Strict International Patent Laws Hurt Developing Countries

In 1998, 39 pharmaceutical companies filed a lawsuit against South Africa. They hoped to stop the government from producing the generic drugs that would have made treatment affordable for the country's AIDS victims. A public outcry ensued, and critics accused pharmaceutical companies of valuing profit over human life. Although these same companies were eventually pressured into dropping the lawsuit, the conflict illustrates a problem inherent in recent free trade agreements – inflexible patent regulations can prevent developing countries from obtaining or producing affordable versions of the medicine they need. – YaleGlobal

Strict International Patent Laws Hurt Developing Countries

Are pharmaceutical companies to blame for rising AIDS fatalities?
Amy Kapczynski
Monday, December 16, 2002
AIDS in South Africa - Man Dying

Last year, at a conference about health and human rights, a representative from a pharmaceutical company told the audience a joke. It was about the now infamous lawsuit that 39 pharmaceutical companies brought against the South African government. The lawsuit was intended to stop the government from making cheaper medicines available in their country - and in the context of the HIV/AIDS pandemic, it generated global outrage. After three years of obstructing the implementation of the South African law, the companies were forced to abandon the lawsuit, which had become a PR nightmare. Here's the joke: "People ask me," the representative said, "how we could have been so stupid as to sue Nelson Mandela. I tell them: We had to. Mother Theresa was already dead."

Perhaps not a terribly funny joke, but it usefully highlights a seismic shift in global public awareness and opinion that happened recently. In 1998, when the 39 companies filed their suit, it seemed to them a perfectly good idea to sue Nelson Mandela to stop him from encroaching upon their patents. Even Al Gore supported the lawsuit, traveling to South Africa to threaten the government with trade sanctions if they did not revoke the law. Three years later, that same lawsuit came to be seen akin to an assault upon a saint. How did this happen, and what have we learned from it? What was the South African lawsuit about, and what does it tell us about globalization?

Understanding the lawsuit requires a bit of background. Patents are temporary monopolies granted by governments. They give the inventor a right to exclude everyone else from producing, selling, or distributing a product in that country. Monopolies are generally viewed as a bad thing, because they create what economists call "deadweight losses". So why are governments granting them? The theory is that the higher prices that patents allow companies to charge provide incentives to develop and commercialize new products. The dirty secret about patents, as a law school professor of mine once put it, is that no one knows how strong patents have to be to serve this purpose. For example, are twenty years of patent protection necessary to provide sufficient incentives for research? Or is ten years sufficient? Under international rules, patents must now be granted for a minimum of twenty years - although until recently, patents were often much shorter, even in the U.S.

Here is another dirty secret: Patents cannot generate innovation where there is no market. Even with patents, it is not profitable for companies to produce drugs for diseases that primarily affect the poor. So, for example, only 13 out of the 1393 new drugs approved between 1975 and 1999 were for tropical diseases,1which is to say, diseases that primarily affect poorer regions of the world. This suggests that the patent system is a raw deal for developing countries - because it gives them monopoly prices without giving them innovation. It also suggests a need for substantial public funds for drug development for neglected diseases.

Cut to South Africa in 1998: Approximately one in five adults is living with HIV/AIDS. Since 1996, the world has known that "cocktails" of antiretroviral drugs save lives. They are not a cure for AIDS, but here they have turned it into an almost chronic disease, akin to diabetes. The rate of AIDS deaths in the U.S. was plummeting, but in South Africa, no one except the exceedingly rich could afford the drugs. In the U.S., taxpayers subsidize the cost of the drugs, which cost around $15,000 per year. In South Africa, making treatment universally available at such prices would have bankrupted the government. But it was not the drugs themselves that were expensive - it was the patents. Where there are no patents on these drugs, as is the case in India, for example, you can buy equivalent versions of those $15,000 drugs for $200. India does not currently grant patents for products (pharmaceutical or otherwise), although they soon will have to, according to an agreement which all WTO members must sign and adhere to, known as the "TRIPS" - Trade-Related Aspects of Intellectual Property - Agreement.

The South African government was in a bind. South Africa has a strong patent system - the legacy of apartheid, but also the result of pressure from countries like the United States. Affordable drugs existed, but not for them. So, in 1998, they did what any responsible government would do: They passed a law that would give them the power to bring drug prices down. The law would have allowed them to "parallel import" cheaper medicines - that is, to take advantage of the fact that patented drugs are sold at different prices in different countries. Parallel importing is what busloads of senior US citizens do when they go to Canada to fill their prescriptions - buying the same brand-name drugs in a country where they are less expensive. And it's completely legal under the TRIPS agreement.

The South African law might also have given the government the power to use generic drugs, harnessing the power of competition to drive prices down. The TRIPS Agreement allows governments to override patents and allow generic production, through a strategy known as "compulsory licensing." Governments can use compulsory licensing whenever they choose, as long as they follow certain procedures (which include first negotiating with the patent-holder and allowing appeal of the government's decision). In an emergency, or where the product is for public non-commercial use, a government can issue a compulsory license without even consulting the patent-holder.

A Bolshevik notion? Piracy? Only if you consider the U.S. Congress to be communists and pirates. During the anthrax crisis last year, Congress threatened to use compulsory licensing to obtain the antibiotic Cipro more cheaply and quickly from generic manufacturers. Bayer, who holds the patent on Cipro, immediately offered to dramatically lower its prices and increase production.

Faced with a potential public health crisis, Congress recognized what many other countries have been arguing all along: that patents are not "rights" but rather privileges - and that they do not come before the rights to health and life. But that is not how they - or the drug industry - approached the issue when it came to South Africa. The possibility that South Africa - a tiny percentage of the world's drug market - might start using generic drugs was treated as a colossal threat to the interests of the U.S. pharmaceutical industry. It did not matter that the United States had signed the TRIPS agreement in 1994, recognizing that developing country governments have the ability to do just what the U.S. would later do with Cipro. And it didn't matter that literally millions of lives were at stake. According to Charlene Barshefsky, the U.S. Trade Representative at the time: "We all missed it.... I didn't appreciate at all the extent to which our interpretation of South Africa's international property obligations were draconian."2

Activists around the world realized it, and mobilized against the lawsuit with slogans like "Patient Rights Over Patent Rights," and "Stop Medical Apartheid." In March, 2001, when the case finally reached the courtroom, the drug companies, fearing the public relations backlash, withdrew their suit.

Riding on the momentum of this win, and with the example of Cipro now in hand, developing countries successfully secured affirmation at the WTO Ministerial meeting in Doha in November, 2001, that they have the right to parallel import and issue compulsory licenses, and that the TRIPS Agreement 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."3

End of story? Not exactly. The lesson that the Clinton Administration learned has been lost on the Bush Administration. They are reneging on promises made at Doha, trying to impose draconian intellectual property laws onto countries through multilateral agreements such as the Free Trade of the Americas Act and bilateral agreements like those recently negotiated with Chile and Singapore. The USTR has just announced plans for a regional African agreement known as the Southern African Free Trade and Development Agreement, or SAFTDA (with South Africa, Botswana, Lesotho, Namibia, and Swaziland), and seeks a similar agreement with ASEAN countries.4If the U.S. negotiating position remains consistent - as it has done up until this point - the USTR will seek TRIPS-plus provisions (that is, more protective of patent rights and more restrictive of countries' abilities to use generic drugs) in each of these agreements, with devastating long-term consequences for the health of people, and especially poor people, in these countries.

The Bush Administration has also prevented a positive resolution to one crucial issue left unresolved at Doha. Currently, TRIPS allows countries to produce generic drugs through compulsory licensing, but requires that such drugs be used predominantly for the country's domestic market. That means that countries cannot export generic products thus produced - even to countries where there are no patents, and these generics are perfectly legal. This undermines the logic of free trade that the WTO is based upon. That logic, which often goes by the heading of "comparative advantage," contends that countries will benefit in the aggregate if each specializes and trades in what they are best at. Thus, you would expect to find WTO proponents insisting that countries like Brazil and India, which have strong generic markets, should be able to supply the markets of other countries if they can do it most cheaply. Many of the poorest countries have no indigenous capacity to manufacture pharmaceuticals, and thus they will need to import if they are to make use of generic drugs. At Doha, governments noted this issue and promised to find a resolution to the issue in the next year. That deadline has passed, but no agreement has yet been reached because the governments of the U.S. and other wealthy countries have insisted on unheard-of limitations and WTO oversight of any exports; for example, that such exports be limited to certain diseases and be pre-approved by the WTO.

What does all this tell us about globalization? That it is still far too easy for powerful countries like the United States to set the terms of global agreements and to ignore those terms when they find them inconvenient. The same applies to the large multi-national companies who search for mega-profits to the exclusion of all other considerations. Another lesson is that globalization isn't an equalizing phenomenon. As shown here, U.S. rules, interests, and ignorance can be writ large upon other areas of the world. Nonetheless, it is also clear that if activists mobilize across borders to resist inequitable outcomes, they can change the rules of globalization - not for good, but for the better.

1 P. Trouiller et. al, "Drug Development for Neglected Diseases: a Deficient Market and a Public Health Policy Failure," The Lancet, vol. 359, pp. 2188-94.

2 Helene Cooper, Rachel Zimmerman and Laurie McGinley, AIDS Epidemic Puts Drug Firms In a Vise: Treatment vs. Profits, Wall Street Journal, Mar. 2, 2001.

3 Declaration on the TRIPS Agreement and Public Health, WT/MIN(01)/DEC/W/2, Nov. 14, 2001 (01-5770).

4 Robert B. Zoellick, Free Trade, Free People, WALL ST. J., Nov. 5, 2002.

Amy Kapczynski is a third year student at Yale Law School. She helped found the Yale AIDS Network, and is currently working on how university patenting and licensing policies can promote access to medicines in developing countries.

© Copyright 2002 Yale Center for the Study of Globalization