The Multinational Monitor

April 2004 - VOLUME 25 - NUMBERS 4


CAFTA:  Recolonizing  Central  America

Dying for Drugs
How CAFTA Will Undermine
Access to Essential Medicines

By Robert Weissman

There are roughly 44 million people in the Central American countries of Guatemala, Honduras, Nicaragua, El Salvador and Costa Rica, plus the Dominican Republic. Their per capita income ranges from $370 a year in Nicaragua to $1,750 in Guatemala to more than $4,000 in Costa Rica.

The corporate members of the U.S. Pharmaceuticals Research and Manufacturers of America (PhRMA) look at Central America and see a market to conquer.

U.S. drug companies presently export about $50 million worth of drugs a year to the Central America and the Dominican Republic.

With adoption of the U.S.-Central America Free Trade Agreement (CAFTA), which includes the five Central American countries, plus a U.S.-Dominican Republic deal that is being "docked" on to CAFTA, the drug companies think they can make more.

According to Renard Aron, assistant vice president for Latin America and Canada at PhRMA, that's due in part to the tariff provisions of the agreement, which would bring down tariffs on imported pharmaceuticals -- and enable the brand-name drug companies to raise their prices commensurately.

But most important to PhRMA is the intellectual property provisions of CAFTA.

"A higher level of intellectual property protection Í is important to the research-based pharmaceutical industry," Aron told the U.S. International Trade Commission at an April hearing.

"We look forward to every government in the region to implement the Agreement in a transparent and timely fashion, ensuring the applicability of strong and enforceable rights established by the Agreement."

Things look different to public health groups.

They say PhRMA should leave the poor Central American countries alone, without demanding the imposition of heightened intellectual property rules to extend and expand brand-name drug company monopolies.

CAFTA's patent and other intellectual property rules will, they say, delay generic competition and artificially raise the price of drugs, with the result that Central Americans will be denied medicines they need to treat illnesses, including life-threatening diseases.

"CAFTA negotiators have given in to U.S. pressure and failed their people by agreeing to measures that place profits above people's lives," says Rachel Cohen, U.S. director of the Campaign for Access to Essential Medicines of the international medical humanitarian organization Doctors Without Borders/M╚decins Sans Fronti╦res (MSF).

Generics: The Price Benefit
It is beyond dispute that the introduction of generic competition lowers price dramatically and enables broadened access to needed medicine. The very purpose of patent monopolies is to enable patent holders to collect supracompetitive profits, as a reward and incentive for innovation. There is now several decades experience in the United States illustrating the price reductions from generic competition.

And, 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. Generic firms from India now offer triple-drug AIDS cocktails for as little as $140 a year. A few years ago, the brand-name companies sold the same products for $10,000 a year or more in poor countries. Prodded by generic competition and activist campaigns, the brand-name companies have dropped their prices significantly, but the lowest brand-name prices for AIDS drugs remain roughly four times the cost of the cheapest generic option. (Both the generics and brand-name companies decline to make their biggest discount prices available in Central America, which is not as poor as sub-Saharan Africa.)

Under the rules of the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property Rights (WTO's 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.

Every CAFTA country is a member of the WTO, and thus already bound by its rules.

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.

Few developing countries have exercised their rights to issue compulsory licenses. Yet, the mere prospect that compulsory licenses might be issued may lead patent holders to lower prices. By threatening to issue compulsory licenses, Brazil, for example, has been able to negotiate dramatic price reductions for AIDS drugs.

The controversy over CAFTA's intellectual property rules relates to requirements that go beyond the Central American countries' WTO obligations.

PhRMA's Aron says the brand-name drug companies need enhanced protections to "provide economic incentives for the industry to invest in-country, leading to improved public health and economic performance by encouraging the development of new and better medicines."

Public health advocates counter that TRIPS rules already provide more than enough incentive. Rather than enhancing public health, they say, CAFTA-created monopolies will cost lives. The situation is perhaps most poignant for AIDS -- a deadly disease for which there is effective, life-saving treatment only from drugs that are still on patent.

More than two million people in Central America and the Caribbean are now living with HIV/AIDS.

"HIV/AIDS kills one person in Honduras every two hours because the vast majority of people with HIV/AIDS cannot afford life-saving AIDS medicines," says Dr. Manuel Munoz, who runs MSF's AIDS treatment program in Honduras.

"Right now," says Munoz, "Honduras is not purchasing the least expensive generic medicines which could allow it to provide AIDS drugs to every Honduran who is in urgent clinical need of antiretroviral therapy and will die without it. It would not surprise me if the government were buying more expensive medicines out of fear of U.S. retaliation for buying generics. If CAFTA makes intellectual property protection of pharmaceuticals even more stringent, lives will be lost."

New Monopolies for Big Pharma
The most controversial measures in the U.S.-Central America Free Trade Agreement 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.

As a condition of selling pharmaceuticals, countries require pharmaceutical sellers to submit data showing their drugs are safe and effective. This data, which is submitted in the United States to the Food and Drug Administration and to comparable agencies in other countries, is commonly referred to as registration, test 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 cannot rely on approvals granted based on the brand-name data, in most 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.

CAFTA includes a number of provisions that establish 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 enable 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 beyond the requirements of TRIPS.

Under the TRIPS Agreement, countries must protect "undisclosed" pharmaceutical test data from "unfair commercial use." 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 countries have considerable discretion in implementing it. They have freedom to determine what kinds of use of test data is "unfair" -- and therefore when protections must be afforded. And they have discretion in deciding what kinds of protection they provide for the data -- they are not obligated to exclude other parties from using the data.

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. 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. In other words, if Pfizer puts a new drug 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. 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." 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.

The brand-name drug companies say these expanded monopoly protections are necessary to ensure that they have an incentive to develop new products and get a fair return on the money they spend on clinical tests.

But public health groups point out that the drug companies already receive the benefit of patent monopolies. And while patents are supposed to reward the genius of innovation with exclusive marketing rights, through data protection the drug companies are seeking monopoly protections simply for the resources invested in conducting tests.

Such monopolies come at a high price.

"People with HIV/AIDS in Central America do not have five years or more to wait for affordable AIDS drugs to become available," says Antonio Girona, head of mission for MSF's AIDS treatment program in Honduras. "Thousands are dying now, and many will die within one or two years of first developing symptoms of AIDS."

Currently, of the CAFTA countries, only Guatemala provides five years of data protection.

A link to Disaster
CAFTA's farthest reaching drug company monopoly protection would effectively make compulsory licensing impossible in Central American countries.

Through the concept of "linkage," the United States has sought through trade agreements to link the ability of FDA-like drug regulatory agencies to approve a drug with the drug's patent status. If a drug is covered by patent, U.S.-favored rules would prohibit a country's regulators from approving it for marketing.

In the United States, drug companies have manipulated such provisions to delay the introductions of generics. The Federal Trade Commission has filed a number of lawsuits to stop such abuses.

Nonetheless, at the behest of Big Pharma, U.S. trade negotiators have sought to export the concept of linkage.

"Health authorities [in Central America] have consistently failed to coordinate with patent officials and inappropriately issue sanitary registrations for products already under patent, whose patent application is pending, or whose period of data exclusivity has not expired," claims PhRMA's Aron. "The adoption of Űlinkage' regulations (i.e., establishing a formal link between health and patent authorities) would help to ameliorate this situation, requiring that Űsecond applicants' (i.e., generic, or in some cases, infringing applicants) demonstrate that the product for which they are requesting market approval is not the subject of a valid patent or pending application. The [CAFTA] Agreement as is would remedy this situation."

It's easy to understand why Aron is so happy.

CAFTA's linkage provision 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.

In other words, generic firms would not be able to 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 -- apparently making the linkage provision an effective bar to compulsory licensing.

Because this provision appears so draconian, Members of Congress and public health groups have asked the U.S. Trade Representative to clarify the precise meaning of the provision. No response has yet been forthcoming.

The Cafta Precedent
There are still other means by which CAFTA extends monopoly protections for Big Pharma.

The agreement requires countries to extend patents to offset delays in granting patents, and in granting regulatory approval for drugs.

Rules on patent filings give companies an incentive to file bad and overbroad patent applications.

And CAFTA's powerful investor protections apply to intellectual property. That means that if a country violates the terms of CAFTA's intellectual property rules, the country could find itself being sued by a drug company (or other intellectual property holder) which claimed that the diminishment in value of the company's patent or other intellectual property is a "taking." If the company were to prevail, the government would have to pay the corporation the purported lost value of its property. Such rules will be a strong incentive for governments not to exercise the flexibilities in the TRIPS agreement -- they will understand that if they get it wrong, they may have to write a big check to patent holders.

Does PhRMA really care so much about poor Central America as to demand the region's government's enforce rules that public health advocates charge will cost lives?

Yes and no.

The industry is devoted to extracting rents from even tiny and desperately poor countries. So it really does care about intellectual property protections in Central America.

But the industry and its public health adversaries alike are concerned not just with Central America, but with the precedent that CAFTA may set.

U.S. Congressional deliberations over CAFTA are expected to be very contentious. If CAFTA is approved with its array of drug company monopoly protections, it will be established as the standard for what the United States seeks to extract in trade agreements (subject to possible alteration if the Bush administration is replaced in November).

If CAFTA is defeated, and if some Members of Congress identify the public health consequences of CAFTA's pro-Big Pharma rules as a reason for their opposition to the agreement, then the tide may turn on Big Pharma's effort, conducted in collaboration with the U.S. government, to force countries to pay ever higher prices for drugs, the health consequences be damned.

Multinational Monitor editor Robert Weissman is co-director of Essential Action, a corporate accountability group which works on access to medicines issues.

Generic Pesticides and CAFTA'S other Assault on Small Farmers

RomĚn Macaya is the executive director of the National Chamber of Generic Products in Costa Rica, a trade association which promotes the benefits of generic pesticides as a means of reducing production costs for farmers, without the need for subsidies. He has a Ph.D. in biochemistry from the University of California, Los Angeles, and an MBA in health economics from the Wharton Business School. Macaya has closely tracked the CAFTA negotiations and the impact of its intellectual property provisions on the generic pesticide industry. Multinational Monitor: What are the differences in price between generic and brand name prices for pesticides?
RomĚn Macaya:
It depends on whether you are comparing within a country or across countries. If you look within a country, for example in Costa Rica, the difference between a brand-name pesticide and a generic pesticide is usually around 20 percent.

Where you see the big difference is between countries where there is no competition versus a country where there is competition from generics. Then you see major differences.

Roundup is the brand name for the generic product glyphosate. It is one of the most widely sold pesticides in the world. In Costa Rica, it costs about $12 a gallon. In the U.S., about two years ago, that price was above $50. It has been dropping recently because there is now some generic glyphosate on the market in the United States. Today, you can probably buy a gallon in the U.S. for $35 or $40. But it is still at least three or four times higher than the price in Costa Rica.

To look at a country closer to Costa Rica, consider Honduras. In Honduras, if you look at the price of glyphosate, brand-name Roundup, it is about $9 per liter. In Costa Rica, it is about $4.

The reason for that differential is that Honduras has established a number of intellectual property laws -- including data protection, which is the key issue for why some countries you find higher agrichemical costs than in others -- which delay competition agrichemicals.

So even though labor costs in Honduras are much lower, and people earn a lot less income per capita, they pay twice as much as in Costa Rica, with a much higher standard of living. It goes to show you that the differences in prices that we are seeing are not based on income per capita. It is just a reflection of whether there is enough competition to bring down the price or not.

In many crops, Costa Rica is more competitive than in Honduras, even though there are much higher labor, environmental and regulatory costs in Costa Rica. That's because what Hondurans save in labor costs, they more than offset in pesticide costs.

MM: How much of a cost for farmers are agrichemicals?

Macaya:
I'm most familiar with crops grown in Costa Rica. Major crops that are exported and also consumed locally are coffee, bananas and a lot of horticulture crops. In banana production, agrichemicals are about 50 percent of the production costs. In coffee, it is anywhere from 20 to 25 percent. In potatoes, it is about a third of the production cost. In vegetables, say broccoli, it is about a third; cauliflower is about 45 percent. In all these examples, pesticides are greater than labor costs.

Considering that in agriculture, agrichemicals are one of the major cost items in the production cost structure, farmers are obviously hurt wherever there is no competition from generics. And the high agrichemical prices create a dependency on the state to provide subsidies to compensate for the farmers' lack of competitiveness in production costs.

MM: Is rapid competition in agrichemicals the global norm?
Macaya:
I would say it is becoming more rare to have a market with broad competition in pesticides.

The reason is that the lobbies for the big six agrichemical companies, through their group CropLife, have been pushing for new intellectual property rules that go beyond [the World Trade Organization's rules], in order to basically block the registration of generic agrichemicals. We are seeing that now in Central America, in Costa Rica specifically through CAFTA. What these companies could not achieve at the WTO, they are now trying to impose through bilateral trade agreements.

MM: What is the regulatory approach in the United States?
Macaya:
In the United States, you have patents that protect the product. But you also have data protection that is extremely strict, whereby the safety and efficacy data that is generated to register a pesticide with the Environmental Protection Agency is protected on an exclusive basis for 10 years. That is, for 10 years, no one can cite that data to register a generic. If a competitor wanted to enter the market, they would have to duplicate the already completed safety and efficacy studies. Then, once those 10 years are up, there is an additional five years of data compensation. During this period, a generic company can cite the data, but they would have to compensate the original generator of that data for the cost of generating that data, plus a risk factor, plus a time factor -- which basically makes the cost even higher than what the actual outlays were for generating the data many years ago. Then, any time new data is generated, you generate new protection periods. All of this creates a system whereby pesticides can come off patent, and the monopoly continues.

No one is going to invest dozens if not hundreds of millions of dollars in generating this data if they do not have a monopoly. So there is no incentive for generics to enter the market.

The argument for this system is that it promotes innovation. In other words, monopolies have to be protected in order for companies to have an incentive to innovate.

But if you look at how much innovation has gone on in the pesticide industry, it is dismal. This is an industry that is asleep at the wheel. Most products are off patent é that is, they are older than 20 years. Most of the development of the big six companies is going into biotechnology rather than chemicals. So they are relying on stricter and stricter data rules to keep their monopolies, rather than generating new products.

In the United States, you have a legal structure, the Hatch-Waxman Act, which creates an incentive for generic drug firms to challenge bad patents and quickly enter the market when patents expire. The Act essentially created the generic drug industry in the U.S. Because the Hatch-Waxman Act only applies to drugs, there is not a true robust and independent generic agrichemical industry in the United States. The result is that U.S. farmers still pay billions of dollars more per year for farm chemicals than they would with a robust generic agrichemical market. This creates a dependency on farm subsidies, which indirectly subsidize the big six agrichemical companies.

MM: When the does the period of data exclusivity begin?
Macaya:
The period of data exclusivity begins from the time of registration. It is not during the R&D process, which consumes several years of the patent life. It is actually once the data is presented to the EPA.

MM: What are CAFTA's provisions on data exclusivity?
Macaya:
In CAFTA, there are clauses defining the specific timeframes for protection of registration data, for both drugs and pesticides. Data protection is provided for five years for drugs; and 10 years for pesticides, with absolutely no justification for that difference.

We asked our negotiators to request an answer from USTR [the U.S. Trade Representative] on why there should be such a difference. It took the USTR six months to come up with an answer. And the answer they came up with is: agrichemicals require tests in plants, animals, the environment, waterways, etc. whereas drugs only require tests in patients -- and therefore agrichemicals are more expensive to develop and merit greater protection periods.

The flaw with the argument is that intellectual property is supposed to be protecting innovation, not investments.

Aside from that, the statement is false. There are two leading industry cited studies on the cost of generating safety and efficacy data, one commissioned by CropLife for the agrichemical industry, and one from Tufts that is cited by the pharmaceutical industry. If you just take those two studies at face value, without even questioning their numbers, it appears that it costs five times as much to develop a drug as a pesticide.

Under CAFTA, the data would be protected in each country from the time the drug or pesticide is registered in that country. That basically starts when the companies decide to register their products in, say, Costa Rica, and not from the first registration on a worldwide basis. There can be a delay of several years between the time the pesticide is registered with the U.S. EPA and the time it is registered in Costa Rica.

The CAFTA rules apply only to new drugs or new pesticides, but it is based on a local definition. That is, a drug or pesticide is new in, for example, Costa Rica, if it has never been registered in Costa Rica. So, there could be a pesticide that has been used around the world, for many years, but if it has not been registered in Costa Rica, it is still considered a new product under CAFTA.

And, there are no compulsory license clauses for agrichemicals.

MM: What will be the impact on Costa Rica and other Central American countries?
Macaya:
A lot of small farmers are going to have to change crops, if they can find a new crop that is going to be sufficiently lucrative to get into -- and that is very difficult, especially if there is no subsidy -- or they are going to have to change professions.

Most small farmers don't have advanced degrees; they are not highly educated. The fact that the rest of the economy might have different types of opportunities doesn't guarantee that they will be employable in the rest of the economy.

The farmers that are going to be most sensitive are those that grow crops where the agrichemical costs are a high percentage of the total production costs. That is not all farmers; some farmers grow crops that are less reliant on pesticides. But remember, this is the tropics, and in the tropics, the environment favors biodiversity. Agriculture, which is growing a monocrop massively, is a constant battle against nature, which is trying to favor biodiversity. Most crops in this region do require significant pesticides to control pests and get high quality produce.

MM: Are higher pesticide costs a helpful mechanism to switch farmers to organic production?
Macaya:
Not at all. Even though I am representing the generic agrichemical industry, we are all in favor of organic farming. The fact is, there is already a huge incentive for organic agriculture. If you can grow food organically in this region, especially export crops, they will command a much higher price than if they are not organic. But the fact is that organic farming in this tropical region is extremely difficult and, for many crops, hasn't been possible to date.

MM: Will Central American farmers be able to demand subsidies to offset pesticide price increases?
Macaya:
No way. Most of our countries have a very low tax base, and there isn't even enough money for healthcare, education, for many high priority items on a government's budget, and farmers have never had subsidies. Costa Rica is an exception in providing access to healthcare and education, but the fact is, there just isn't enough money raised through taxes to provide subsidies. n