IMPLEMENTING THE DOHA DECLARATION-
A Potential Strategy for Dealing with Legal & Economic Barriers To Affordable Medicines

Alfred B. Engelberg 1

Introduction

The WTO Ministerial Conference at Doha declared that the exclusivity afforded by patent rights could not prevent governments from taking steps to protect public health, including, most importantly, providing access to affordable medicines. Despite that declaration, there are significant legal and economic barriers to the implementation of policies which will actually result in the availability of reasonably priced medicines.

The Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), with certain exceptions, requires that member countries honor a patent owner's exclusive right to make, use and sell the patent invention. Article 31 of TRIPS provides a clear pathway for member nations to compulsory licenses under patents. Presumably, the issuance of such licenses would lead to lower cost drugs while still providing some compensation to the patent owner. Article 30 of TRIPS permits a member nation to provide for limited exceptions to the exclusivity afforded by a patent. There appears to be general agreement that these provisions provide sufficient flexibility for a member nation to produce lower cost medicines for its own use. But the issuance of a compulsory license by a member nation that lacks capacity for the domestic production of a patented drug is of no use unless the grant of the license is sufficient to permit the manufacture and sale of a drug for export to that nation. Therefore, post-Doha discussions have focused on developing interpretations or amendments to TRIPS that would allow exports to the nation issuing the license without violating TRIPS obligations in the country of export.

It would be wrong to assume that the mere existence of a TRIPS-compliant compulsory licensing regime will insure the availability of a low-cost supply of newly developed drugs to the least developed nations. The current supply of low cost generic drugs from developing nations results from the fact that those countries have not yet fully implemented patent protection for pharmaceuticals. Therefore, the markets are large and the availability of generic drugs from multiple sources have served to keep prices and per unit profits low. Once India and other developing nations that have significant drug manufacturing capability fully implement pharmaceutical patent enforcement (after 2006), the ability to develop and sell copies of patented drugs in those countries may disappear. Absent a domestic market for such products, the issuance of a compulsory license by a least developed nation may not provide a sufficient economic incentive to spur the development of low cost generic drugs by companies located in developing nations.

For the foregoing reasons, a supply of low cost drugs to the poorest countries is critically dependent on whether those drugs are available (at low cost) in the developing nations. There are only two possible ways in which such availability can be assured, namely: (1) the routine issuance of compulsory licenses for pharmaceutical products in the developing nations or (2) the implementation of stringent price controls by developing nations that are based on the cost at which such drugs would be available if production by multiple generic sources was permitted. It is the thesis of this paper that a price control system is preferable to a compulsory license system since price controls are not prohibited by TRIPS and do not undermine the exclusive right of the patent owner. In any event, for obvious economic reasons, compulsory licensing alone can not assure that a supply of low cost medicines will be developed and produced.

Economic Barriers to Implementation of the Doha Declaration

A meaningful strategy for making available low cost medications can not be developed without a basic understanding of the costs and risks associated with the production of both innovative new drugs and generic copies of those drugs. Some important basic principles are as follows:

  1. Most manufacturers of generic drugs in developed nations are not capable of producing the ingredients which go into a drug. They are totally dependent on a relatively small number of companies that have the ability to produce specialty chemicals. Prior to 1990, the largest producers of such chemicals were located in Europe. As a result of changes in European patent law from a system which only granted process patents to a system which granted full patent protection for pharmaceutical products, the major markets for production of active pharmaceutical ingredients are now located in the developing countries, such as India, that have not yet implemented patent protection for pharmaceutical products.

  2. The costs involved in developing a suitable process for the commercial production of a chemical can be significant. The most efficient production processes or intermediates may be patented thereby making it difficult, and in some cases, impossible, to find a non-infringing production method. Moreover, because the purity of the chemicals is critical to safety concerns, production must take place under highly controlled conditions in facilities which must be inspected and approved by regulatory authorities such as the FDA. In the United States, for example, unless there is an approved Drug Master File for the source of the bulk active ingredient it is not possible to obtain the approval of a finished dosage form containing that ingredient.

  3. The costs of developing a bioequivalent generic dosage form are also significant. It takes both time and money to develop a formulation which exhibits dissolution characteristics similar to the original product; to produce commercial-sized batches of that formulation; to evaluate the product's stability; to conduct clinical studies designed to establish bioequivalence to the original product; and to apply for and receive regulatory approval. In the United States, assuming a supplier for the active ingredient can be found, it takes 2-3 years to develop and obtain approval for a generic product and development costs, including the value of invested dollars, can easily run to more than $2 million for a single product. These investments are not made lightly because most generic drug companies need to develop dozens of new drugs each year. In making investment choices a company must examine the risk of (i) non-approval for technical reasons, (ii) competition from other generic manufacturers that may drive down prices to unprofitable levels, (iii) how long it will take before the development investment is recovered, and (iv) the possibility that the product being copied may become obsolete by virtue of the introduction of a second generation "me-too" products by the innovator before the product being copied is approved for marketing.

  4. The degree of risk for the bulk chemical manufacturer is also significant. The sale of a bulk chemical in commercial significant quantities is dependent on the success of a finished dosage form manufacturer in developing an approved product and establishing a market. In addition, the demand for the bulk chemical can be small. For example, if the finished product contains 10 milligrams of the active ingredient, only 100 kilograms (220 pounds) of material is needed to produce 10 million tablets. Therefore, unless the chemical manufacturer directly or indirectly participates in the profits derived from the sale of the finished product, it may be unable to make a sufficient return to justify the investment in developing a new chemical.

  5. Not surprisingly, given all of the foregoing costs and risks, the major producers of the active pharmaceutical ingredients in countries like India are primarily engaged in the production of final dosage forms for consumption in their home market. Absent patent protection, the investment in the development of a new product can be more quickly recovered due to the immediate prospect of high volume sales. The eventual incremental additional profit to be derived from the export of either bulk chemicals or finished dosages is certainly a plus but it is not the driving force in prioritizing product development projects and maintaining a profitable enterprise.

Once India and other developing nations become fully compliant with TRIPs, they will no longer have a domestic market for a generic drug until patent rights expire. Therefore, there will be no incentive to invest in the development of processes for the production of bulk pharmaceutical ingredients or finished dosage forms until late in the life of a patent when a determination can be made as to the likelihood that a viable market for a generic product will exist after the patent expires. Thus, even if TRIPS is construed as permitting a nation lacking the capacity to produce pharmaceuticals to issue a compulsory license that could be legitimately filled by importing product from a more developed nation, like India, no such product may actually exist anywhere in the world.

Could the issuance of a compulsory license spur the development of such a product? Perhaps. But there would be a significant time lag to enable development and both the price and guaranteed volume of purchases would have to be high enough to induce the investment in development. Indeed, the availability of a low-cost generic product could ultimately become dependent on whether a sufficiently large group of least developed nations would find it feasible to pool their compulsory licensing capability and buying power to create an exclusive compulsory license thereby guaranteeing a sufficient volume of business to induce the development of a product. Clearly, the price at which a least developed nation could acquire a supply of generic drugs would be far higher in this scenario than in the current environment where there are multiple existing producers seeking to make a small amount of additional profit by increasing the volume of production of an existing product for which development costs have already been recovered in their home market.

The truth is that in a TRIPs-compliant world, the patent owner is likely to be the lowest cost producer since the cost of producing an additional volume of a product which is already in mass production will be lower than the cost of producing a newly developed product at low volume. The critical question, therefore, may become whether the patent owner can be induced (or compelled) to make product available to least developed nations at a small mark-up from the actual cost of production.

In summary, those who believe that the mere issuance of a compulsory license by a least developed country will spur competition between multiple generic sources and result in the availability of low-priced generic products for the least developed nations are mistaken. Anyone who doubts it should take note of U.S. experience where blockbuster drugs attract large numbers of generic entrants while many relatively low volume products remain as single-source drugs available only from the patent owner even after the expiration of all patents. The usual cause of that seemingly inexplicable result is the unavailability of a supply of the active ingredient.

Price Controls-A Potential Path to Affordable Medicines?

"Issuance of a patent does not signify government approval to commercialise the patented product. It only prevents others from doing so for the period of the patent. Approval by a regulatory agency, such as the Food and Drug Administration or the Environmental Protection Agency, may be necessary before a patented product can actually be marketed by the patent holder or licensee." 2
Every nation in the world appears to exercise some degree of control over the price at which a pharmaceutical can be sold and the exercise of that control is not subject to TRIPs.3 In fact, TRIPS leaves the question of whether to allow parallel imports of patented pharmaceuticals to the discretion of each nation. The primary incentive for parallel imports is lower prices. Significant international price differentials for pharmaceuticals primarily result from variations in price controls.

It is not the purpose of this paper to discuss the various techniques used by nations to determine a price for a particular pharmaceutical. Suffice it to say that the price is determined by a negotiation with the manufacturer which involves an evaluation of a variety of factors including the price of competitive products, the relative value of the product, the price in non-control nations like the United States, etc. The most significant fact, in relationship to this discussion, is that the price of a new drug is not based on its cost of manufacture whereas the price of a generic copy of that drug is usually related to its cost of manufacture except when there is only one source for the generic product. To put the matter in perspective, the cost of goods for a patented drug rarely amounts to 10% of the selling price whereas the cost of goods represents 50% or more of the selling price of most multi-source generic drugs. That is why it is not uncommon to see a patented drug that sells for $1.00/tablet eventually become a generic drug that sells for $0.20/tablet.

Unquestionably, some group of consumers must pay for the cost and investment made in research and development to discover new drugs even though it appears that governments are bearing an ever-increasing portion of that burden. The price of drugs in the U.S. is also inflated by costs associated with advertising, physician marketing and lobbying and by public acceptance of corporate and government policies geared to produced extraordinary returns for pharmaceutical companies.

Despite some effort to take advantage of Canadian drug prices, it is unlikely that, in the near term, the United States or other developed nations will adopt policies that eliminate differential pricing between the richest and the poorest nations. So long as that remains true, it is reasonable to assume that major pharmaceutical companies will reluctantly accept reasonably stringent price controls imposed by the least developed or developing nations. The fact is that the profits derived from sales to those nations are currently small to non-existent and do not materially affect the earnings or market value of the major pharmaceutical companies. Obviously, over time, the vast populations in these regions represent a source of sales and profit growth. Moreover, there is no valid economic or social rationale for compelling a poor nation to pay a price that incorporates costs connected to the manner in which drugs are sold and distributed in developed nations. Indeed, for drugs that were primarily developed for western markets, a reasonable basis exists for arguing that the price to the poorest nations should be based solely on production cost and exclude any development costs.

Given the foregoing, developing nations could adopt the strategy of maintaining a flow of affordable medications, despite patents, which would fix the price of a drug in relation to the costs involved in producing it plus a reasonable manufacturing profit and a reasonable royalty based on those costs. In short, developing and least developed nations can fix a price that would approximate the cost of a generic version of a drug plus a small royalty (5% or less) based on that price in recognition of the patent rights. The manufactured cost could be determined in one of several ways, as follows: (i) a nation could demand that the patentee seeking approval to sell must submit those costs, (ii) the costs could be estimated by qualified chemists and process engineers based on process information disclosed in the patent or other published sources, or (iii) the costs could be established by an actual price quote from a potential generic manufacturer.

This is not a compulsory licensing scheme. It merely uses some of the analysis that might occur in establishing a compulsory license to establish a pricing mechanism. A compulsory license destroys exclusivity. The basic patent right, namely, the right to exclude other from making, using or selling the patented invention could be rigorously enforced by a nation so long as the patent owner is willing to sell product at the price fixed in the manner described.

Using TRIPS Exceptions to Enforce Price Controls

If patent owners are willing to submit to the proposed price control scheme and to supply a nation's requirements of a drug on these terms, all new drugs will be available to the poorest nations at affordable prices, i.e., a price within 5% or less of the price of an unpatented drug. Indeed, for reasons previously discussed, production efficiencies enjoyed by the patented source and development costs incurred by the generic source could result in prices that are comparable to today's low-cost generics even after a royalty burden is added to the price.

What happens if the patent owner refuses to sell at such prices or offers an inadequate supply of drug? To put it simply, the pricing mechanism can be readily enforced by applying the compulsory license provision of TRIPs (Article 30) and/or the exemptions from exclusivity provision (Article 31). Thus, for example, if India (or China) adopted the proposed pricing mechanism and a patent owner refused to sell at those prices, all of the prerequisites to the grant of compulsory license defined in Article 31 would be in place. In effect, the patent owner would have a right of first refusal to sell all of a nation's requirements at a price that covered costs, a manufacturer's reasonable profit and a royalty. Does the patent owner have a right to complain solely because it seeks monopoly pricing and profits? There is nothing in Article 31 of TRIPs, any other provision of TRIPs, or the Doha declaration that would suggest that such a complaint could succeed. To the contrary, giving the patent owner the right of first refusal to maintain exclusivity and the right to always collect a reasonable royalty would appear to go further in the direction of honoring patent rights than the Doha conferees contemplated.

The adoption of stringent price controls by developing nations that have the capacity to produce generic substitutes is critical to insuring a flow of low cost medications to the least developed nations. It insures that the low cost drug will exist either by virtue of production and sale by the patent owner or by a local producer under a compulsory license. Under the terms of the Doha Declaration, the least developed nations will not be required to enforce pharmaceutical patent protection until at least 2016. Accordingly, they will be able to purchase the low cost drug either directly from the patented source at prices comparable to the controlled price in the developing nation or from a licensed producer in the developing nation. It might be argued that product produced in one country under a compulsory license can not be exported to another country without violating Article 31(f) of TRIPS. However, Article 31(f) does not bar such sales completely but merely requires that products produced under a compulsory license be "predominantly" for the domestic market. A compulsory license issued by a developing nation because of a patent owner's refusal to sell product at a controlled price would clearly be issued primarily for the purpose of satisfying domestic needs. The fact that product was also produced for export to a least developed nation would not change the predominant purpose of the license. Therefore, Article 31(f) of TRIPs will not be an impediment to honoring cross-border compulsory licenses.

It is hard to contemplate a reason why a patent owner would agree to sell at the controlled price in a developing nation but refuse to sell at the same price in a less developed nation with no capacity to produce a substitute product. Nevertheless, the right of first refusal to sell at the controlled price would also appear to satisfy the prerequisites to invoking an exception under TRIPs Article 30 in a producing nation for the benefit of a non-producing nation. Clearly, if a patent owner refuses to deal after a legitimate offer to purchase goods at a reasonable price has been proffered, it would be hard to argue that granting an exception to the patent right either "conflicts with the normal exploitation of the patent" or "unreasonably prejudice(s) the legitimate interests of the patent owner". Therefore a nation "taking account of the legitimate interests" of the non-producing nation should be able to produce the goods for export that the patent owner refused to supply.

At first blush, it might be presumed that the large pharmaceutical companies would vigorously oppose this restrictive pricing scheme but, in fact, it contains much to commend it that would be of interest to these multi-national companies including:

  1. It provides justification for differential pricing between nations. The implementation of this proposal by poorer countries could provide a powerful argument against parallel imports to developed nations.

  2. It puts generic competition out of business and gives the research-based companies control over distribution. By controlling the size, color and shape of products manufactured and distributed in the poor countries, it lessens the opportunities for the production of counterfeit goods or the possibility that legitimate goods imported to treat illness in poor nations could be easily exported to developed nations for profit.

  3. It provides a predictable, albeit small, profit on the consumption of drugs by billions of people in poor nations. As those markets grow and prosper, respect for patents, and the profits which flow from that respect, will grow.

  4. It solves a major political problem. The large drug companies are under increasing pressure to help the underprivileged. Attempts to enforce patents have been a public relations disaster and have led some drug companies to talk about offering free drugs to the poorest nations. A system which addresses the public health needs of poor people, shows respect for patents and produces a small profit is preferable to the current environment of relentless attacks on the morals of pharmaceutical companies.

  5. There is no significant amount of money to be made in the markets of the poorest nations under any conditions in the foreseeable future.

Conclusion

The development, manufacture and sale of drugs is a business. Neither generic or brand name drugs will be produced and sold without some predictable profit. A system which combines a small profit with maximum respect for the exclusive rights of a patent owner preserves the possibility for greater profits in the future while making new drugs available today at the lowest practical cost is the most practical route to a continuing supply of affordable medicines for the poorest countries.

Endnotes

1 B.S., Chemical Engineering. Drexel University (1961); J.D., NYU School of Law (1965). The author was formerly patent counsel to the Generic Pharmaceutical Industry Association (GPIA) and acted as its principal representative on patent matters during the negotiations leading to the Hatch-Waxman Act of 1984. He is a former member of IFAC-3, the Advisory Committee of the U.S. Trade Representative on intellectual property matters. He is also the founder of the Engelberg Center on Innovation Law & Policy at NYU School of Law.

2 Gerald J. Mossinghoff, "Gene Patents", Scrips Magazine, February, 1996, p. 40. Mr. Mossinghoff is the past president of PhARMA and former U.S. Commissioner of Patents.

3 In the United States direct price controls have never been invoked and are politically unacceptable but mandatory discounts to government drug purchase programs are common. Congress is now flirting with indirect price controls in the form of allowing parallel imports of lower-priced pharmaceuticals knowing full well that the lower prices are due to price controls in the country of origin.

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