The following are written submissions concerning the South African reform of pharmaceutical policies. The Consumer Project on Technology (CPT) is a non-profit consumers organization located in the United States. The CPT was created by Mr. Ralph Nader, the world's best known consumer advocate. CPT has been involved in a wide range of issues relating to intellectual property and pharmaceutical drug policies. Our work is well documented on the Internet at http://www.cptech.org.

I am trained as an economist, and I am the Director on the CPT. We are extremely pleased to offer comments in support of the proposed legislation which seeks to modernize South African laws, and harness market powers to benefit consumers.

The main features of this legislation, as I understand the bill, would facilitate aggressive marketplace competition for pharmaceutical drugs, through the encouraged use of generic drugs and parallel imports. I would hope too that the legislation would provide the government with adequate authority for the use of compulsory licenses, when appropriate, and that it does not erect unnecessary barriers for the marketing of unpatented drugs through restrictions on the use of scientific knowledge related to registration of new drugs. I will begin with a discussion of parallel imports, a topic on which the pharmaceutical industry has been less than forthcoming.

Parallel Imports

Parallel importing concerns products which are imported into a country through unauthorized distributors of goods. Parallel importers find the national markets where goods are cheapest, and import them into countries with higher prices. This price competition for the same good is a boon for consumers. Not surprisingly, parallel imports are opposed by some manufactures, who seek to engage in significant price discrimination by geographic area.¹

Parallel imports can be an important source of price competition for many goods. There is particular interest in pharmaceuticals and other products which are valuable relative to the costs of shipping, and which are the subject of significant price discrimination by geographic market. This is certainly true in the instant case, where pharmaceutical manufacturers have asked the South African government to reject legislation which would explicitly permit parallel importing of medicines.

For example, on September 9, 1997, the Pharmaceutical Manufacturers Association of South Africa (PMA) submitted written comments on the Medicines and related substances control Amendment Bill [b72-97] which asserted that the proposal to permit parallel imports of medicines "involves several intellectual property right violations (rights that are sacrosanct to all international investors) in both domestic and international law." Similar assertions were offered by N.J. Vermaak, a patent lawyer for the PMA, and by the South African Chamber of Business. The PMA comments on this topic are wrong on several counts. For example, the PMA completely ignores recent decisions by the European Court of Justice and the Supreme Court of Japan which clearly state that parallel imports of patented and trademarked goods are not contrary to international law, and they ignore the enormous body of international law which seeks to encourage parallel imports, in order to promote the free flow of goods.

National legislation regarding parallel imports vary from country to country. In many nations, parallel imports are not only permitted, but national antitrust authorities actively take steps to prevent manufactures from discouraging or impeding parallel imports. This is the case, for example, in the European Community² and in Japan.

The following is a recent note by Richard Sako regarding the Japan FTC's recent efforts to promote parallel imports in Japan:³

Parallel importing, that is the importation of a product through channels other than those arranged between the manufacturer of the product and its authorized distributors, is generally considered to promote price competition in a market, and therefore restrictions on parallel importing are viewed with scrutiny under the antitrust rules and regulations of most countries. The Antimonopoly Law of Japan (the “Antimonopoly Law”) is no exception. The guidelines to the Antimonopoly Law concerning Distribution Systems and Business Practices in Japan specifically address forms of restrictive conduct with respect to parallel importing which are deemed to be violations of the Antimonopoly Law. . . .

On February 29, 1996, the FTC ordered Hoshi Shoji Kabushiki Gaisha to cease its practice of restricting parallel imports. . . . The FTC ruled that Hoshi Shoji violated the Antimonopoly Law by obstructing imports of Herend products by a Japanese discounter which was selling the products at prices 30% lower than Hoshi Shoji’s list prices. . . . According to the FTC, Hoshi Shoji was able to determine that the discounters were purchasing Herend products from various authorized European distributors of Herend by checking the serial numbers on products sold at the discounters’ stores. Hoshi Shoji, with the assistance of Herend, notified the European distributors to stop selling products to the discounters, thus effectively cutting off the discounters’ access to Herend products. . . . [T]he FTC ordered Hoshi Shoji to immediately cease in its conduct or face the threat of administrative proceedings which could ultimately result in the assessment of civil fines and criminal penalties.

On April 5, 1996, the FTC issued a similar warning to Kabushiki Gaisha Matsuogaki Shokai, the exclusive Japanese distributor for U.S.-based Steinway & Sons. According to the FTC, Matsuogaki, with the assistance of Steinway & Sons, acted jointly to prevent Steinway & Sons’ Holland distributor from selling Steinway pianos to discount importers in Japan. Matsuogaki was able to determine the place of origin of the pianos sold by discounters by checking the manufacturer’s numbers on the pianos. As in the case of Hoshi Shoji, the FTC ordered Matsuogaki to immediately cease its practice or face administrative proceedings with possible civil fines and criminal penalties.

As in South Africa, manufactures of goods often seek to use domestic trademark, copyright or patent laws to block parallel imports. Charles Gielen notes:⁴

IP owners have tried to use the territoriality principle of IP rights to oppose parallel trade, in order to protect their interests and those of their licensees and distributors, who want (to the extent possible) exclusive sales and distribution rights in their markets.

In South Africa, the pharmaceutical industry has sought to convey the impression that parallel imports would be illegal under the GATT's TRIPS accords, pointing to the language in Article 28 of the TRIPS, which concerns the rights of patent owners.

Text of TRIPS Article 28

1. A patent shall confer on its owner the following exclusive rights:

(a) where the subject matter of a patent is a product, to prevent third parties not having the owner's consent from the acts of: making, using, offering for sale, selling, or importing (See footnote 6) for these purposes that product;

(b) where the subject matter of a patent is a process, to prevent third parties not having the owner's consent from the act of using the process, and from the acts of: using, offering for sale, selling, or importing for these purposes at least the product obtained directly by that process.

Footnote 6, This right, like all other rights conferred under this Agreement in respect of the use, sale, importation or other distribution of goods, is subject to the provisions of Article 6.

As indicated, while Article 28 clearly gives the patent owner the exclusive rights to import a good into a country, that right is subject to Article 6 of the TRIPS, which concerns the doctrine of the "exhaustion" of intellectual property rights. This text of Article 6 is as follows:

TRIPS Article 6, Exhaustion

For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3⁵ and 4⁶ nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.

The principle of exhaustion is sometimes referred to as the first sale doctrine. When a good that benefits from patents, copyrights and/or trademarks is sold, the owner of the good has realized the benefits of the IP protection, and those rights are considered exhausted at the point of sale. Once the IP owner's rights are exhausted, the purchaser of the good is free to resell the good, even in cases where the reseller competes against the IP owners. Countries have taken a variety of approaches on these matters. As noted by Gielen:⁷

There is clearly no worldwide consensus about the exhaustion of IP rights. The older IP agreements, such as the Paris Convention and the Berne Convention, do not touch upon this issue at all. The most recent global IP agreement, TRIPS, carefully circumvents this issue; TRIPS Article 6 states that, for the purpose of dispute settlement, nothing in the agreement shall be used to address the issue of the exhaustion of IP rights.

Legislation and jurisprudence on this topic is varied from country to country, with countries taking different and nuanced positions on exhaustion of rights patents, copyrights and trademarks. But is it clear that parallel imports of patented goods, including pharmaceuticals, are permitted in many countries, and not proscribed by International law.

On July 1, 1997, in a widely heralded case, the Supreme Court of Japan rejected arguments that parallel imports of patented goods was contrary to international law, and declared that parallel importing is a matter of domestic patent law.⁸

The European Court of Justice has ruled on a number of parallel importing cases. As discussed in a recent issue of EU and Competition Law Newsletter, patent rights do not, in general, provide a basis for stopping parallel imports.⁹

As the result of the principle of exhaustion of rights, the pharmaceutical company is unlikely, except in limited circumstances, to be able to rely on his national patent rights in the second Member State to prevent the importation of parallel import[,] the company's rights having been “exhausted” by his placing of the goods on the market in the first Member State. This is the rule in the 1981 decision in Merck v Stephar and it presently applies even where the pharmaceutical company does not have and could not have obtained patent protection for its product in the first Member State (recently confirmed by the European Court of Justice in the cases of Merck v Primecrown and Beecham v Europharm).

The latter case, Merck v. Primecrown and Beecham v Europharm,¹⁰ was a ringing endorsement of the free flow of goods. Merck and Beecham were seeking to stop parallel imports from Spain and Portugal into the UK. As noted in the December 6, 1996 ECJ opinion, "Merck and Beecham consider that they are entitled to oppose parallel imports of a drug for which they hold patents when, as in these cases, those imports come from a Member State where their products are marketed but were not patentable there."

Primecrown and Europharm claimed that the parallel imports were permitted, due to the principle of exhaustion of rights. Merck and Beecham asked the court to consider if moral or legal obligations to sell their products in Spain and Portugal modified the principle of exhaustion of rights. The court clarified the grounds under which such an argument might be presented to the court, but it found in favor of the parallel importers.¹¹ With regard to concerns that price controls in various countries are problematic for parallel imports, the court said:

Here the national court is concerned to know whether it is relevant that those authorities have fixed the price of the products at a level such that substantial exports of the product to the Member State of importation are foreseeable.

As to that, although the imposition of price controls is indeed a factor which may, in certain conditions, distort competition between Member States, that circumstance cannot justify a derogation from the principle of free movement of goods. It is well settled that distortions caused by different price legislation in a Member State must be remedied by measures taken by the Community authorities and not by the adoption by another Member State of measures incompatible with the rules on free movement of goods.

In the EU, companies have also sought to block parallel imports on the grounds that it violated trademark or copyrights which were associated with product packaging or labeling. Several cases involve situations where pharmaceutical drugs were repackaged for the imported market.

As a consequence of enormous differences in pharmaceutical prices throughout the EC, the parallel import of pharmaceuticals is a very fruitful businesses. The problem of the parallel traders, however, is that there are also quite a number of differences in national provisions on the packaging of pharmaceuticals and they way they are prescribed by physicians or used in hospitals. Therefore, parallel traders need to repackage the pharmaceuticals, add or remove original blisters, put a new wrapper around he blister and sometimes affix the original trademark.¹²

In a series of case, the European Court of Justice has defined the limited and narrow circumstances where trademark rights could be used to prevent parallel imports. ¹³ In general, repackaging and parallel importing is permitted, if:

1. the parallel importer notifies the trademark owner of his intended sale, and provides a sample of the repacked good,
2. the repackaging does not directly or indirectly effect the condition of the product,
3. the new packaging clearly states the identity of the repackager and the original manufacturer, and
4. the repackaging is not liable to damage the reputation of the trademark owner.

Parallel imports of pharmaceuticals are common in the UK and many other European countries, and the savings can be substantial. Firms like Informedica track parallel prices for clients who are seeking to minimize expenditures on medicines. Table 1 presents data from a recent analysis by Informedica of HIV drug prices. Informedica compared the UK list and best UK contract prices, to the prices charged by five parallel importers, plus the Informedica "best euro" hospital price, for eight important drugs for HIV. These are expensive drugs, costing consumers thousands of dollars each year, and the differences in the prices are significant.

The UK list price for a 270 capsule package of Roche's Inversae is £ 331, but the drug was available from a parallel importer for £ 203. This is £ 95 less than the best UK contract price. A package of Bristol-Myers Squibb's Videx, a drug licensed from the U.S. NIH, is listed in the UK at £ 88, and available from a US parallel importer for £ 50. Bristol-Myers Squibb's Zerit is listed at £ 172 in the UK, but the Spanish parallel import is available for £ 66. The best European price for Glaxo's Retrovir (another NIH funded drug discovery) is £ 54, compared to a UK list price of £ 125.

Source: Informedica

In Table 2, the potential savings on the drugs are considered, by comparing the UK list price, the UK best contract price, and the highest foreign price to the best price from the five parallel importers. The average percentage savings from the UK list price was 41 percent. The average savings from the UK best contract price was 30 percent. This group of HIV drugs are among the most expensive drugs marketed to consumers.

Should South Africa permit or encourage parallel imports of pharmaceutical drugs? Of course! South Africa consumers are poor, and high prices for drugs will present terrible barriers for access to medicines. Certainly South Africa should avail itself to the benefits of market competition and purchase drugs as cheaply as possible in world markets.

The issue of parallel imports is likely to become better known as many poor countries that have not traditionally extended patent protection to pharmaceuticals struggle to comply with the TRIPS accord. Many of these poor countries have small domestic economies that do not offer the type of aggressive market place competition that exists in the United States and Europe. Ironically and sadly, many pharmaceutical products are more expensive in developing countries than in the developed countries -- and this is mostly because markets in poorer countries are not as mature or competitive. By looking toward parallel imports, South Africa wisely seeks to harness market forces outside its borders to benefit the poor consumers inside its boarders.

Health Registration Data

PMA is seeking modifications in the bill to create even greater barriers for the introduction on new drugs on the market, through restrictions on the use of scientific data used to prove that drugs are safe and effective. Much is this is motivated by Bristol-Myers Squibb (BMS), a company that markets Taxol, a cancer drug invented and developed by the U.S. government. Taxol will generate about $1 billion this year in sales for BMS. BMS prices the drug excessively, and uses regulatory barriers concerning health registration data to protect the drug from competition. BMS did not invent Taxol, and all of the clinical trials used for U.S. FDA approval of Taxol were sponsored by the United States government. BMS's contributions to Taxol development, prior to marketing approval for the drug, are estimated to be less than $10 million.

Bristol-Myers Squibb (BMS) is asking the U.S. government to bring pressure against South Africa, as well as Canada, the Netherlands, Australia, Indonesia, Pakistan, Taiwan, China, Turkey, Argentina, Thailand and other countries, to protect the BMS monopoly on the sale of Taxol. In each case, BMS is seeking to establish an international norm that nations should provide at least 5 years of exclusivity for clinical trial data used for regulatory approval of pharmaceutical drugs, with the period of exclusivity beginning with the date of drug approval.¹⁴

In our view, generic versions of Taxol should be available now to consumers worldwide. Taxol is a drug developed by the U.S. government. BMS’s sole role in the development of the drug was to provide the U.S. government with 17 kilos of Taxol, which BMS acquired in bulk from Hauser Chemical (a firm that manufactured Taxol for NIH) at a cost to BMS of about $5 million. For its very modest support to the NIH’s Taxol development effort, BMS has earned billions of dollars. Indeed, BMS will register more than $1 billion this year alone from Taxol sales. While BMS charges wholesalers nearly $5 per milligram for Taxol, the company was able to acquire the drug in bulk from a contractor for only $.25 per milligram.¹⁵

BMS and other companies are asking South Africa to emulate the United States policy of giving companies who register new drugs with the FDA five years of exclusive rights to use the data for regulatory approval.¹⁶

What is really at stake here? Disputes over the use of health registration data are only important where the drug is not protected by a patent. If the pharmaceutical company has a claim of invention which would lead to the award of a patent, it would have 20 years of market exclusivity in most cases. For Taxol, BMS did not have a patent because BMS did not invent Taxol, nor did BMS discover Taxol’s cancer fighting properties. Why then should governments prevent consumers world wide from benefiting from competition from generic versions of Taxol? This is a form of undeserved corporate welfare for BMS.

While it is not surprising that BMS and other drug companies are seeking ever greater regulatory protections from competition, South Africa should consider alternative approaches. We have serious doubts that any market exclusivity for health registration data is needed, given the fact that firms can receive patents for inventions, and drugs with limited client populations are also protected by Orphan Drug market exclusivity in the United States and some other countries. Indeed, can PMA identify any cases where a drug other than Taxol would be affected by this? If some form of market protection is to be considered, South Africa should consider a shorter period of exclusivity, combined with compulsory licensing of the clinical trial data used for drug registration. The compulsory licensing of the clinical trial data is needed to avoid abuses like the Taxol case.

There are substantial economic costs when firms receive excessive and unnecessary protections from competition. For example, the National Economic Research Associates¹⁷ examined the economic consequences of a two year extension of the current FDA market exclusivity for Taxol health registration data. According to Dr. Rozek, the report's author, a two year delay in the introduction of generic versions of will cost U.S. Taxol consumers $1.27 billion. Whatever the numbers are for South Africa, they should also include an accounting of the number of patients who would be excluded from treatment because they could not afford the drug.

Closing comments.

We have just received copies of the proposed legislation, and the comments from PMA and other interested parties, and as a consequence, our own comments are necessarily limited. We look forward to providing the parliament with additional information in the future. Thank you very much for the opportunity to share our views.

James Love
Consumer Project on Technology
P.O. Box 19367
Washington, DC 20036
202.387.8030; fax 202.234.5176
http://www.cptech.org | email love@cptech.org

^1/ D.A. Malueg and M. Schwartz, "Parallel Imports, Demand Dispersion and International Price Discrimination," U.S. Department of Justice -- Antitrust Division, 1993.

^2/ See discussion is EC Green Paper on "Vertical Restraints Under EU Competition."

^3/ Unreasonable Restrictions on Parallel Imports Prohibited, By Richard Y. Sako, August 5, 1996, on the Web at: http://www.faegre.com/areas/area_ib9.html (no period).

^4/ Charles Gielen, "EC Ponders Radical Change in Exhaustion of Trademark Rights, Area for exhaustion is altered, and now the very rationale for exhaustion is being reexamined," July/August 1996, Intellectual Property Worldwide, on the Web at: http://www.ipww.com/july96/p3ec.html (no period).

^5/ National Treatment.

^6/ Most-Favoured-Nation Treatment.

^7/ "EC Ponders..."

^8/ DECISION on Case No. Heisei 7(wo)1988 delivered on July 1, 1997. For an english translation of the opinion with commentary, see Jinzo Fujino. "Parallel Imports of Patented Goods: The Supreme Court Talks about Its Legality," available on the Web at: http://okuyama.com/c3v01ok.htm (no period).

^9/ Relabeling of Parallel Imports: Bayer v Paranova, EU and Competition Law, December 1996.

^10/ Joined Cases C-267/95 and C-268/95 ,Merck & Co. Inc. and Others v Primecrown Ltd and Others, Free movement of goods, Decided December 6, 1996. On the Web at: http://europa.eu.int/cj/en/act/9633en.htm#C-267/95 (no period).

^11/ "Parallel Imports: the Status Quo Restored," UK Patent Review, Spring 1997. "Court backs parallel trade for unpatented drugs," Chemist & Druggist, December 14, 1996,

^12/ Charles Gielen, "EC Ponders Radical Change in Exhaustion of Trademark Rights."

^13/ Stephen Whybrow and Peter Jennings, "Parallel Imports and the Exhaustion of Trade Mark Rights: Judgments by the European Court of Justice in three recent related cases have re-affirmed the Court's trend in recent years to allow the exercise of intellectual property rights to interfere with the free movement of goods only in exceptional circumstances," the McKenna Law Letter, Autumn 1996. Available on the Web at: http://www.mckenna.co.uk/news/llau96/index2.html (no period) Sarah Faircliffe, "Repackaging of Parallel Imported Pharmaceuticals in the EU -- the ECJ Gives a Long-Awaied Ruling,” first published in "Update," the journal of the European Pharam Law Centre, Issue 54, September 1996, on the Web at: http://twobirds.com/library/pharma/repackage.htm (no period).

^14/ Several drug companies are also trying to establish an international norm against disclosures of information relating to claims of safety and efficacy. The U.S. FDA is an international leader in the disclosure of health registration data, which is released under the U.S. Freedom of Information Act (FOIA). We have told U.S. trade negotiations that if truly seek to advance U.S. policy norms in international forums, they should push for greater transparency and disclosure of health registration data, rather than more secrecy.

^15/ BMS and other pharmaceutical companies have acquired Taxol in bulk from variety of sources. At one time BMS was buying Taxol from Hauser Chemical for $.25 per milligram. Today industry experts say that bulk Taxol could be acquired for as little as $.125 per milligram, if purchased in large quantities. The cost of packaging and final preparation of Taxol for distribution to doctors is estimated to be about $.15 per milligram.

^16/ The FDA regulates the sale of pharmaceuticals. For a new drug, a firm must submit data to the FDA which is used to evaluate the safety and efficacy of the drug. If a drug is protected by a patent, or by exclusive marketing protections under the Orphan Drug Act, the FDA will not grant another company marketing approval. If the drug is not protected by patent, and not protected by the exclusivity marketing provisions of the Orphan Drug Act, another firm can seek marketing approval for the same drug. However, for five years, the FDA requires the any new firms present their own data which proves the safety and efficacy of the drug, even though the FDA has already determined the drug to be safe and effective. After 5 years from when the drug was approved for marketing, and after any patents or Orphan Drug marketing exclusivity expire, a firm can obtain marketing approval for a drug by showing that a product is biologically equivalent to the approved drug.

^17/ Richard P. Rozek, Costs to the U.S. Health Care System of Extending Marketing Exclusivity for Taxol, N.E.R.A., Washington, DC, March 1997.