Issue brief |

Globalization and medications : a new constraint for developing countries

Photograph by Giorgos Moutafis
A close-up photo shows pills in the hand of an MDR TB patient taking his Direct Observation Treatment Short Course (DOTs) medication at the Nhlangano TB Ward supported by MSF.

This paper discusses the implications of the Marrakech agreements, the final GATT agreement instituting the World Trade Organization, including patent barriers to access to medicines.

On April 15, 1994 the final GATT agreement instituting the World Trade Organization (WTO) was signed in a developing country, Morocco. The Marrakech agreements, signed after long and arduous negotiations of the Uruguay round, will force all the countries of the world to follow the same set of rules, adhere to a single model of development based on the free-trade economy that industrialised countries, first and foremost the United States, have succeeded in imposing on the rest of the world.

The Marrakech agreements will enhance the openness of all the countries of the world to investments and trade. They give new rights and more power to investors and multinationals. Conversely, they reduce the rights and power of the states. This is a victory of the theorists of liberalisation according to whom, from the viewpoint of the theory of comparative advantage, each country would gain from the greatest possible opening. But this is mostly a victory for the industrialised countries and for their multinationals which, in practice, are the only ones that have the capability to take full advantage of these "benefits."

The WTO agreements represent a point-of-no-return in the so-called globalisation process. They affect most of the world's countries and a large part of the economic sectors. Granted, China is not yet a member of the WTO, but it aspires to the title, on the one hand because of the risk of being left out of the game, and on the other hand because it hopes to reap benefits from the opening of certain borders. Most of the countries of the world have already ratified the WTO agreements or are in the process of doing so.

The WTO agreements are a group of specific agreements that affect a wide range of areas, well beyond trade. For the pharmaceutical industry in developing countries, there are two series of provisions that are of particular importance: those that impose the dismantling of protectionist measures, and those that generalise the recognition of patents to all industrial fields.

These provisions suit the purposes of the Western States and their industrialists, who would do away with the barriers to international trade and reinforce industrial property. The industrialised countries thus hope to open up new opportunities in the sectors where they already dominate, such as pharmaceuticals and biotechnology, for example. For their part, developing countries are counting on a greater opening of the markets in Western countries, which currently restrict imports, in the agricultural and textile sectors for example.

The future will tell if the dreams of either are well founded. One thing is clear today; customs duties authorised henceforth on industrial products are decidedly lower than those left in place for agricultural goods by the major Western agricultural countries. In other words, the Western countries will reinforce their position in their areas of excellence, while they continue to protect the sectors where their position is weak.

It is also obvious that the opening of the national markets to import will benefit different countries (developed or not) and different segments of their population to varying degrees. The 1997 report of the United Nations Development Programme (UNDP) indeed notes that "This globalisation is moving fast but, for a large part, it benefits the most reactive and powerful countries of the North and South. The 1992 Global Report on Human Development estimated the losses suffered by emerging countries due to their marginalisation in international trade and in the labour and financial markets at $500 billion per year, ten times the volume of international aid received by these countries. Those who claim that the poorest countries will inevitably benefit from globalisation seem to have a very active imagination."

As we will now demonstrate, opening the pharmaceutical markets of developing countries to Western industrialists will not have any real counterpart. These countries now face the loss of some of their leverage against industrialists of the pharmaceutical sector, which poses a threat, namely of an increase in the price of medications that are already so difficult to access for a greater part of the world.

An international pharmaceuticals market under construction

Today's international pharmaceuticals market is comprised of three sectors: non-prescription medications; generic prescription drugs; and patented prescription drugs. Of these, the market for patented prescription drugs is the most important economically. This market is dominated by large Western conglomerates which are also responsible for the development of new therapies.

Over the last few years, there have been many mergers between these giant pharmaceutical manufacturers which have enabled them to reduce costs by eliminating duplication in research and development and by jointly marketing their products internationally. These mergers are also part of the globalisation of health care practices and health information: health care professionals the world over are increasingly treating their patients using the same medications.

Of the ten largest corporations worldwide at the beginning of 1998, five were American, two British, two Swiss, and one German, and further mergers are expected. Fierce competition among these conglomerates - each marketing brand name medications protected by patents and trademarks - has resulted in targeted promotional activity (medical representatives and salespeople, advertising, etc.) aimed exclusively at health care professionals; these promotions command budgets larger than those devoted to research by these companies.

Another fast-growing sector of the international pharmaceutical industry is that of generic medications. Generic medications are copies of brand-name drugs whose particular patents have expired (the trademarks themselves are protected indefinitely). Generic medications began to be developed in industrialised countries in the 1970s as the most profitable patented medications were released into the public domain and manufacturers of generics began a price war amongst themselves and against developers whose drugs were in the public domain. In countries like the US, where there are strong incentives to replace patented medications with generics (high prices for patented medications and laws favouring competition) as soon as their patents expire, generic drugs currently make up half the pharmaceuticals market.

The pharmaceutical industry in the developing countries has also evolved considerably. Often motivated by the industrial politics of the 1950s, many countries began to create national pharmaceutical industries to replace imports as well as to guarantee themselves autonomy in a domain considered strategic, or at the least, symbolic; to reduce expenditures in foreign currencies by limiting imports of materials; and to supply the country's needs at the lowest prices for social and public health reasons.

Essentially, existing medications were produced locally replacing foreign imports. And though certain countries, such as Morocco and Brazil, have opened their doors to the multinationals, others like India and Egypt have preferred to support locally financed enterprises and like most other countries have expressly excluded medications from their national patent legislation (Egypt, India, South Korea, etc.).

At first glance, it might seem that because of reduced production costs (most significantly, labour costs) it should be possible to produce medication cheaply in developing countries. But it is not so simple in countries without industrial or environmental expertise, and it is also difficult for countries which have limited internal markets (those with small and/or impoverished populations) which cannot benefit from the economies of scale larger countries and multinational companies enjoy.

Also, developing countries have been compelled to protect their local industry against imports (in particular, to avoid the "dumping" campaigns of the Western pharmaceutical laboratories), at least initially. This protection has many side benefits: it supports local producers, keeps the cost to the local consumer down, benefits the local job market, and the currency market, and develops competitiveness in local industry. Such protection can take many forms: import taxes, discounts on prices, or greater ease of registration for medications produced locally, a ban on imports, etc.

Certain industries in developing countries have been shown to be competitive in the production of generic medications, above all in view of the fact that the multinationals don't want to invest in certain markets (for example, India), selling brand name medications only at a price much higher than the manufacturing cost.

Beginning in the 1970s and continuing through the 1990s, the world has seen certain developing countries not only refine their manufacturing capacities to enable them to produce more and more sophisticated medications but also conducting their own research. This research often consists of refining a new production process for medications which are still under patent (reverse engineering) to benefit from international pharmaceutical innovations without paying fees to the companies concerned. Multinationals have accused countries who do not recognise pharmaceutical patents of supporting piracy and counterfeiting.

In certain cases, developing countries have succeeded in improving such processes making them less costly, or producing a better product than the multinationals. Thus, the Bayer laboratory, holder of the patent for praziquantel (an anti-schistosomiasis drug) has been incapable of matching the price offered by Shin Poong, a Korean laboratory which has developed a less costly means of production. Such experiences have contributed to the accelerated withdrawal of Western pharmaceutical conglomerates from research into tropical diseases.

One-way borders

When the WTO agreements become applicable in full (that is in 2005 for countries with the longest stay of implementation), the developing countries which are members of the WTO will no longer be able to protect their industries, as all discrimination is now prohibited between national local producers and foreign local producers on the one hand and between local producers and importers on the other (small duties on imports are still however possible).

The multinationals are promising that the new legislation covering patents (component of the WTO agreements concerning intellectual property) and deregulation of capital movements (component of the WTO agreements concerning investments) will lead them to invest massive-ly in the developing countries. The multinationals may however in many cases find it preferable quite simply to export from the industrialised countries, or from a limited number of develop-ing countries. In the field of generic drugs, Western industry could in certain Southern countries enjoy lower production costs than in their country of origin. But this production would doubtless be more aimed at winning a share of the local generic drugs market than for the sale in the industrialised countries.

In the field of innovative drugs, Western industry does not necessarily want to set up shop in the developing countries, because production costs, in particular manpower, are often a secondary factor when industry determines the price of brand-name drugs.

Western industry could indeed delocalise part of its production to the developing countries for drugs which are not used or only little used in the country of the parent company, but which are employed more widely in the Southern countries. Apart from drugs intended for tropical diseases, it is unfortunate but nonetheless reasonable to assume that these drugs will often be those considered by the West to be obsolete.

In total, it is probable that western industry will establish itself on the most buoyant markets of the developing countries. Some Southern countries - particularly open to the multi-nationals - could benefit from significant investment, but it is also probable that in most other countries, the local pharmaceutical industry will be hit head-on by competition from the multi-nationals, with no positive effect on the country in question, in terms of technology transfer, employment or cost of medicine. The foreseeable consequence of doing away with protect-ionist measures is, for many countries, the disappearance or undermining of the national pharmaceutical industry. This is exactly what has happened in certain Latin American countries, where the origins of deregulation go back to the early 1990s.

The developing countries will thus be thrown open to pharmaceuticals from the western countries, but the reverse will not be true, because the Western pharmaceutical market will remain strongly protected by public health measures. In the industrialised countries, a company must submit a weighty dossier before obtaining a permit from the health authorities to market its particular drug. The cost of registration and of producing these dossiers, allied with the sophistication of the quality control techniques involved, in terms of both research and pharm-aceutical production, in practice rule out any chance of the developing countries being able to gain direct access to western markets. In this, as in many other industrial fields, the increasingly strict quality standards put in place in the more industrialised countries are a means of provid-ing effective protection against competition. Hitherto, drug exports from developing countries to the industrialised nations have been extremely limited, mainly concerning raw materials alone.

Double-edged pharmaceutical patents

Until the WTO agreements were signed, the organisation of international patents was based on the Paris Agreement (1883) and the Stockholm Agreement (1967) which set up the world intellectual property organisation (WIPO). These agreements do not make it compulsory to file patents in all technological fields, nor to set a minimum protection time for the patents. The WTO agreement concerning the intellectual property aspects relative to trade makes these two points compulsory: those developing countries which wish to become mem-bers of the WTO are obliged to set up a system of patents in all industrial sectors, for both products and manufacturing processes, lasting a minimum of twenty years.

In the pharmaceutical field, it is commonly estimated that the average exclusive market-ing time for innovative drugs, taking account of the research time, is about ten years. All innovative drugs will thus enjoy exclusive world sales for an average of more than ten years. This is a claim to which United States industry was particularly strongly attached, feeling itself to be seriously prejudiced by industry in the South, in particular in Latin America and India.

Patents are usually justified by the fact that they encourage firms to innovate. The period of exclusive sales guaranteed by the patent enables industry to obtain a return on its research investment. This exclusivity creates a monopoly situation which could open the door to exces-sive pricing, through abuse of a dominant position. The developed countries have often taken their time before adopting patents legislation, with some even waiting until they had caught up in industrial terms, enabling their industry to copy the innovations. In practice, the industrial-ised countries often go through three stages, as their national industry develops: no patents - patenting of processes - patenting of processes and of products. It is this industrial strategy that the developing countries were barred from by the developed countries, in 1994, through the WTO agreements.

Some developing countries justify their failure to abide by patents filed by western pharmaceutical companies by pointing out that in any case, the latter do not devote research budgets to the fields of concern to the Southern countries (tropical and infectious diseases), owing to the insolvency of these countries. Industry replies that it can only invest in research if it can be sure of not being copied and thus financially penalised. This quandary raises the more general question of financing health research, for which a variety of alternative solutions could be imagined, such as public funding or a special turnover tax on firms in the sector, for example.

Western firms claim that recognition of patents would be favourable overall to transfer of technology and research in the developing countries. This viewpoint is shared by the WTO, with a representative even declaring: "The agreement could lead to higher prices, but not necessarily on a large scale. On the other hand, protection of intellectual property will stimulate research into products meetings the needs of the third world".

Scepticism would however seem to be the order of the day. Pharmaceutical research is in fact a highly centralised activity, with the multinational pharmaceutical industries only having a very few research sites around the world. The current trend moreover is towards yet greater concentration, with for example the American groups simply having a single site in Europe (at best). So why open a research centre in a developing country? Apart from the few countries in which there is a highly-qualified but relatively poorly paid scientific community, investment is unlikely to be particularly attractive. This is for example shown by a survey of the reasons western companies would set up a research centre in India, in cutting edge technological fields. The availability of qualified personnel and low salaries are the leading motivations for these firms.

From the viewpoint of a company, patent recognition will not make the patients or countries concerned more solvent and thus more worthy of investment. Patent recognition is perhaps a first step towards research into tropical diseases but is not sufficient motivation in itself. Patent recognition will only lead to additional local research if this research is encour-aged from elsewhere, in a competitive sector and with a minimum of resources. "Otherwise, it could lead to higher prices and low economic growth" as recognised by the United Nations Conference on Trade and Development (UNCTAD).

At least there is one point on which all would seem to agree: the price of medicine, in particular innovative products, will go up for the developing countries.

The world pharmaceuticals market has changed in recent years in the same way as it did in the United States a few years earlier. On the one hand, increasingly inexpensive generic drugs, and on the other, increasingly expensive innovative products.

Innovative drugs often originate in countries where prices are free, such as the United States. Industry sets the price, not on the basis of cost (research and production) to which is added a profit margin, but at a far higher level: that which the (American) market can bear. A whole economic calculation methodology (pharmaco-economics) has been developed in the last 10 years to deal with this: if, for example, a drug permits savings on hospital costs, it can be sold at a far higher price. If it prolongs the life of Aids patients, there will be almost no limit on its monetary value. The consequence of this recent development is that the new American drugs are extremely expensive, including for patients in the industrialised countries. This is also true - albeit to a lesser extent - for European pharmaceuticals.

But in most developed countries, there are different ways of regulating the pharma-ceutical market. In the United States for example, the price of medicines is keenly negotiated by Pharmaceutical benefit organisations (PBO) which supply the care networks (Managed care) taking charge of a large part of the American population. Furthermore, when the patent expires, the fall in the price of drugs is spectacular, as the generic drugs market is highly competitive.

In the developing countries, western industrial firms are sometimes willing to sell at a lower price, as the market would be unable to bear such high levels. But the development of parallel imports (imports into a country where the drug is sold more expensively, from a country in which it is sold more cheaply, without the manufacturer's approval), is leading the firms to reduce pricing differentials between countries, and sometimes eliminate them altogether. The general trend is thus towards a single worldwide price - whatever the level of wealth of the country - a price on which the countries themselves have less and less influence.

Innovative drugs are increasingly unaffordable in developing countries (other than for a privileged elite). The ban on local copies will quite simply rule out any access for the majority of the population. In Latin America, deregulation of the pharmaceutical market, which has been under way since the early 1990s, has led to an overall rise in the price of medicines.

Little room for manoeuvre

When one estimates the potential consequences of the WTO agreements on the pharma-ceutical sector of the developing countries, there is little room for optimism. One could even be surprised that the field of medicine was not given exceptional "health" status, like agricul-ture - so dear to the hearts of the United States and the European Union - or Culture, France's particular hobby horse. What was obtained by France, in the name of cultural exception, was refused to developing countries, who therefore continue to dispute the WTO agreements.

Medicines and drugs are industrial products in a category of their own. By refusing to recognise this, the WTO agreements could have negative social and health consequences for already fragile populations, which is quite unacceptable. A system needs to be set up which reconciles the resumption of research into the illnesses afflicting tropical countries with the financial accessibility of the corresponding medication for those who need it.

Only history will tell us who benefited and who suffered from the WTO agreements, but some countries today are doing their best to apply the WTO agreements as little and as late as possible. It is in their own interests to take advantage of the maximum implementation delays granted to them, even if only to have the time to look at all the possible means of attenuating the negative effects of the WTO agreements. In this respect, the fact that western pharma-ceutical firms are insisting that the countries concerned cut short the grace period to which they are entitled speaks volumes. This period of reflection is all the more important as these countries will be unable to backtrack once the new legislation is in place, even if their grace period has still not fully elapsed.

There are also two main ways of trying to attenuate the consequences of the WTO agreements: parallel imports and "compulsory licences", two options that countries could still include in their national legislation for possible use one day.

  1. According to the legal principle of "exhaustion of rights", the holder X of a patent in a country, cannot prevent this country importing the drug from a subsidiary of X working out of a third-party country in which this drug is cheaper (parallel imports system). It is therefore possible to take advantage of price differentials between countries, which will be practically the only means import-dependent countries have of controlling drug prices in the slightest. It should however be noted that the pharmaceutical industry interprets the WTO agreements differently and parallel imports are a subject of considerable conflict, as shown by the South African example described later. It must also be remembered industry has a dangerous weapons to be used on the populations if needed: a single worldwide price.
  2. The second way of minimising the negative effects of the WTO agreements, compulsory licences, is also tricky to implement and will certainly lead to numerous conflicts and objections to the WTO. These agreements in fact state that the rights of a patent holder can be limited among others in certain cases of general public interest (extreme emergency, public health, etc.) or in the event of anti-trust practices. The developing countries which have a local industry should therefore be able to make use of compulsory licences in cases which could by nature only be exceptional, and the western pharmaceutical industry firmly intends to keep a close watch on this.

In the United States, again, the granting of mandatory licences is anything but excep-tional, in particular in the pharmaceutical field. This last American example clearly shows what is at stake in the WTO agreements: western industries enjoy the political support of their governments in imposing rules on the whole world which at home they fail to apply, at least in full.

Western countries have taken great care to make sure that the health of their people is not completely in the private commercial sector. But, under the pretext of claiming to defend their export trade interests, they have managed to ensure that the pharmaceutical policy of the developing countries is dictated by their industries.

South Africa under pressure from American industry

Several American pharmaceutical firms are exerting pressure on the South African government at a time when it is revising its pharmaceutical legislation. These firms have convinced the American government to back them in their efforts. With the help of the South African pharmaceutical industries union (chaired by the president of an American firm), some American companies are trying to persuade the South African government to ban parallel imports of drugs into their country, on the pretext that this would be a breach of the WTO agreements. It is through these parallel imports that South Africa hopes to take advantage of international competition and thus obtain better prices, in particular for the benefit of the poor black population which has no access to the more expensive medicines.

These claims that parallel imports are illegal, are nothing more than wishful thinking on the part of the American firms, as article 6 of the WTO agreements in fact excludes objection to the WTO on the grounds of "exhaustion of rights" which is the legal source for parallel imports.

In this debate, an American consumers association hostile to the WTO agreements, informed Vice-President Gore that jurisprudence in the European Union and Japan is rife with recent examples confirming the legality of parallel imports. It cheekily added that "as they are based on competition and market forces, parallel imports would seem to correspond to certain aspects of the efforts exerted by the Clinton administration to bring down the price of medicines in the United States. "

Until summer 99, the face-off between the two countries continued at the highest political level.American sanctions, such as duties on South-African metals, have reminded to all countries reticent about implementing the WTO agreements, that the American government is side by side with American industry in this particular fight.

However the public outcry by Act up of Al gore's personnel role in the pressure on South Africa led the American government and the American pharmaceutical industry to step down. South Africa has won a battle for its population. This victory is thanks to the persistent motivation of the South African authorities and associations, as well as the international solidarity of various associations.

It is in the name of this solidarity that MSF asks that the new WTO round, the 'millennium round', be the occasion to contemplate the setting up of a 'health exception' for essential medicines. Developing countries should at least be able to take advantage of the legal possibilities in the TRIPS framework (parallel imports and compulsory licences) as often as the public health needs of their population require it. This would only be the humanising of the WTO agreements.

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