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Patents and monopoly prices

Product patents, by conferring a monopoly on drug companies in the production and distribution of the patented drug, enable them to charge exorbitant prices for their products. The TRIPS Agreement of the WTO (a body avowedly dedicated to trade liberalisation) sanctions this anti-competitive behaviour.

by Cecilia Oh

PRODUCT patents enable medicines to be sold at prices that are artificially high due to the curbing of competition. Product patents provide for absolute protection of the product. Process patents, on the other hand, provide protection in respect of the technology and methods of manufacture. With process patents, generic versions of medicines may be produced through alternative processes, allowing for competition from other producers. Product patents, however, prevent generic production.

The TRIPS Agreement, in requiring patent protection for both products and processes, will allow the patent holder an effective monopoly on the production and sale of the patented product for the duration of the patent (which, under TRIPS, is a minimum of 20 years). The patent holder is therefore able to exercise a monopoly in the pricing of the product. This relationship between patents and drug prices must be viewed in light of the World Health Organisation estimate that one-third of the world population currently lack access to essential medicines, and this number is likely to increase.

The effect of patents and monopolies on prices is demonstrated by data which compare prices of patented or branded products and those of generic products; prices of the same product sold in different countries; and the prices of raw materials used in the production of medicines, in the open competitive market and in transfer-pricing practices of multinational drug corporations.

(1)  Prices of branded or patented products are often far higher than the prices of similar medicines produced by alternative or generic sources.

A comparison of prices for HIV/AIDS medicines illustrates the fact that the drug MNCs sell their medicines at much higher prices than those charged by generic producers. For example, the US price of 3TC (Lamivudine) marketed by Glaxo is US$3,271 (per patient per year) whilst Indian generic manufacturers, Cipla Ltd. and Hetero Drugs Limited, offer their generic versions for $190 and $98 respectively. In the case of Zerit (Stavudine), the US price offered by Bristol-Myers Squibb is $3,589 (per patient per year) as compared to $70 and $47 for the generic versions by Cipla and Hetero respectively. As for Viramune (Nevirapine) marketed by Boehringer Ingelheim, the US price is $3,508, compared to the Cipla and Hetero prices of $340 and $202.1 This point is further illustrated by Cipla’s recent offer of $350-600 for a year’s supply of a combination of these three anti-AIDS medicines, as compared to the price of $10,000-15,000 for the branded medicines.

(2)  When generic competition is introduced, prices of the patented product will fall.

Competition from generic producers will result in the lowering and levelling of prices of medicines. For example, the drug fluconazole is marketed by generic companies in Thailand at $0.29 and in India at $0.64.  This compares with market prices for brand-name drugs at $10.50 in Kenya, $27 in Guatemala and (until recently) $8.25 in South Africa.2

The case of Brazil offers another good example. When the Brazilian government began producing AIDS drugs generically, the prices of equivalent branded products dropped by 79%. The domestic production of AIDS drugs has enabled the Brazilian government to offer universal free treatment, making its AIDS programme one of the most successful, having halved the AIDS death rate and saved $472 million from averted hospitalisations.3

(3)  When a drug company sells the same product in different countries, it adopts a policy of price differentiation, setting price levels ‘according to what the market can bear’. 

In a country where alternative or generic medicines are available, a branded product is usually priced lower due to the competition it faces from the cheaper alternatives. The same brand may be sold at higher prices in other countries where there is no competition from generic producers.

A 1998 Health Action International survey on Zantac, an anti-ulcer drug manufactured by Glaxo, indicated that the company lowered the price of the drug in India (marketed as Zinetac) because of competition.  Several generic manufacturers in India produce ranitidine, the generic name for the active substance contained in Zantac. The survey showed that 100 tablets (150mg) of Zantac were sold for $2 in India, $3 in Nepal, $9 in Bangladesh, $30 in Vietnam, $37 in Thailand, $41 in Indonesia, $55 in Malaysia, $61 in Sri Lanka, $63 in the Philippines and $183 in Mongolia. It was also sold at $23 in Australia, $77 in Canada, $196 in Chile, $132 in El Salvador, $150 in South Africa and $97 in Tanzania.4

(4)  Multinational drug companies practise transfer pricing in the trade of raw materials used in the drugs, and this raises the cost of medicines in developing countries.

A study by Dr Zafar Mirza (The Network Association for Rational Use of Medication in Pakistan) compared prices of pharmaceutical raw materials imported into Pakistan for local manufacture by drug MNCs. The study found that several MNCs exported the raw materials to their subsidiaries in Pakistan at much higher prices than the prices of the same raw materials if purchased from the open international market at competitive rates.5  In the case of one drug produced by a German-based company, the price for the raw materials charged to the company’s subsidiary in Pakistan was $11,092 per kg whereas the competitive international price was $320 - a price difference of 3,360%. For an Italian-based drug MNC, the price of the raw material transferred from the MNC to its Pakistani subsidiary was 7,044% more than the price in the international market.

(5)  There is a belief that drug companies sell their branded products more cheaply in developing countries. This is often not the case.

Prices of some products are higher in many developing countries. This makes medicines even less affordable, as countries with much lower per capita incomes have to pay much higher prices for the same medicine as compared to prices in developed countries.

Another study by Health Action International showed that retail prices of 10 out of 13 commonly used drugs for which comparable data were available were higher in Tanzania (annual per capita Gross National Product of $120) than in Canada (per capita GNP of $19,380). The average retail prices of 20 commonly used drugs in 10 developing countries of Central and South America were all higher than the average retail prices of the same drugs in 12 countries of the Organisation for Economic Cooperation and Development (OECD, the ‘rich countries’ club). The average prices of drugs surveyed in South Africa were higher than in any of the eight Western European countries for which data are presented.6

Conclusions

The above data suggests that the pharmaceutical industry fixes the prices for medicines by setting the limits according to what the market can bear.7 Profit maximisation, through the elimination of competition and the maintenance of market monopoly, is the main objective. Patent protection is the most effective tool for drug MNCs to keep out competition from generic producers and thus maintain monopoly control over the production, marketing and pricing of medicines.

The pharmaceutical industry and its government supporters justify patents on medicines and high prices on the ground that R&D for pharmaceutical drugs is extremely expensive. Thus far, there is little convincing evidence to support this claim. Research indicates that industry estimates for R&D on each new drug range from $350-500 million, while independent estimates range from $30-160 million. Whichever estimate is used, revenues from many life-saving drugs are found to very easily exceed their R&D costs. For example, in 1999, the sales of Bayer’s ciproflaxin totalled $1.63 billion and Pfizer’s sales of fluconazole totalled $1 billion.8 

The drug MNCs’ claim that their huge investments in R&D warrant the high prices for their products is debatable in another respect. A number of the patented drugs were not in fact discovered by the MNCs. Rather, public-funded institutions and universities were largely responsible for the initial R&D of several medicines. For instance, the National Institutes of Health (NIH) in the US was instrumental in the discovery of a number of AIDS medicines. In fact, the NIH estimated that in 1995, its contribution to the overall US health R&D accounted for 30% of the total, whilst that of private industry amounted to 52%.9  And yet, it is the pharmaceutical industry that reaps most of the profits from the production and sale of medicines. In addition, available data suggest that pharmaceutical companies spend more on marketing and administration than on R&D. As percentages of sales, R&D expenses account for 10-20%, while marketing and administration add up to 30-40%.10

It is not sufficient reason for pharmaceutical companies to justify high drug prices in developing countries as an incentive for R&D on new drugs. Eighty percent of the projected worldwide drug market is in North America, Europe, Japan and Australasia. All of Africa accounts for only 1.3% of the world market in pharmaceuticals. In fact, Africa and Asia, with 67% of the world’s population, account only for 8% of the world market.11  The small markets in developing countries will not significantly affect the R&D costs. The profits of the pharmaceutical industry will also be little affected by weaker patent protection in developing countries which would enable the latter to manufacture and market medicines at lower prices.

The Africa Group of countries in the WTO has stated:  ‘[A]ll this has further aroused public interest and led to the conclusion, in some quarters, that patents have enabled drug companies to raise prices of their products far above the levels that can be afforded by a great number of people. Further it is argued that contrary to the principles and objectives of the TRIPS Agreement, the present model of intellectual property rights protection is too heavily tilted in favour of rights holders and against public interest.  ... In the same manner, patent protection is seen, whether rightly or wrongly, as shielding drug firms from competition from other firms and other products’.12

Appropriate legislation

An important conclusion made by K Balasubramaniam, Pharmaceutical Adviser of Consumers International, is as follows: 

‘Consumers in developing countries can have regular access to affordable drugs when chemical intermediates, raw materials and finished products are available at competitive prices in the world market. This will not be possible when new life-saving drugs are given protection for 20 years and patent holders have the exclusive monopoly for manufacture, distribution and sales. The only way to ensure that chemical intermediates, raw materials and finished products are available at competitive prices in the world market and countries can freely import them is to have appropriate legislation, which will provide for compulsory licensing and parallel importing. Developing countries need assistance to enact such laws. They should not be in a rush to initiate the complex process of reform of the national legislation on IPR’.13

Despite the clear need for developing countries to exercise their rights to compulsory licensing and parallel imports to enable their people to have access to affordable medicines, a major and perhaps the most disturbing aspect of the crisis of patents and drugs is that obstacles have been and are being put in the way of developing countries seeking to make use of TRIPS provisions on compulsory licensing or parallel imports in order to buy or produce drugs at more affordable prices. 

The case of access to affordable medicines has illustrated a disturbing aspect  of TRIPS: that this Agreement has facilitated, and is continuing to facilitate, anti-competitive behaviour and the flow of trade in products at prices that are influenced or determined by monopolistic elements, which hinder trade at free-market prices. This runs counter to the trade-liberalisation principle of the WTO.                          

Endnotes

1.   Kavaljit Singh (2001), Patents vs Patients: AIDS, TNCs and Drug Price Wars, Public Interest Research Centre.

2.   Oxfam (2001), Patent Injustice: How World Trade Rules Threaten the Health of Poor People, Oxfam Briefing Paper.

3.   Medecins Sans Frontieres (2001), Prescriptions for Action, MSF Briefing for the European Parliament on Accelerated Action Targeted at Major Communicable Diseases within the Context of Poverty Reduction.

4.   Health Action International (1998), HAI News, No. 100, April 1998.

5.   Health Action International (1994), HAI News, No. 78, August 1994.

6.   Health Action International (1998), op.cit.

7.   Balasubramaniam, K. (2001), Access to Medicines: Patents, Prices and Public Policy - Consumer Perspectives, paper presented at Oxfam International Seminar on Intellectual Property and Development: What Future for the WTO TRIPS Agreement?, Brussels, 20 March 2001.

8.   Medecins Sans Frontieres (2001), op.cit.

9.   Oxfam (2001), op.cit.

10. Medecins Sans Frontieres (2001), op.cit.

11. Balasubramaniam (2001), op.cit.

12. Zimbabwe (2001), Statement by Zimbabwe on Behalf of the Africa Group on the Crisis Arising from the Effects of Patents on Prices and Affordability of Pharmaceutical Drugs, Permanent Mission of Zimbabwe to the World Trade Organisation, Geneva.

13. Balasubramaniam, K. (2000), Implications of the TRIPS Agreement for Pharmaceuticals: Consumer Perspectives, Consumers International.

The above is extracted from the TWN report, ‘TRIPS, Patents and Access to Medicines: Proposals for Clarification and Reform.’

 


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