Dying for Drugs: How CAFTA Will Undermine Access to Essential Medicines

If adopted, the proposed U.S.-Central America Free Trade Agreement (CAFTA) will cost lives.

The intellectual property, and to a lesser extent the investment, provisions of the draft agreement throw up a number of road blocks to the introduction of generic medicines.

By Robert Weissman
Essential Action

March 5, 2004

If adopted, the proposed U.S.-Central America Free Trade Agreement (CAFTA) will cost lives.

The intellectual property, and to a lesser extent the investment, provisions of the draft agreement throw up a number of road blocks to the introduction of generic medicines.

As elaborated below, these include provisions to establish a system of monopoly protections for pharmaceuticals that runs parallel to the patent system – so that even government efforts to authorize generic production while products are on patent (compulsory licensing) will be thwarted – and provisions to extend patent terms.

The most extreme of the CAFTA provisions appears to establish an effective bar to compulsory licensing of pharmaceuticals in Central American countries.

If CAFTA is adopted, these measures will have a major, harmful impact on healthcare in Central America, and perhaps even in the United States.

This analysis proceeds by briefly discussing the following topics:

• The benefits of generic competition and compulsory licensing;
• How CAFTA’s data exclusivity protections can work as back-door barriers to compulsory licensing;
• A draconian CAFTA data exclusivity provision that may function as a de facto prohibition of compulsory licensing;
• CAFTA provisions requiring patent extensions;
• CAFTA provisions requiring overprotection of patents; and
• A conclusion that CAFTA runs afoul of the Doha Declaration on the TRIPS Agreement and Public Health, and should be rejected.

1. The Benefits of Generic Competition and Compulsory Licensing

It is beyond dispute that the introduction of generic competition lowers price dramatically and enables broadened access to needed medicine. The purpose of patent monopolies is to enable patent holders to collect supracompetitive profits. There is an extensive literature on the price reductions that follow from generic competition in the United States and industrialized countries. And, now several years into the international campaign for access to essential medicines, generic competition has brought down the price of lifesaving antiretrovirals used to treat people with HIV/AIDS by more than 98 percent.

Under the rules of the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), countries are required to provide 20-year patent protections for all products, including pharmaceuticals. This global standard has forced many developing countries that previously did not offer patent protection for pharmaceuticals, or offered only limited protection, to adopt U.S.-style patent rules covering medicines.

Although it imposed on countries the requirement to adopt 20-year patents for drugs, the TRIPS Agreement also contained certain safeguards. Most important among them is the right to undertake compulsory licensing.

Compulsory licensing enables a government to authorize a third party — whether a company, government agency or other party — to use a patent held by another. Honduras, for example, could issue a license to generic company Z for an HIV/AIDS drug manufactured by brand-name company X. Generic firm Z would then manufacture or import the drug for sale in Honduras under a generic name, and pay a reasonable royalty to brand-name company X on each sale.

Compulsory licensing can lower prices to consumers by creating competition in the market for the patented good. The key benefit of compulsory licensing is that it creates competition for a pharmaceutical product while it is still covered by patent. Just as the prices of drugs may decline dramatically when patent protection runs out, compulsory licensing can introduce these price reductions while a drug remains on patent. And, even when compulsory licenses are not issued, the mere prospect that they might be issued may lead patent holders to lower prices to avert the possibility of a compulsory license.

Trade agreement rules that delay in the introduction of generic competition delay the attainment of these gains in lowered prices and expanded access — with deadly effect in the case of life-saving medicines such as antiretrovirals, and diminished quality of life for other medicines with useful if not life-saving effects.

2. Data Exclusivity Protections: Back-Door Barriers to Compulsory Licensing

The most worrisome measures in the U.S.-Central America Free Trade Agreement (FTA) involve requirements that countries establish special monopoly protections for pharmaceutical regulatory data. The impact of these measures will be, at least, to greatly delay countries from undertaking compulsory licensing. The impact will be harshest in the Central American parties to the agreement, but effects may be felt in the United States as well, including during times of gravest national emergency.

As a condition of selling pharmaceuticals, countries require pharmaceutical sellers to submit data showing their drugs are safe and effective. This data is commonly referred to as registration data, or marketing approval data.

Generating the data, based on animal and human testing can be relatively expensive, costing in some cases tens of millions of dollars.

To gain regulatory approval to sell generic versions of drugs already approved for market, generic companies generally do not repeat these studies, which are very time consuming and, from the perspective of the relatively low-capitalized generic industry, costly. Instead, they typically show their product is chemically equivalent and bioequivalent (meaning it will work the same in the body as the brand-name drug). Then the generic companies simply rely on the drug regulatory agency’s approval of the patented product to earn approval for the generic version of the product.

If the generics are not able to rely on approvals granted based on the brand-name data, in many cases they simply will not enter the market. This is especially true in smaller size markets, as in Central America, where prospective revenues are limited. Yet CAFTA includes a number of provisions providing an array of special monopoly protections for regulatory data.

The meaning of these provisions is that generics will effectively be barred from entering the market — even if patent terms have expired, and even if countries have issued compulsory licenses that would otherwise them to sell on the market while a product is on patent — until the monopolies on use of the data expire.

These CAFTA provisions go far, far beyond the requirements of TRIPS.

Under the TRIPS Agreement, countries must protect “undisclosed” pharmaceutical test data from “unfair commercial use” (TRIPS Article 39.3). The meaning of this vague language is uncertain and subject to debate. There is a strong argument that this TRIPS provision is intended only to cover the misappropriation of test data — along the lines of literal theft of the data from files kept by drug regulatory agencies. Whatever else it means, the extremely vague language of the TRIPS provision makes clear that:

1. Countries have considerable discretion in determining what is “unfair.”

2. Multiple approaches to provide reasonable protection will satisfy the provision’s mandate.

3. There is no requirement that countries exclude other parties from using the data or relying on approvals based on the data, and no requirement that any exclusivities granted extend for a particular period of time.

4. Protections for pharmaceutical test data need only be granted for new chemical entities.

These flexibilities in the TRIPS Agreement would be completely overridden by the CAFTA provisions.

Under CAFTA:

• Countries would be required to provide five years of data protection from the moment a product was given regulatory approval in their country. (Article 15.10.1(a).) This amounts to an effective five-year bar on compulsory licensing from the time of marketing approval.

• CAFTA members must grant five years data exclusivity protections to brand-name companies if their product has received marketing approval anywhere in the world – even if the brand-name company has not introduced the product in their country! (Article 15.10.1(b).) In other words, if Pfizer puts a new product on the market in the United States, but does not introduce it in Honduras, Honduras is effectively denied the right to authorize generic versions of the product for five years.

• Pharmaceutical companies could maneuver in this system to extend the period of monopoly control over the data to 10 years. Under CAFTA, countries must grant a fresh period of five years data protection from the moment a product receives marketing approval in their country — even if they have already granted up to five years protection while the product had been approved elsewhere but not put on the market in their country. (Article 15.10.1(b).) Thus, if Pfizer waits five years after introducing its new product in the United States before introducing it in Honduras, Honduras must provide for data exclusivity both during the five year period when the product was not on sale in the country, and for the five-year period after Honduras has granted marketing approval. This outcome would be required even as the United States, which benefited from the initial product introduction, is only required to grant five years of data protection.

• Regulatory data monopolies must be granted for the marketing approval data submitted for all “new pharmaceutical products.” (Article 15.10.1(a).) Under TRIPS, the requirement of data protection applies only to data submitted for new chemical entities. Under CAFTA, data protection must be granted for any new product containing a chemical entity not previously approved in the country – even if it is not actually new. ((Article 15.10.1(c).)

3. A De Facto Prohibition of Compulsory Licensing

CAFTA’s farthest reaching data monopoly protection would have an even more devastating impact. It would effectively make compulsory licensing impossible in Central American countries.

Notwithstanding the provisions discussed in section two above, CAFTA’s Article 15.10.3, appears to prohibit any generic firm from relying on the data submitted by a patent holder at any point during the term of the patent unless the generic firm has the permission of the patent holder.

The actual text of the provision reads:

Where a Party permits, as a condition of the marketing of a pharmaceutical product, persons, other than the person originally submitting safety or efficacy information, to rely on evidence or information concerning the safety and efficacy of a product that was previously approved, such as evidence of prior marketing approval in the Party or in another territory, that Party:

(a) shall implement measures in its marketing approval process to prevent such other persons from marketing a product covered by a patent claiming the product or its approved use during the term of that patent, unless by consent or acquiescence of the patent owner; and

(b) if the Party permits a third person to request marketing approval of a product during the term of a patent identified as claiming the product or its approved use, it shall provide that the patent owner be informed of such request and the identity of any such other person.

If in fact this language means what it says, then generic firms cannot rely on marketing approval data for a product for the entire term of the product’s patent, even if a compulsory license is issued. Because of the cost, and the small size of the markets in Central America, generic firms will probably never be able or willing to re-perform safety and efficacy tests to obtain marketing approval in Central American countries. Thus, even if they were issued a compulsory license, they could not enter the market. In other words, this provision appears to be an effective bar to compulsory licensing.

Because this provision appears so draconian, Essential Action has asked the U.S. Trade Representative to clarify if the language should properly be interpreted to mean something other than what it appears. In an informal meeting, a USTR representative agreed that the Essential Action interpretation of the language appeared to be correct, but promised to contact us later with clarification.

This devastating data monopoly protection might also have severe effects in the United States.

In 2001, amidst the anthrax scare, the Department of Health and Human Services (HHS) considered issuing a compulsory license on ciprofloxacin, used to treat anthrax. (The U.S. government maintains very aggressive authority to undertake compulsory licensing for its own use.) The government ultimately did not issue the compulsory license, but the threat helped encourage the patent holder, Bayer, to lower its price.

Suppose the scenario were repeated, and HHS decided that it did want to issue a compulsory license, either because Bayer would not lower its prices sufficiently, or because it could not make an adequate supply available fast enough. If the CAFTA provision were in effect, a generic licensee would not be able to rely on Bayer’s safety and efficacy data, or the fact that it had received regulatory approval. The generic firm would have to repeat the already completed test. Given the size of the likely purchase from HHS, this would probably be a worthwhile investment. But redoing the tests would likely take years – far too long a delay in the case of urgent circumstance.

Perhaps in such a circumstance the U.S. government would simply ignore its obligations under international trade agreements – but surely that is no rationale for entering into such provisions in the first place.

4. Extending the Life of a Patent

TRIPS obligates member countries to grant 20-year patents. Patent terms seek to create a balance between providing incentives for inventors and the public interest in maintaining and promoting competition. The 20-year term manifested such a balance taking into account the known delays in the process of getting a drug to market.

Adding additional time to the patent term after a balance has been struck improperly and dangerously tips the patent system in the direction of patent holders. It discriminates against generic entry, and requires consumers for a longer period of time to buy the patented product from the patent owner, or not at all.

Two key provisions in CAFTA would require countries to extend the life of a patent.

• Patent extensions must be provided to offset delays in the grant of a patent (Article 15.9.6). Whatever the reason for delays in granting a patent, it is clear that consumers are not responsible for them — yet it is consumers who pay the price under this provision.

• Patent extensions must be provided to offset delays in marketing approval for pharmaceuticals (Article 15.10.2). Thus, if regulatory complications result in a delay in the grant of marketing approval, the patent monopoly must be extended. Again, whatever the reason for delays in marketing approval, it is clear that consumers are an innocent party — yet are the ones stuck with the bill under this provision.

5. Overprotection of patents

Other provisions of CAFTA’s intellectual property and investment chapters will unjustifiably deepen monopoly protections for patents.

• The agreement creates an incentive for brand-name drug companies to submit bad patent applications. Article 15.9.8 requires countries to permit patent applicants to amend their patent application. This gives patent applicants an incentive to submit inadequate applications– providing inadequate disclosure of how to make and use the subject invention — or overly broad patents. With this rule, if a patent officer concludes that a patent application is inadequate, the applicant can simply amend it by providing the information initially withheld.

• The agreement biases the judicial system by mandating a presumption in courts that challenged patents are valid. Such a rule obviously makes challenged patents more likely to be upheld, and provides a disincentive for generic firms or others to challenge bad patents. Even in the United States, with a massive bureaucracy devoted to patent examination, federal government agencies acknowledge that bad patents are routinely granted. In many poorer countries, there is little or no serious patent examination — making the mandatory presumption in favor of patent validity all the more misguided.

• CAFTA investment rules will inhibit compulsory licensing. The investment chapter specifies that compulsory licensing done in compliance with TRIPS and/or CAFTA’s intellectual property rules does not violate the investment chapter’s limitation on expropriation (Article 10.7.5) or performance requirements (Article 10.9.3). However, even with these savings provisions, the agreement’s investment chapter rules are so severe that they are likely to chill countries’ willingness to undertake compulsory licensing. The investment agreements are enforced through special rules that investors sue national governments directly, often for huge sums of compensation. If a CAFTA country were to issue a compulsory license, but do so in a manner that was not compatible with the TRIPS Agreement or CAFTA’s intellectual property rules, it would be subject to suit under CAFTA’s investment rules. Even the fear of such a suit, which could require a government to pay heavy compensation to a patent holder, will work to deter countries from issuing compulsory licenses.

6. Conclusion: Reject CAFTA

By design, intellectual property rules in trade agreements are highly technical and confusing.

But the rules embodied in such agreements determine the shape of markets for medicines: which players will be able to compete, when, and on what terms.

Because of the critical importance of medicines in saving lives and maintaining quality of life, these market-determining decisions have life-and-death consequences.

CAFTA contains an array of provisions designed to entrench the power of brand-name pharmaceutical companies, and to delay the entry of generic competition. It will deprive governments of key tools they need to lower prices. It will effectively strip them of the ability to issue compulsory licenses for many years, and quite possibly at all. It will deny them the bargaining power they maintain by virtue of their ability to threaten to issue compulsory licenses.

CAFTA therefore runs afoul of the historic 2001 Doha Declaration on the TRIPS Agreement and Public Health, in which all WTO members “affirm[ed] that the Agreement can and should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all” and “in this connection … reaffirm[ed] the right of WTO members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose.” It runs afoul of the Doha Declaration because it denies countries the right to use the flexibilities intended to promote the goals of protecting public health and promoting access to medicines for all.

The Doha Declaration was the product of the international community at its best, recognizing an overriding commitment to healthcare that cannot be subordinated to commercial considerations.

CAFTA, by contrast, uniformly favors the interests of multinational drug companies over those of patients. It must be rejected.