Bargaining for Lives at the
World Trade Organization:
The Law and Economics of
Patents and Affordable AIDS
Bradly Condon, ITAM and Bond University
Tapen Sinha, ITAM and University of Nottingham
The Global AIDS Crisis at a glance:
World-wide: over 40 million cases
Sub-Saharan Africa: over 28 million cases
Spreading most rapidly
in Eastern Europe and Russia
and sheer numbers are scary in India and China
prevalence rate in India is estimated at 0.8%, with
if more than 1%, numbers tend to rise steeply
The Global AIDS Crisis
UN considers AIDS a global security issue.
Hits South harder than North.
Sub-Saharan Africa and S. & S.E. Asia:
85% of total worldwide cases
84% of new infections (2001)
90% of deaths (2001)
Prevalence rate versus incidence rate
Prevalence might fall with rising incidence: the
case of Uganda
Dimension of the problem in South Africa
Economics of drug pricing
If it is a developing country only disease
(like tropical diseases)
There is no high-income markets to pay for
Supply-side or demand-side subsidies are
essential to encourage R&D
There is no alternative
Differential (Ramsay) Pricing
Demand for drugs is less price elastic in the
North than in the South
Ramsay rule says that for profit
maximizing price discriminating
monopolist should charge higher price in
the North and charge lower price in the
What is the empirical evidence?
Are Drug Companies Evil?
Drug Company Reports 2001, SEC Filing
Source: Profiting from Pain
Antics of PhARMA
(1) The pharmaceutical giant Glaxo representatives sent a
letter to an Indian generic-drug maker, Cipla Ltd.,
accusing it of violating Glaxo's patent by seeking to sell
low-priced versions of Glaxo's drugs in Ghana. Glaxo
later conceded it had no valid patent in Ghana.
(2) Later, they repeated the warning to Cipla for allowing
generic import of AIDS drugs in Uganda, only to back
down once more.
(3) In a meeting with United States Trade Representative
Charlene Barshefsky, industry executives insisted that the
problem with AIDS in Africa was not high-priced drugs,
but a lack of computers and other components of healthcare infrastructure
Cost and pricing of drugs
Patents encourage R&D, innovation.
Pharma says average cost of developing
successful drug is $500,000,000.
This overstates true R&D costs and ignores
public investment in research.
Cost of AIDS cocktail in US: $10-15,000/yr
African health-care budgets: $6/yr/person
Cipla, Ltd. of Bombay, India has offered cocktail
for $350/yr. in Africa to DWB.
Thus, to supply in Africa, the drugs need huge
subsidy or donation from somewhere
WTO: India has until 2005 to recognize 20 year
patents on products that had no patent protection
in India before 1995.
WTO allows countries to issue license to
manufacture generic drugs, but not for export.
Global prices for active ingredients for HIV/AIDS
Note: Prices are expressed in dollars per kilo.
These are the ingredients for the triple therapy
Relevance of drug cocktail
Relevance of drug cocktail
WTO TRIPS Agreement
Exhaustion of patent rights cannot be subject of a
Exhaustion means once the product is sold, the
patent holder cannot prevent resale.
WTO members are thus free to permit parallel
imports of patented drugs.
Parallel imports of generic copies of patented
drugs prohibited in countries that implement
WTO TRIPS Agreement:
Necessary to protect public health and nutrition,
provided consistent w TRIPS.
Necessary for protection of essential security
Compulsory license after negotiations; can be
waived in emergency, extreme urgency or noncommercial public use.
License must predominantly supply domestic
market; this prohibits large-scale exports
AIDS, Anthrax and Patents
Brazil threatened to issue compulsory license in
negotiations with Merck (US) and Roche (Swiss).
US filed WTO complaint against Brazil
US and Canada used similar strategy with Bayer
(German) during Anthrax scare.
In the case of Anthrax, there were exactly five
deaths in the US and none in Canada
US/Canada actions against Bayer weakened their
negotiating position at Doha.
WTO TRIPS Agreement:
Brazil, India and 38 African countries joined
together to fight US, Canada and Switzerland
position at Doha, resulting in Doha Declaration
Members have right to grant compulsory licenses
and determine grounds for granting
“Public health crises, including those relating to
HIV/AIDS, tuberculosis, malaria and other
epidemics, can represent a national emergency…”
TRIPS and Bargaining Power
TRIPS exceptions enhance bargaining power of
governments in price negotiations.
Brazil used threat of compulsory license to reduce
Roche price to 30% of U.S. price.
U.S. used same threat to reduce Bayer price to
25% of normal retail price.
Note that the threat is only credible if country has
generic manufacturing capability.
Parallel Imports of Patented
WTO rules permit members to allow parallel
imports of patented drugs.
If allowed, price discrimination strategy not
sustainable -- if drug is cheaper in Brazil, U.S.
consumers would import from Brazil.
Developed country markets not threatened by
price cuts in developing country markets if
former prohibit parallel imports.
Imports of Generics
WTO rules prohibit imports and exports of
generic copies of patented drugs: 1995, 2005,
Developing countries should be allowed to import
generics if they have no manufacturing capability.
To give them same bargaining power as those
who can issue compulsory license.
Can prohibit resale in developed countries to
preserve research incentives.
Doha Declaration, Paragraph 6
Para 6. “We recognize that WTO members with
insufficient or no manufacturing capacities in the
pharmaceutical sector could face difficulties in
making effective use of compulsory licensing
under the TRIPS Agreement. We instruct the
Council for TRIPS to find an expeditious solution
to this problem and to report to the General
Council before the end of 2002.”
Paragraph 6 Negotiations
Dec 2002: 143/144 WTO members agree
United States disagrees because Pharma
Pharma donated $60m to Republicans
Problem of regulatory capture
Decision finally reached just before
Cancun meeting on Aug 30, 2003
Paragraph 6 Decision
WTO members can issue compulsory license for export to
countries that lack generic manufacturing capacity.
Exporter pays compensates patent owner (litigation risk).
Importer must also issue license (paperwork).
All except least-developed must notify WTO, specify
names and quantities of drugs (limits competition), and
duration of license (hard to determine).
Must prevent parallel imports and diversion (extra cost).
Manufacturer must use special labels and post info on
website re quantities and destination (extra cost).
Paragraph 6 Decision:
4 categories of country
Least-developed (UN index)
Countries that (voluntarily) agree not to use system to
import: EU, US, Canada, Japan, Oz, NZ, Switzerland, and
E. Europe after accession
Countries that agree to use system only in emergency or
extreme urgency (ie not for non-commercial public use):
Hong Kong, Israel, Korea, Kuwait, Macao China,
Mexico, Qatar, Singapore, Taiwan, Turkey, United Arab
Remaining members (developed and developing)
Problem: UN index not appropriate
Implications for Global
Profits come mainly from rich markets.
1975-1999: 16/1393 of new chemical entities marketed
were for tropical diseases and tuberculosis.
0.2% of annual health-related R & D worldwide iss for
pneumonia, diarrhoeal diseases and tuberculosis yet these
account for 18% of the global disease burden.
Price reductions or compulsory licenses for AIDS drugs
in developing countries do not remove research
Differential pricing strategy not affected as long as resale
in rich countries prohibited.
Brazil’s move in Sept 2003
Threatened to import generics from India, China or
Thailand in further price negotiations.
Brazil wants 40% price reduction; companies offered
Brazil can do this until 2005 without using Para. 6 system;
plans to manufacture in Brazil later.
After 2005, India, China, Thailand must implement
After 2005, only least-developed can produce for export
without using Para. 6 system.
Stephen Lewis, UN Special
Envoy for AIDS, Sept 25, 2003
“the rich world, annually, spends 600 times as much on
defense as Africa has for AIDS, and 350 times as much on
subsidies as Africa has for AIDS. My use of the phrase
‘grotesque obscenity’ ...may sound strong, but it wilts in
the face of those numbers.”
“It’s time for one of the major industrial countries, in
particular, one of the G7 countries, to announce the
manufacture and export of generic drugs to Africa. I
would wish it to be my country, Canada...”
Canadian generic industry asked govt to change law to
permit exports at cost.
Can. govt expressed concern over possible US reaction
After Lewis statement, Can. govt announced plans to
change Canadian patent law to permit generic exports
under the Paragraph 6 system.
Representatives of the multinational pharmaceutical
companies first criticized Canada, then decided to
participate in negotiations with the government regarding
the content of the proposed legislation.
“The world must do more, much more on every front in
the fight against AIDS. Of course, it means dramatically
expanding our prevention efforts, but the most striking
inequity is our failure to provide the lifesaving treatment
to the millions of people who need it most. The single
most important step we must now take is to provide
access to treatment throughout the developing world.
There is no excuse for delay. We must start now. If we
discard the people who are dying from AIDS, then we can
no longer call ourselves decent people.”