While discussing the post-2005 Healthcare scenario, one of the major concerns among all stakeholders is the issue of the impact of the emerging product patent regime on drug prices in India and other developing countries, which did not permit patenting of drugs per se under their earlier legislations. The general impression is that drugs which are under patents are expensive compared to generic products and once the product patent regime is in place, they will be unaffordable to the majority of Countries of the developing world and as a consequence their healthcare status will be seriously affected. High prices of patented drugs affect not only the patients in developing countries, but also in the developed world.

Even if one assumes that in the latter countries, the bulk of the burden of costs are transferred to the Insurance Companies, the fact remains that over 20% of the population even in the U.S.A., are still not covered by Insurance. In addition, due to the high costs of healthcare, reaching 15-17% of GNP in U.S.A., there is increasing pressure on reducing healthcare costs at all levels of the healthcare supply chain. This is evidenced by the dominance of HMOs and other Medicare Organizations, which today run the system in U.S.A with an eye and mandate to reduce costs of healthcare. Similar is the case in U.K and several other Countries, which are generally

labeled as Healthcare Welfare States

Of the various components of the healthcare system, the Pharmaceutical Industry is the most organized and the most visible and hence most readily targeted when the high costs of Healthcare to Society are discussed. As a general rule, the Hospitals (In-patient and Out-patient costs), the Medical and Para-Medical Professionals, the Clinical and Pathology Labs and even the Insurance Companies are generally left out of the discussions on the increasing burden of costs for the patients.

This is in spite of the fact that drugs constitute only less than 15% of the total healthcare costs even in developing countries where these costs are the highest as a percentage of total costs. In addition, the availability of new, better and safer drugs has considerably reduced the need for hospitalization for treatment or surgery, thereby providing indirect benefits to the patients and the healthcare system.

Costs of Drug Discovery & Development

The increasing costs of drugs is at the center stage of attention among all Policy Planners, National Health Programmes, Healthcare providers and Insurance Companies The Pharmaceutical Industry is fully aware of its obligations to Society to keep the prices of drugs to the lowest possible levels, but argue that they need to recoup the investments made in R&D on new drugs, which is essential for the progress of medicine and therapeutics. Without these investments, there will be no new drugs discovered in the first place and like any other investments, they deserve adequate returns.

Estimates of the total costs to Companies for the discovery, development and launch of a new product ranges from $ 800 mio to $ 1 billion and even after the drug enters the market, only 3 out of 10 pay back even the direct costs incurred for their discovery and development. Further, even the successful ones face the risk of rapid obsolescence, due to better and later generation drugs of the same or different class being discovered and reaching the market. Equally disheartening to the innovator Company is the reality that, in spite of extensive clinical trials in many Countries, after the drug reaches the market, unexpected and unpredictable adverse reactions, in rare cases, with fatal outcomes occur.

Based on these premises, it would therefore appear, that if Society wants new and better life-saving drugs, the price to pay for that would be unaffordable to most of the patients who need them. Even for the pharmaceutical Companies, the costs for R&D on New Drugs have been accepted as unaffordable, under their present structure, leading to a spate of mergers and acquisitions during the last two decades, Some recent studies indicate that such a strategy is also not paying off, partly since, the larger the Corporation, the greater the challenge to remain creative, make decisions and cut down the gestation period for moving R&D programmes from concept to the market.

Are the costs of drug R&D real?

Detractors of the way the R&D based Pharmaceutical Companies function today, point out that the present approach to drug discovery and development need a paradigm shift if companies are to develop drugs at lower costs both for their benefit and those of their customers. They claim that a large percentage of the present day total costs of drug R&D are spent on promotional exercises in the market place and has no relation to costs of drug discovery and development.

In a study by the Boston School of Public health (Sagar & Socolar-Dec.2001), it is reported that in 2000, drug makers employed 39% of their staff in marketing and 22% in R&D and the gap between expenditure in R&D versus marketing has been steadily widening, For example, they employed 48527 people in R&D in 2000, down from 49409 in 1995, while employment in marketing increased from 55348 to 87810 during the same period. It is also claimed that most, if not all of the promotional costs involved are loaded to R&D costs.

The industry on the other hand justifies the large investments in marketing of a new product as legitimate, since Pharmaceutical marketing unlike in other products, is primarily dissemination of medical information to the first level target group, the medical profession, which is a scientific activity, vital for deriving maximum benefits by the ultimate customer, the patient.

In November 2001, the Public Citizen Group in U.S.A., challenged the Tufts University’s figures of $ 800 million for a new prescription drug marketed, claiming that real out-of-pocket costs for a new drug are not more than $ 240 million, if one considers tax benefits which are provided by the U.S. federal Government and if one removes the component of ‘opportunity costs to Capital’, a notional concept which defines the benefits that would have accrued if the R&D costs were invested elsewhere.

Impact of Patents on Drug Prices

Protection of Intellectual Property has been advocated as an essential requirement for encouraging and rewarding R&D in knowledge-based industries such as the Pharmaceutical industry, which is responsible for discovery of New Drugs. The patent system which grants monopoly for a limited period of time to the Patent holder or his assignee are deemed to ensure that R&D expenses are recouped from product sales over which the Patentee has exclusive rights for a period of twenty years from the date of filing the patent application.

The stipulated term of protection under TRIPS is the minimum requirement and there is provision for its extension to compensate for inadequate returns on investment, a provision that has been incorporated in their national laws by a few developed countries. While in principle, the Patentee has the right and prerogative to fix the prices of a patented drug in the various markets where the drug is made available, pricing strategies for different markets are based on a number of factors which includes availability of equivalent or similar patented or generic drug in the market, the nature of the disease and available market, purchasing power of the target customer, status of products for the same indication in the pipeline of Competitors and price control mechanisms operating in the Country where the drug is introduced.

The overall strategy is to ensure guaranteed and early returns on investments and maintaining and improving the Company’s market share in the therapeutic segment.

Compulsory Licensing & Drug Pricing

Article 7 of TRIPS recognizes that the protection of Intellectual Property, “should contribute to the promotion of technological innovation and the transfer and dissemination of technology to the mutual advantage of users and producers of technological knowledge and in a manner conducive to social and economic welfare and to a balance of rights and obligations”. Similarly under Art. 8 of TRIPS Agreement “WTO Members may, in formulating or amending their rules and regulations, adopt measures necessary to protect public health and nutrition, provided that such means are consistent with the provisions of the Agreement”.

Art.31 of TRIPS refers to the conditions for use of a Patent without authorization of the Right Holder, generally termed as provisions for Compulsory Licenses. The Article specifies that such use “shall be considered on its individual merits” and except “in case of a National emergency or extreme urgency or in case of public non-commercial use”, the proposed user should make efforts to obtain authorization from the Right Holder on reasonable terms and conditions and that such efforts have not been successful within a reasonable period of time”.

It is obvious that most on-going discussions on Compulsory Licenses ignore the true letter and spirit of Art. 31, where it is categorically stated that the Government or third parties authorized by the Government could authorise exploitation of a Patent on merit by a third party through the system of Compulsory Licenses, if attempts to obtain formal authorization from the Patent Holder are not successful.

Therefore the general belief that Compulsory Licenses can be granted only in case of national emergencies is incorrect. The questions which needs to be debated and resolved are not so much as to the conditions for issue of Compulsory Licenses, but yardsticks for measuring and approving standards for determining merits of individual cases. For example, can high prices of patented drugs, which are outside the affordability of patients and healthcare providers, who need them, a case which merits consideration for grant of Compulsory Licenses?

If that indeed is the case what is the added significance of Para 6 of DOHA declaration and its impact on the grant of Compulsory Licenses for Developing Countries which neither have the resources or capability to utilize the Patent system to bring succour to the ailing millions of their patient population? Part II will discuss these issues as well as strategies of pricing patented drugs adopted by R&D based Pharmaceutical Companies, in detail.

Doha Declaration on Public Health

It was expected that the Doha Declaration on Public Health will have an impact on drug prices particularly for those drugs, which are needed, by the Developing and Least Developed Countries to meet the challenges of diseases, which are life-threatening and endemic. The TRIPS Council's rather belated decisions arrived at on 30th August just days before the fifth Inter-Ministerial Conference at Cancun, have belied these expectations according to many concerned publics, particularly in Developing Countries.

Article 7 & 8 together with Article 31 of TRIPS make ampler provisions for ensuring that nothing in the TRIPS Agreement will stand in the way of maintaining an equitable balance between rights and obligations of both the Patent Owners and beneficiaries of the Patent System. By that token, it would appear that Para 6 of the DOHA Declaration made at the 4th Inter-Ministerial Conference in November 2001 was a redundant expression of an intention already spelt out in TRIPS.

Nevertheless, the Declaration was prompted by the following considerations. 1) The drugs needed for diseases largely endemic to some of the poorest Countries in the World are discovered, developed and marketed by the MNCs in the Developed World. 2) Most of them are protected by Patents. 3) To the majority of patients and healthcare providers in the Developing Countries, these drugs, even if they are available and accessible, are not affordable. 4) Even if Compulsory Licences are granted as provided for in TRIPS, the Countries where they are needed have neither the technological capabilities nor resources to produce and distribute them. 5) In the event the innovator's drugs are not available, the required medical information for their use is often times not properly disseminated.
Para 6 of Doha Declaration was meant to address these issues and even though the modalities of implementation were to be finalized before the end of 2002, in reality the final decisions were arrived at and announced by the TRIPS Council only on 30th of August 2003.

Case of HIV/AIDS

The advent of a new cocktail therapy consisting of Retroviral drugs has reduced the progression of the disease in HIV positive patients and halted to mother to foetus transmission of the infection in all Countries where the drugs were properly used. As a consequence incidence of HIV/AIDS tapered off in the U.S.A and even in some of the developing Countries, such as Brazil. On the other hand, Countries in Africa which had no access to these drugs continue to be ravaged by the disease, in many cases reaching epidemic proportions. The main reason for the drugs' non-availability is due to the high costs of the drugs, which in U.S.A. is as high as $ 15,000 per year per patient.

While the issue whether such prices alone would be cause enough to invoke the provisions under Article 31 of TRIPS has been largely resolved; the question remains as to the methodology of making the drugs available at much lower prices. Even though some Indian Companies came forward offering some of the drugs at one-twentieth their U.S. prices, the first and only Government which decided to use its muscle and fight the MNCs on this issue against what is termed 'abusive prices' was Brazil. This is in spite of the fact that unlike India, Brazil opted to ratify a Bill granting product patent protection in May 1997, ahead of the permitted deadline of 2005. The Government considered it legitimate to consider HIV/AIDS as a National emergency warranting the issue of Compulsory Licences to domestic Companies to manufacture the drugs concerned.

In August 2001, the process to domestically produce Roche's Nelfinafir was started under the direction of the then Minister Jose Serra, which led the patent holders, Roche and Merck to considerably reduce the prices of these drugs (up to 65%) from the U.S. prices. The threat that Brazil, South Africa and some of the Indian Companies posed to the MNCs, by promising to make the patented products and supply them at lower prices, led to a rethinking in WTO, culminating eventually in the DOHA Declaration on Public Health. The leadership that Brazil took through concrete action is, however not applicable in general to most of the other Developing Countries, except, India and China.

Firstly, these three Countries have the technological capability to produce sophisticated drugs. Secondly, the Brazilian stand at that time was restricted to the drugs' use only in the domestic market with no authority or intention to produce them and export them to other Developing and Least Developed Countries, which need the drugs. Thirdly, the bargain that Brazil achieved was that drugs were made available at around U.S.$ 4800 against the U.S. price of $ 15,000. which is still high from the developing Countries' perspective. By that token the offer of Indian Companies of $ 350 -600 per year per patient was much more attractive.

TRIPS Council's Decision On DOHA Declaration

Even though the decision on the terms of implementation of Para 6 of the DOHA Declaration was delayed beyond the deadline by over 20 months, the fact that such an Agreement was arrived at has surprised many, since it was felt that a consensus on this sticky issue was well nigh impossible, particularly in view of the sustained intransigence of the U.S. Trade office. Initially U.S. insisted that the provisions of the Declaration should be restricted to only those diseases specially mentioned in the Declaration, namely, HIV/AIDS, Malaria and Tuberculosis and later, while relenting on this issue took the stand that Countries such as India, Brazil and China, which had technical capabilities to produce the Active Pharmaceutical Ingredients and their formulations should be outside the provisions of the DOHA Declaration.

The final Agreement on the DOHA Declaration has the following terms and mandates.
1) Compulsory Licenses could be used to export pharmaceutical products to eligible Countries, which are defined as Countries which have no manufacturing capabilities or even if they have, the requirements cannot be met by their existing capacities. In the latter case, as soon as the required capacity generation is effected, further imports will not be permitted
2) The eligible importing Country should notify the TRIPS Council the names of the drugs to be imported and the quantified needs.
3) The exporting Country should ensure that products made for the specific purpose of exports to the Least Developed and the Developing Countries with no technical strengths to manufacture the products, should be separately produced for the purpose, with the products distinct from the original in colour, shape and labeling.
4) Eligible importing Countries through legal and administrative means, should ensure that the product imported are used only for the public health purpose for which it was imported and should enforce reasonable measures to prevent their re export to other unauthorized territories.
5) Without prejudice to the territorial nature of the patent rights of any Member, a Developing or Least Developed Country which is an eligible importer may export the concerned product to another Country which is it's partner in a Regional Trade Block. This is to enable the setting up of economically viable scales of production.
6) Concurrently as per Art. 7 and Art. 66.2, Members should cooperate to develop capacity building and promote technology transfer to Developing and Least Developed Countries.
7) The TRIPS Council will review annually the functioning of the system set out in this decision and may work towards making specific amendments to the TRIPS Agreement, consistent with this decision, the activities for which will be initiated before the end of 2003.
8) The measures taken under this decision are not challengeable by any Member.

The Implications Of The TRIPS Council Decision

The principal stake holders for whom the DOHA Declarations was meant are the Patients and Healthcare Providers, who cannot access or afford life-saving drugs due to lack of resources to procure high priced products, particularly for the various diseases endemic to the Least Developed and the Developing Countries of Asia, Africa and Latin America. Assuming that the high prices of drugs are due to the monopolies offered to the Patent holder and the compulsions of R&D Companies to charge prices based on market forces rather than the real costs of the drug per se, can such 'abusive prices" be used as an alibi for issue of compulsory Licenses under Art, 31 of TRIPS, which presumably will lead to reduced drug costs? Even if such Compulsory Licenses are granted, most Countries in the Least Developed and the Developing having no technical capability, will not be able to manufacture the products.

With the DOHA Declaration and the recent decree on the terms of its implementation, the question remains as to whether the objectives of the Declarations would be met by the implementation of Art. 31of the TRIPS Council. If one takes the case of HIV/AIDS, the most visible epidemic in the poorest of Countries, with the new dispensation, it is possible for Countries like India, Brazil and China to manufacture the needed Retroviral drugs and export them at prices which are based on actual costs plus reasonable margins, without having to consider and incorporate components of R&D costs. Whether it will be possible to cross the various bureaucratic hurdles brought in by TRIPS to implement the terms of the Declaration and achieve its objectives in a relevant time frame is being debated.

The question whether even the minimum costs required for making these drugs under Compulsory Licences would be within the affordability of poor patients has also to be discussed. The various conditionalities imposed by TRIPS to utilize the new provision would also result in the need for setting up economically non-viable scales of production leading to higher costs. While the WHO feels that that the new TRIPS decree is a progress in the right direction, Developing Countries capable of producing these drugs for exports under Compulsory Licenses feel that not much has been gained and the spirit of DOHA Declaration has been sacrificed if not negated. Ultimately, the poorest of the poor patients in the remotest parts of Africa, Asia and Latin America will once again be left with little hope of accessing life-saving drugs at prices they can afford.

-- The author is a senior industry observer and a leading scientist