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The Debate Over Generic-Drug Trade

Author: Toni Johnson
Updated: August 3, 2011
This publication is now archived.

Introduction

The most comprehensive set of global trade rules for intellectual property, including drug patents, was agreed upon in 1994 during the World Trade Organization's (WTO) Uruguay Round of multilateral trade talks. The rules required signatories to strengthen intellectual property laws, but also gave members the right to override patents to produce generic drugs in times of national emergencies. This exception has evolved into a conflict between patent-holding pharmaceutical companies and developing countries. Legal disputes with developing states have largely been over HIV/AIDS treatments, but a move by Thailand's government in 2008 to ignore the patents of some cancer drugs raised new questions about the trade regime's assumptions over what constitutes an emergency. Until recently, chronic conditions such as cancer have been considered epidemics in only the developed world. However, with the global health community beginning to address the rise of non-communicable diseases in developing countries, policymakers are looking at ways to structure an international drug-trade regime that ensures developing nations' access to medicines, including for so-called lifestyle ailments such as diabetes, without discouraging future research and development efforts by drug companies.

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Disputes over Drug Patents

The HIV/AIDS epidemic of the late 1980s brought attention to the difficulties developing nations faced in obtaining access to new lifesaving drugs. Patented antiretroviral drugs for HIV/AIDS were expensive, cutting-edge treatments that emerged just as the number of victims was exploding. These treatments were quickly adopted in the developed world, but in the developing world they were often well out of reach.

In some cases, developing countries such as Brazil began producing generic versions of HIV/AIDS treatments without the permission of patent holders. But that practice became problematic when developing nations joined the World Trade Organization (WTO) and became bound by the organization's intellectual property rights agreements. In 1995, members of the WTO ascribed to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which established minimum levels of protection for member countries for products including pharmaceuticals. "The WTO was a game changer," says David Fidler, an international law professor and director of the Center on American and Global Security at Indiana University. "If you wanted the benefits of being a member, you had to sign on to TRIPS." All members were allowed to issue compulsory licenses to produce generic versions of products domestically, including drugs, without the permission of the patent holder under circumstances such as a national emergency. But the compulsory license provision has led to controversy and confusion about how and under what circumstances it should be applied.

By 2000, a number of emerging economies threatened to issue compulsory licenses, primarily as a tool in drug price negotiations. Many such threats were issued by developing countries for AIDS drugs. Drug companies responded by lowering their prices by as much as 40 percent, but many developing countries tried to push for larger price reductions. For example, India wanted the price of the antiretroviral Efavirenz cut from $1.57 per dose to just 65 cents per dose, about a 60 percent reduction, but the drugmaker did not wish to go that low.

By 2005, Malaysia, Indonesia, and several African countries officially issued licenses for the generic production of antiretroviral drugs. India, Brazil, and Thailand followed in 2006 and 2007. The WTO expanded the compulsory license rule in 2003 to allow developing countries with no capacity to produce drugs on their own to import them from other countries operating under a compulsory license. In 2007, Canada became the first country to issue a compulsory license to export generic drugs under this rule.

While poor countries maintain the only way they can afford medicines to combat epidemics is through domestic production of generic drugs, the pharmaceutical industry argues that developing new drugs depends on the defense of patent rights. It also asserts that rather than being unable to afford medicines, some countries are just opting to spend the money elsewhere (InsideCounsel). Mark Grayson, a lobbyist at PhRMA, questions whether compulsory licenses are being used for "getting medicines for people or as a way for countries to start their local industry." Merck, the U.S.-based producer of Efavirenz, says "both the letter and spirit of international trade rules suggest that such authority [to use compulsory licensing] should be used only in the most extraordinary and limited circumstances" (PDF).

Compulsory license use requires political will, says Priti Radhakrishnan, director of I-Mak, a health advocacy group looking at drug innovation and access, who notes that even threatening to issue a compulsory license can lead to significant backlash. In some cases, drugmakers have responded by threatening to withhold all new drugs for sale in a country if it proceeded with its compulsory license. CFR Senior Fellow Laurie Garrett notes the compulsory license issue is "deeply divisive in global health circles, and there is no clear position." Still, global health experts say it is likely that big countries such as India and China will continue to make use of compulsory licenses.

One attempt to decrease the need for the compulsory licenses is a patent pool program for AIDS medicines set up in December 2009 by UNITAID, the UN agency dedicated to helping increase access to AIDS, malaria, and tuberculosis treatments in developing countries. Such a pool would allow the generic manufacture and sale of certain patented drugs from different countries to be combined into a single treatment for a select number of poor countries. In July 2011, Gilead Sciences became the first drug manufacturer to allow its drugs tenofovir, emtricitabine, cobicistat, and elvitegravir, to be manufactured under a pool agreement (Reuters). Still middle-income countries are excluded from the Gilead deal, which has been decried by some health activists.

Non-communicable Diseases and Compulsory Licensing

Some experts, including Indiana University's Fidler, contend that drug companies fought so strongly over the licensing of HIV/AIDS drugs because they foresaw that the "national emergency" line would not end at infectious diseases. In 2008, a year after issuing compulsory licenses for several HIV/AIDS drugs, Thailand issued compulsory licenses for four cancer drugs when pricing talks with drug companies broke down. The U.S. Centers for Disease Control and Prevention estimates there were about twenty-one thousand AIDS-related deaths in Thailand in 2006, yet, according to a white paper by Thailand's health ministry, cancer causes thirty thousand deaths annually (PDF). From the Thai government's point of view, cancer "is no less serious than HIV/AIDS," according to the white paper. CFR's Garrett points out there are "unique features to the Thai situation," including that Thailand has become a destination for medical tourism, where people from wealthy countries get expensive procedures at low cost.

Still, Thailand's move to issue compulsory licenses for chronic, non-communicable diseases like cancer hits at the heart of the drug industry's profit model. Much of the global pharmaceutical industry's research money is spent on ailments considered prevalent in wealthier nations, such as cancer, heart disease, and diabetes. But research shows that non-communicable diseases are among the world's top five killers; the World Health Organization says more than 60 percent of deaths globally (PDF) are attributable to chronic disease, and 80 percent of those deaths occur in the developing world.

Some experts are concerned that the inclusion of noninfectious diseases in compulsory licensing could undermine innovation for chronic diseases. "Somebody's got to pay, there's no free lunch," argues Fidler. With the investment climate so competitive, research and development (R&D) money for a product likely to be "immediately stolen" by countries breaking patents could be a difficult sell to investors.

Research and development averages between ten and fifteen years in the United States and is included as part of the twenty-year patent-- meaning the average drug patent (PDF), once on the market, lasts about eleven years, according to the lobby group PhRMA. R&D for 2010 was about $67 billion, growing less than $11 billion between 2006 and 2010. Comparatively, industry earnings grew by more than $200 billion between 2006 and 2010, and the industry is expected to top $880 billion globally in 2011. Few drugs ever recoup their R&D costs, notes PhRMA, and even fewer ever reach the incredible earning potential of a drug such as Lipitor, which made nearly $11 billion in sales in 2010 but expired  in the United States in 2011. Overall, drug companies are spending less on research (Reuters) and bringing fewer drugs to market than a decade ago.

Other R&D models are possible. For example, there are nearly fifty public/private partnerships to combat the world's most neglected infectious diseases, including malaria, tuberculosis, dengue fever, and leishmaniasis—research which had languished because it lacked profitability. The partnerships are aimed at offsetting R&D costs, with the acknowledgement that the drugs will be sold cheaply from the outset. Such partnerships are also under discussion for non-communicable diseases.

"This is an issue that will occupy us for the next twenty years," said Nils Daulaire, U.S. representative to the Executive Board of WHO at the July 2011 CFR meeting on combating non-communicable disease. "There's no single answer, but we recognize that innovation and the development of new products is going to be critical [for treating the end stages of illness], and we certainly don't want to inhibit that while at the same time trying to maintain a reasonable balance in terms of access for people in low-income countries."

The Rise of Generic Drugs

Emerging markets are expected to nearly double spending on drugs as governments seek to expand access to healthcare. While the branded drug market in these countries will increase, 80 cents of every dollar is likely to be spent on generic drugs, according to healthcare analyst IMS. With healthcare costs rising, interest in generic drugs in wealthy countries also has increased. Generic drugs overall have jumped from 49 percent of the global drug market in 2000 to 78 percent in 2010 (PDF).

Expired patents for drugs controlling chronic ailments could reduce pressure to use compulsory licenses. The pharmaceutical industry faces a wave of expirations on numerous lucrative drugs by 2014 that could reduce drug spending as much as $100 billion worldwide. By the end of 2012 alone, the patents on seven out of twenty of the world's most profitable drugs (AP) could expire.

The pharmaceutical industry in the United States and Europe has come under fire for using so-called delay tactics against generics—pushing for patent extensions and paying off generic drugmakers. A branded drug can lose anywhere from 40 percent to 80 percent of its market share within the first year of market introduction by a generic rival in the United States. Although the generic drug market represents about 65 percent of U.S. prescriptions, those drugs represent only about 25 percent of industry profits (generics sell at just a fraction of the cost of name brand medicines).

Some industry advocates warn that importing inexpensive patented drugs and generics from other countries will erode safety standards; regulatory agencies are already unable to keep up (PDF). And some experts note a massive influx of generic drugs could help mask increases in the counterfeit drug trade, already a multibillion dollar industry and expected to see a 90 percent jump in global sales from 2005 to 2010. The U.S. Food and Drug Agency estimates counterfeit drugs represent as much 30 percent of all drugs sold in some developing countries, but amount to less than 1 percent of drugs in the developed world.

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