30 Another possible feature is to grant additional bonus payments for products that are superior in certain regards to the minimum APC eligibility requirements.31 This would incentivize R&D into products that have superior efficacy or cost-effectiveness. The inherent limitation of APCs generally is that specifying desired output ahead of time is a difficult task32, though the clinical requirements of most neglected diseases are well understood and should not pose a barrier to reliably predict needs.

Another problem is that estimating the size of the total market promised under an APC that would efficiently induce R&D efforts is difficult. A commitment must be sufficient to provide an expectation of revenues that cover expected fixed costs, including research failures, and also a return on investment to a potential developer.33 Based on observation of pharmaceutical research decision-making processes in developed countries, Kremer sets a rough rule of thumb that $250-300 million per annum over 10 years would be likely to garner results, though he argues that a purchase program would be highly cost effective even at a substantially higher value.34 One strategy to overcome this information problem would be for a program to begin with a commitment in this range, and then increase the value of the program if it proves insufficient to stimulate research.35

Absolutely central to an effective purchase commitment, tied to the issue of credibility, is that potential developers must be guaranteed market exclusivity. Thus, unlike strategies to increase access to currently existing medicines in developing countries, enforcement of intellectual property rights in developing countries would theoretically be required. If imitator products were allowed to compete, this would undermine the credibility of any subsequent APC initiatives.36 Another problem is how to deal with a situation where competing products are developed for the same disease in response to an APC. Clearly defined market exclusivity rules should seek an appropriate balance between encouraging R&D competition, rewarding subsequent superior products, and maintaining strong incentives through strong first-mover advantages.37 In order to reduce that risk that developers would be dissuaded from investing in R&D because of fears that “me-too” products developed by other firms would reduce sales, an appropriately balanced strategy would be for an APC to commit to only purchasing the first eligible product developed unless a newer, clinically superior alternative is

30 Ibid, at 4.31 Ibid, at 57.32 Ibid, at 40.33 Towse, supra note 357, at 304.34 Kremer, supra note 14, at 76.35 Ibid.36 Kremer, supra note 14, at 72.37 Towse, supra note 357, at 304.

developed.38 However, in order to reduce the risks to firms engaged in a tight race to develop the first product, the APC could allow a small window of 1 or 2 years following licensing of the first successful product in which other therapeutically equivalent products may also be eligible for purchasing.39

Other potential international pull programs have been proposed, and all in on form of another operate in a similar manner to advance purchase commitments. Examples include extending patent rights on other drugs to compensate pharmaceutical companies who are successful in developing drugs for neglected diseases, committing in advance to purchasing patent rights from potential developers and then putting the patent in the public domain, and conducting prize-oriented research tournaments.40 APCs offer advantages over each of these. First, APCs most closely link payment to actual delivery of new drugs for neglected diseases to patients in developing countries.41 Extending patent protection on other products in exchange for developing targeted therapies inefficiently and inequitably places the entire burden of subsidizing neglected disease R&D on consumers of those products instead of on governments. Patent buy-out offers may be attractive, but run the risk that the original inventor may retain an effective monopoly due to trade secrets over the production process. Moreover, products have been known to have unforeseen side-effects that render them useless even after regulatory approval. If this occurs, APCs can discontinue purchasing them whereas a patent buy-out system is less adaptable. Finally, research tournaments are susceptible to the same problems as patent-buyouts.

Despite the attractiveness of pull mechanisms and particularly advance purchase commitments, international initiatives to foster R&D for neglected diseases to date have been push-oriented. In light of this, IAVI has recently called on G8 governments to establish a multi-billion dollar APC for AIDS vaccines.42 Currently, $600 million is spent annually on AIDS vaccine research, much of it on basic pre-clinical research. IAVI points to the need for goal-oriented, industrial-style applied vaccine research and product development, which focuses on design issues, clinical testing and steps to bring products to market in developing countries. Though it recognizes the need to continue to use push strategies to promote basic science research and product, IAVI strongly supports a concurrent APC to induce greater use of private sector expertise and capacity in vaccine development and manufacturing. In principle, it also supports the use of APCs to spur innovation for HIV/AIDS microbicides, as well as drugs and vaccines for other neglected diseases.

Indeed, it is difficult to argue that APCs should not be used. Failed projects would entail few if any public costs, while successful ones could potentially save millions of lives. Though APCs are greatly underused, one example at the domestic level serves

38 Kremer, supra note 14, at 73.39 Ibid, at 74.40 Ibid, at 43.41 Ibid.42 Strengthening the G8 Commitment to AIDS Vaccines: Concrete Steps to Accelerate AIDS Vaccine Research and Delivery, Proposals from the International AIDS Vaccine Initiative, available at www.g8.utoronto.ca/speakers/g8outreach2005/iavi_g8_long.doc.

to demonstrate their potential. In the early 1990s, in response to an outbreak of meningitis B, the UK government approached five originator pharmaceutical companies with a guarantee to purchase meningitis B vaccines. Three of the five companies responded with R&D initiatives and all three were successful at developing vaccines, which now all share the domestic market.43

Ideally, the international community will heed the call of IAVI and others and establish a sufficiently financed APC program which makes credible commitments to purchase new drugs and vaccines for a variety of neglected diseases. It could build up a reputation for making due on commitments over time, thus further increasing incentives to invest in R&D.44 In the immediate future, APCs should at least be launched for the development of more fixed-dose combinations and pediatric formulations of ARVs and other currently-existing drugs. Since the active pharmaceutical ingredients already exist, R&D to develop these products is relatively inexpensive and thus likely incentivized with only marginally improved market prospects. In additional, given the magnitude of the HIV/AIDS epidemic, a multi-billion dollar APC for AIDS vaccines should be immediately implemented.

Orphan Drug Laws

The US Orphan Drug Act (ODA) provides an important example of the possible synergies between push and pull mechanisms. The ODA was designed to stimulate R&D for drugs with high therapeutic but low economic value45 to treat so-called orphan diseases of national public health importance (orphan diseases are defined as rare diseases affecting less than 200,000 Americans).46 The ODA has generally been regarded as an unqualified success, with drugs being developed for more than 200 orphan disease indications since its enactment in 1983, compared to only 10 in the previous 10 years.47

The ODA offers four push incentives and one pull incentive to pharmaceutical companies undertaking orphan disease R&D. The 4 push incentives include: technical and administrative assistance provided directly by the US FDA; FDA grants to cover clinical trial expenses; FDA registration fee waivers; and tax credits for clinical development costs. The pull mechanism is a guaranteed 7-year period of FDA marketing exclusivity against all subsequent therapeutically equivalent drugs.48 Pharmaceutical companies and industry analysts consistently cite the pull mechanism as by far the most important factor49, demonstrating the importance of implementing pull mechanisms in the international sphere to stimulate neglected disease research.

43 Towse, supra note 357.44 Kremer, supra note 14, at 57.45 Milne, supra note 17, at 10.46 Trouiller, supra note 12, at 2191.47 Towse, supra note 357, at 302.48 Milne, supra note 17, at 5-7.49 Ibid.

As to whether the ODA itself can be used to address the lack of innovation for neglected diseases, in principle the answer is yes. Diseases of poverty technically qualify for ODA assistance50, which has been confirmed by Congress and the FDA.51 In this regard, the ODA had successfully supported 20 approvals for AIDS and AIDS-related conditions by the end of 2000. 52 However, a substantial US population basis was likely mostly responsible for this. For other neglected diseases, the ODA does not have as impressive a track record.53 This could be partially remedied by prioritizing neglected diseases under the ODA and by ensuring that R&D grants and tax credits are available for clinical trials in developing countries. However, the central limitation is that marketing exclusivity is likely too weak a pull incentive to garner interest from pharmaceutical companies. As opposed to domestic orphan diseases, where drug developers can charge high monopoly prices54, the opposite would be true for neglected diseases where few if any patients can afford to pay at all. This again highlights the need for internationally funded APCs to simulate potential market demand for those contemplating neglected disease R&D.55 In the near term, the US and other countries should take steps to make ODA-style legislation more attractive for research on neglected diseases. Ideally, a transnational orphan drug program56 for neglected diseases would be created to complement an international advance purchasing scheme. This would minimize wasteful overlap and duplication among national orphan drug programs.

Conclusion

In sum, international push mechanisms for neglected diseases, such as IAVI, MMV, the Global Alliance for Tuberculosis Drug Development and DNDi, are laudable and ought to be further supported, but must be complemented by international pull strategies. Advance purchase commitments in particular offer great potential in stimulating neglected disease R&D by closely mimicking market conditions that have proven efficient for global disease drug development. To be maximally effective, APCs must be credible, sufficiently financed, and must stipulate clear eligibility requirements and marketing exclusivity arrangements. Ideally, an international APC would be established to offer purchase commitments for drugs and vaccines to treat a variety of neglected diseases, but in the immediate term smaller scale APCs for FDCs and pediatric formulations, as well as an APC for AIDS vaccines ought to be implemented. Finally, orphan drug programs, if appropriately adapted, could be a powerful complement to international APCs.

IX. Conclusion

The world’s system of pharmaceutical research and development continues to create a range of new treatments for diseases prevalent in rich markets (‘global diseases’)

50 Ibid, at 3.51 Ibid, at 11.52 Ibid, at 12.53 Trouiller, supra note 12, at 2192; Milne, supra note 17, at 16.54 Ibid, at 2192.55 Towse, supra note 357, at 301.56 Sandler, supra note 209, at 33.

such as heart disease, cancer, diabetes and other metabolic and congenital disorders, as well as HIV/AIDS and other important infectious diseases. However, a majority of the world’s population living in developing countries and LDCs does not have regular access to these medicines. By contrast, pharmaceutical R&D into diseases localized to poor countries (‘neglected diseases’) such as malaria, tuberculosis, African sleeping sickness, leishmaniasis and others is paltry. Where drugs do exist to treat these diseases, they are often old, ineffective due to resistance, unsuited to resource-poor settings, and can cause serious side-effects. HIV/AIDS exhibits characteristics of both global and neglected diseases. Whereas as plethora of ARVs and drugs to treat opportunistic infections have been developed in response to developed world demand, important needs in developing countries have not been met, including fixed-dose combinations, pediatric formulations, and AIDS vaccines. Sustained international action to address these crises in pharmaceutical access and innovation is imperative from economic, human rights and moral perspectives.

Though theoretically difficult to justify, with the exception of least-developed countries (LDCs), the TRIPS Agreement mandates universal pharmaceutical patenting in all WTO Members, whether developed or developing. This threatens to impose an additional significant barrier to efforts to scale up access to new medicines for the poor. To address this problem, TRIPS, reinforced by the Doha Declaration on TRIPS and Public Health and the subsequent August 30th Agreement on the Implementation of Paragraph 6, purports to provide a number of flexibilities that countries can use to protect public health. Most importantly, Members have the discretion to issue compulsory licenses, which are authorizations to 3rd parties to produce and sell a patented invention without the patent holder’s consent, so long as certain procedures are followed. One explicit limitation in the TRIPS Agreement itself is that use authorized under a compulsory licensing must be “predominantly for the supply of the domestic market.” In light of its potential to block access to medicines in developing countries lacking domestic manufacturing capacity, the August 30th Agreement waives the domestic supply requirement under certain conditions in order to facilitate a regime of import/export compulsory licensing. It is absolutely crucial that India and other potential exporters fully incorporate the flexibilities in this Agreement so that developing countries have future access to generic versions of patented medicines. However, numerous commentators have pointed out that the procedural complexity of this Agreement makes it unlikely to succeed. Observation to date confirms these concerns, as after almost 2 years the system has never been used. If it continues to be ineffective, a new and more workable solution must be sought.

Aside from pharmaceutical patenting, several factors constrain access to medicines in the developing world, including inadequate infrastructure, drug regulatory hurdles, insufficient financing and high drug prices. Though scaling up infrastructure is critical, it is often not as large a barrier as those wishing to defer attention from pharmaceutical patenting issues would suggest. With respect to regulatory approval, national drug regulatory authorities (NDRAs) in developing countries should use originator clinical test data to register generic drugs on the basis of bio-equivalence. A reasonable interpretation of TRIPS Article 39 allows this, particularly where countries are

facing public health crises. Moreover, NDRAs should facilitate fast-track registration of WHO pre-qualified products, and donors such as PEPFAR should not inappropriately require additional regulatory hurdles such as FDA approval. In any strategy to increase access to medicines, substantially increased financing from both donors and developing countries must be deployed through public treatment programs. Finally, restrictively high prices can pose a substantial barrier to access and can be caused by several factors. Inappropriate tariffs and domestic distributor mark-ups need to be abolished. The absence of competition is also strongly correlated with drug prices. Where patents are not a factor, generic entry can be facilitated by easing registration hurdles and by creating economic incentives through increased financing of drug purchases.

However, where patents are a barrier, additional solutions are required. The vast majority of drugs on the WHO Essential Drugs List (EDL) are off-patent, but this list includes only a very small portion of new drugs to treat global diseases, most of which are still on-patent and important for developing countries. With respect to ARVs, most are widely patented in developed countries and potential developing world exporters. India has been the exception because it took full advantage of the permissible delay in implementing pharmaceutical product patenting under TRIPS. When India becomes TRIPS-compliant in 2005, several ARVs, particularly important second-line drugs, may become patented after mailbox applications are reviewed. If the Indian supply of cheap generic ARVs dries up, this will pose a substantial barrier to continued ART scale up in developing countries. Finally, with respect to drugs developed in the future, most will likely be widely patented in the developing world due to uniform TRIPS implementation.

Where patent monopolies block access to medicines, the appropriate policy response is to induce differential pricing across developed and developing markets. The central objective is to attain drugs prices close to marginal variable cost in developing countries, while maintaining patent monopoly pricing in rich countries so that incentives to innovate are maintained. Differential pricing is economically and morally rational, as well as technically feasible. Though arbitrage concerns are warranted, the phenomenon is not generally observed and can be effectively prevented. Several mechanisms to induce differential pricing have been advanced by treatment advocates. Voluntary price discounts and drug donations by originator firms are one possibility, but for a variety of reasons, are unlikely to provide a sustainable long-term solution to drug access problems. Promoting vigorous generic competition in developing countries while insulating rich markets has proven extremely successful, particularly in the context of ARVs. After full TRIPS implementation, a credible system of import/export compulsory licensing is absolutely essential, both as a means to foster generic competition in developing countries, and as a negotiating tool to acquire price concessions from originator firms. As noted above, it is unclear that the August 30th Agreement achieves this objective, and thus likely ought to be amended or replaced in the future.

Bulk purchasing can be a powerful tool at both the national and regional level, and can be used to garner substantially reduced prices for both on- and off-patent medicines. By promising large volume contracts, it also has the potential to make compulsory licensing under the August 30th Agreement a more attractive prospect for

potential generic exporters. Though current international purchasing initiatives for contraceptives, vaccines, tuberculosis drugs and first-line ARVs are laudable, a more comprehensive international bulk procurement program to provide a wide range of cheap medicines to developing countries ought to be implemented. Finally, price control mechanisms work well in developed countries but are not generally well suited to the developing world because of high monitoring and enforcement costs. However, using price controls to cap local distributor mark-ups could be an important complement to other differential pricing strategies.

TRIPS-plus intellectual property provisions in bilateral and regional free trade agreements (FTAs) threaten to undermine compulsory licensing as a strategy for differential pricing. Overly restrictive provisions include those requiring NDRAs to enforce patents, and prohibiting important flexibilities such using originator clinical test data to approve generics (so-called ‘data-exclusivity’ provisions), compulsory licensing for export, and parallel importation. The US is currently in the process of negotiating an FTA with the Southern African Customs Union, which includes South Africa, Botswana, Swaziland, Lesotho, and Namibia. It is absolutely critical that these countries retain the flexibility in their IP laws to use compulsory licensing where needed to gain access to low price medicines, particularly second-line ARVs. Thus, treatment activists must mobilize against the inclusion of restrictive IP provisions in this and other future FTAs.

Where treatments for neglected diseases are insufficient or lacking, strategies to stimulate pharmaceutical R&D are needed. Two broad approaches exist. The first set of strategies, deemed ‘push’ mechanisms, subsidize research inputs, whereas the other set, ‘pull’ mechanisms’, reward innovators for research outputs. International push mechanisms for neglected diseases, such as IAVI, MMV, the Global Alliance for Tuberculosis Drug Development and DNDi, are laudable and ought to be further supported, but must be complemented by international pull strategies. Advance purchase commitments (APCs) in particular offer great potential in stimulating neglected disease R&D by closely mimicking market conditions that have proven efficient for global disease drug development. To be maximally effective, APCs must be credible, sufficiently financed, and must stipulate clear eligibility requirements and marketing exclusivity arrangements. Ideally, an international APC would be established to offer purchase commitments for drugs and vaccines to treat a variety of neglected diseases, but in the immediate term smaller scale APCs for FDCs and pediatric formulations, as well as an APC for AIDS vaccines ought to be implemented. Finally, national orphan drug programs, originally designed to foster R&D for rare diseases through a variety of push and pull mechanisms, can be adapted to promote neglected disease research as a powerful complement to international APCs.

In time, the international community should consider establishing a donor-financed global pharmaceutical purchase fund, which would purchase and distribute currently-existing medicines in developing countries and which would offer purchase commitments where developing world therapeutic needs are unmet. By combining the power of bulk purchasing to create differential pricing through strengthened negotiating power and guaranteed market volume with the promise of APCs in stimulating R&D for

neglected diseases, a global purchase fund would prove an effective mechanism to solve the twin crises of pharmaceutical access and innovation. This idea has had support from the United Kingdom. Gordon Brown, in a speech to the International Conference Against Child Poverty in London, framed it as such: “a purchase fund – providing a credible commitment to create a market for current and future treatments in developing countries – would surely serve as a strong incentive to develop and deliver affordable treatments. That is why … the UK proposes that a new global purchase fund for drugs and vaccines be created. Both for treatments that do not yet exist but could be developed in time – for AIDS and malaria, for example – as well as for those that already exist and need to be purchased now.”1 The logic of his words is evident, but political commitment is not. 4 years after this speech, the international community has made only piecemeal progress towards addressing the problems of pharmaceutical access and innovation.

1 Brown, Gordon. Speech given by Gordon Brown, Chancellor of the Exchequer, at the International Conference Against Child Poverty, London, February 26, 2001. Available: http://www.hm-treasury.gov.uk/docs/2001/child_poverty/chxspeech.htm. See in Kremer, supra note 14, at 7;

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