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| Author: | Toni Johnson, Staff Writer |
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January 7, 2009
The most comprehensive set of global trade rules for intellectual property, including drug patents, was agreed 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 ignore patents in special cases. This exception has evolved into a dilemma for pharmaceutical companies holding drug patents, stuck between the need to make a profit and pressures to uphold the public good. Their legal disputes with developing states have largely been over HIV/AIDS treatments. But a move by Thailand's government to ignore the patents of some cancer drugs could spell trouble for the industry. The episode spotlights the long-running debate among global health experts over how to increase global drug access while maintaining revenues for pharmaceutical firms so as to promote future research and development efforts.
The pharmaceutical industry currently faces serious profit setbacks. A 2007 article in the New England Journal of Medicine notes that, by 2010, patents on some 110 drugs will expire, including some of the industry's most profitable sellers. Estimates for yearly sales of these drugs range as high as $80 billion. Such expirations come at a time when the industry is bringing fewer drugs to market. The profit holes from the expiration of blockbusters are unlikely to be filled (Forbes) because of the lack of new blockbusters, such as U.S.-based Pfizer's cholesterol drug Lipitor, which alone earns nearly $13 billion annually (its patent is expected to expire in 2010). And some companies are seeing sales of popular drugs begin to decline (IHT). (Many of the world's top pharmaceutical patent holders are based in the United States, with others located primarily in Europe and Japan.)
Many of the industry's top sellers are for ailments, such as asthma, cholesterol, gastrointestinal disorders, and mental disorder. The number of new drugs brought to market in the last decade has failed to match the drug boom of the 1990s, experts say. Even though drug patents last for at least twenty years, that includes the research and development stage. With R&D averaging between ten years and fifteen years, the average drug patent (PDF) once on the market is about eleven years, according to a 2008 report by the industry lobby group PhRMA. Industry earnings in 2006 were about $600 billion globally, while industry R&D for that year was about $60 billion, or about $1.3 million per drug.
Until recently, drug companies did not devote significant research and development expenditures to developing drugs for infectious diseases in the developing world, given concerns about profitability. By the end of 2008, however, there were about nearly fifty public/private partnerships (PDF) to combat the world's most neglected infectious diseases in the developing world, including malaria, tuberculosis, dengue fever, and leishmaniasis. The partnerships are aimed at offsetting research and development (R&D) costs, with the acknowledgement that the drugs will be sold cheaply from the outset. Some experts predict the global credit crunch that hit in 2008 could delay R&D on new medicines (Euractiv).
While drug companies strive to maintain their profit margins, developing countries struggle to obtain access to expensive drugs to treat critical epidemics. The HIV/AIDS epidemic of the late 1980s brought attention to the difficulties developing nations have faced in obtaining access to new lifesaving drugs. Unlike drugs for developing world scourges like malaria and tuberculosis, 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.
"Somebody's got to pay [for drug research and development], there's no free lunch." – David Fidler, Indiana University
That practice became problematic, however, when developing nations joined the World Trade Organization (WTO). Joining the WTO was seen as a boon for economic development because it gave access to major trade markets that would have otherwise needed to be negotiated individually between countries. 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. Non-member countries had few, if any, intellectual property laws. "The WTO was a game changer," David Fidler, an international law professor and director of the Center on American and Global Security at Indiana University, says. "If you wanted the benefits of being a member, you had to sign on to TRIPS." Of the current 153 WTO members, roughly two-thirds are developing states. Developed countries were given one year to bring their laws in line with the agreement, while developing countries and transition economies were given between five and ten years to comply--deadlines that were later extended by five years. WTO members were also given flexibility in how to establish their patenting systems, which allowed them to issue compulsory licenses to produce generic versions of products, including drugs, without the permission of the patent holder under circumstances such as a national emergency. But this flexibility has led to a lot of controversy. Do Hyung Kim of the University of the Houston Law Center in February 2007 says in a research guide on TRIPS that the problem is "any nation can, in theory, declare a public health emergency for questionable reasons to assign compulsory licensing for any patented drug."
By the turn of the century, a number of emerging economies threatened to issue compulsory licenses just as they would have come under TRIPS jurisdiction, primarily as a tool in drug price negotiations. Many such threats were issued by developing countries for AIDS drugs. (A notable exception was the threat by the United States to issue a compulsory license for antibiotic Cipro following the 2001 anthrax attacks.) Drug companies responded by lowering their prices by as much as 40 percent. Still, a 2008 joint report by major global health organizations says more than 60 percent of people in need of these treatments (PDF) in middle- and low-income countries do not have access to them. Developing governments have pushed for larger price reductions with mixed success. 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 drug maker 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 drug under this rule.
Poor countries maintain that the only way they can afford medicines to combat epidemics is through the domestic production of generic drugs. The pharmaceutical industry disagrees. It argues that rather than being unable to afford medicines, some countries are just opting to spend the money elsewhere (Inside Counsel). 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). (TRIPS language states the requirement to obtain permission of the patent holder "may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.")
Despite the concerns raised by the pharmaceutical industry, the use of compulsory licenses by the end of 2008 has been limited to less than a dozen countries. It is unclear how widespread their use will become. Emerging economies recently came under TRIPS jurisdiction and least-developed economies do not have to begin to comply until at least 2016. Compulsory license use requires a certain amount of 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 says the compulsory license issue is "deeply divisive in global health circles, and there is no clear position." The industry contends that the development of new drugs for diseases in the developing world depends on the defense of patent rights on more profitable drugs. Still, global health experts say it is likely that big countries such as India and China will continue to make use of compulsory licenses.
Government trade negotiators in the United States, where a majority of the world's largest pharmaceutical companies are located, have approached the issue by placing stronger provisions, sometimes known as TRIPS-plus, into bilateral trade agreements designed to make it harder to issue compulsory licenses for drugs. A U.S.-Thailand free trade agreement has stalled in part because the agreement contains such provisions (PDF). Mead Over, a senior fellow at the Center for Global Development, criticizes the bilateral treaty strategy as a "divide and conquer" approach to AIDS-afflicted countries. However, U.S. trade officials maintain that those provisions "do not stand in the way of measures necessary to protect public health" (PDF).
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, Thailand announced its intention to issue compulsory licenses for at least three cancer drugs, one year after issuing compulsory licenses for HIV/AIDS drugs. According to a white paper by the nation's health ministry, cancer causes thirty thousand deaths annually (PDF) in Thailand. The U.S. Centers for Disease Control and Prevention estimates there were about twenty-one thousand AIDS-related deaths in Thailand in 2006. From the Thai government's point of view, cancer "is no less serious than HIV/AIDS." CFR's Garrett points out there are "many 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. Currently, much of the global pharmaceutical industry's research money is spent on ailments prevalent in wealthier states, such as cancer, heart disease, and diabetes. At the same time, developing countries have a good case for ignoring these patents under WTO rules, since health data show these non-communicable diseases are indeed epidemics (PDF). Cancer and cardiovascular disease are among the world's top five killers; the World Health Organization says more than 60 percent of global deaths (PDF) are attributable to chronic disease.
Barack Obama's health care reform plan includes "allowing the importation of safe medicines from other developed countries, increasing the use of generic drugs in public programs and taking on drug companies that block cheaper generic medicines from the market."
Some experts are concerned that the inclusion of noninfectious diseases, such as cancer, diabetes and heart disease, into this little- or no-profit scenario could undermine innovation for chronic diseases, because there would be few profit avenues left for pharmaceutical companies. "Somebody's got to pay, there's no free lunch," argues Fidler. With the investment climate so competitive, R&D money for a product likely to be "immediately stolen" by countries breaking patents could be a difficult sell to investors. Although other R&D models are possible, many would include public money, and that money is expected to be constrained by the global financial crisis.
The drug industry also faces a challenge on generics within the developed world. With health care costs rising, interest in generic drugs in wealthy countries is increasing and will likely intensify in the economic downturn. The pharmaceutical industry in the United States and Europe has come under fire for using so-called delay tactics against generics. Congressional testimony from a U.S. Federal Trade Commission (FTC) official in 2007 contends drug companies have in some cases been paying off generic drug manufacturers (PDF) "to abandon the patent challenge and delay entering the market." Similarly, a November 2008 report (PDF) by the European Union "confirmed" that drug companies were employing a number of strategies "aimed at ensuring continued revenue streams for their medicines." In response, industry officials said the report "overstates the level as well as the reasons for delays in generic market access" (Independent).
Some industry experts contend such strategies are necessary. 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, according to the FTC. Although the generic drug market represents about 65 percent of U.S. prescriptions, those drugs represent just only about 20 percent of industry profits (generics sell at just a fraction of the cost of name brand medicines).
Meanwhile, the brand-name drug industry's practice of varying prices according to the wealth and laws of countries has created interest in a different kind of trade. Boston University Associate Law Professor Kevin Outterson notes a patented drug sold cheaply in one country may be identical to a product sold at a much greater cost in another, creating an opportunity for buyers in a lower-priced market (PDF) to export to a higher-priced one.
Part of President-elect Barack Obama's health care reform plan includes "allowing the importation of safe medicines from other developed countries, increasing the use of generic drugs in public programs and taking on drug companies that block cheaper generic medicines from the market." But 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, they contend (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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