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TRIPS – Promoter of Innovation or Illusion?

JUSTIN CHARLES WARD[1]

“Intellectual property protection is key to bringing forward new medicines, vaccines and diagnostics urgently needed for the health of the world's poorest people”.[2]

I. Summary.

This paper discusses, inter alia, the provisions of TRIPS[3], its progeny[4] and its underlying market and economic underpinnings, intended and actual. One conclusion that may be reached upon examination of the relevant data is that, despite its great promise as a promoter of innovation through its much touted “universalization” of IP rights, TRIPS may very well result in a trip of a different sort for the patent owner and for the innovator. Indeed, the patent coverage guaranteed by TRIPS’ major provisions might well be rendered entirely or substantially ineffective by preemptory provisions for “mandatory licensing,” and particularly where trans-shipping of imported pharmaceuticals into a non-producing country cannot be materially prevented, either legally or practically. Accordingly, the utilization of free-market and free-trade approaches to TRIPS and related international agreements, and relevant modifications thereto, is advocated.

II. Introduction – The Trouble With TRIPS. Pharmaceuticals are unique substances - individually, collectively, biologically, innovatively, and economically. In particular, the interface between a very large percentage of pharmaceuticals and the marketplace is distinctly different in a very fundamental way from nearly every other form of product. What makes pharmaceuticals so different is their role as chemicals in interacting with biological systems, and yet more specifically in the diminishing biological activity (over time and exposure to biological systems) of many classes of pharmaceuticals. Indeed, those pharmaceuticals that are most related to public health issues frequently involve contagious diseases[5] caused by bacteria[6] (such as flesh eating bacteria)[7], and diseases caused by viral and/or viral-related elements.[8] The particular mechanism by which pharmaceuticals lose their biological activity or effectiveness, is known as “resistance”.[9] More specifically, what happens is that the causative agent, whether bacteria or virus, “adapts” through natural selection to the presence of the drug and eventually overcomes the mechanism of operational effectiveness of the drug.[10] When resistance occurs, the only practical solutions are the administration of greater amounts of the drug and/or use of an entirely new and different drug.[11] Of course, the development of resistance occurs at varying rates depending upon a host of factors, including, degree of use, completeness of use, speed of reaction of the disease causing agent, speed of mutation of the bacteria or virus independently of the drug, etc.[12] In order to counter effectively this type of relatively rapidly mutating disease-causing vector, new drugs must be discovered, screened, tested, approved, manufactured, marketed, delivered, dispensed and administered – and often in countries far from the site of the developmental activity.

Accordingly, some tentative conclusions are firmly suggested: (1) the driving parameter towards problem solving is and must be innovation, and (2) whatever stands in the way of innovation is a impediment toward patient care, but (3) if the costs of ultimate drug delivery are above the ability of the patient‘s available economic resources, the existence of the new drug will have been rendered moot. Looking at the fundamental logic, it may well be shown that both (a) innovation, and (b) cost effectiveness, are necessary conditions for successful treatment of infectious diseases.[13] However, it should not be pretended that somehow there is a “balancing” of factors. Instead, both innovation and cost effectiveness are material elements in the treatment equation. The ultimate purpose must be to address the alleviation of human suffering through the development of institutions that would result in effective administration of vital drugs to the patient to cure or to treat infectious disease.

No scorecard is yet available on how well TRIPS has done to address the problem. In fact, there are several problem areas that TRIPS may aggravate. Accordingly, this paper addresses the economic, political and legal factors that affect innovation in the pharmaceutical industry, together with proposals for improving drug delivery services, and particularly as related to lesser-developed economies.

III. The Present Status and History of the TRIPS Phenomenon. A time line of major events will help to focus upon the present dangers to innovation brought about by the sequence of several TRIPS-related agreements. As a beginning and in 1994, TRIPS provided for “mandatory” intellectual property protection of World Trade Organization Member States -- through patents, trademarks and copyrights.[14] TRIPS also provided for mandatory licensing under specified conditions.[15]

In 2001, the Doha Declaration made specific reference to pharmaceuticals, disallowed retaliation for a Member’s resort to mandatory licensing, permitted a unilateral declaration of emergency (to justify such mandatory licensing), and allowed the terms and conditions of the mandatory license to be determined solely at the discretion of the invoking Member.[16] Also, Doha did not require a request for voluntary licensing as a first step. But, Doha did require that the pharmaceuticals be used predominantly within the Member State invoking the mandatory license provisions.[17]

In late 2003, the requirement that compulsory licenses be used predominantly for the domestic market was waived, essentially opening the door to manufacture, importation and re-importation and/or transshipping, between partner countries who have agreed to abrogate the patent coverage of pioneer drug innovators, for the most part residing in other Member States.[18]

In examining the TRIPS scorecard, a brief synopsis of the historical background and salient features of TRIPS may be helpful. TRIPS was signed in 1994 when the WTO[19] was established, and provided for multilateral intellectual property protection for signatory States, in the areas of patents, trademark and copyrights, and specifically including research, new technological processes, and new products, either manufactured or agricultural.[20]

Article 7 of TRIPS states the broad goal that technological innovation and the transfer of technology should be administered so as to be “conducive to social and economic welfare... to the mutual advantage of producers and consumers”.[21] TRIPS further adopted the prevailing 20-year period[22] of mandatory patent ownership, as previously set forth in GATT.[23] However, under GATT, the patent protection scheme had been voluntary.

Several phase-in periods were not set forth, based principally upon the economic status of the affected countries. In particular, developing countries were granted a transition period of between four and ten years in which to incorporate and adapt to the new TRIPS standards and procedures. Also, an additional period of five years had been provided to permit development of policies, practices and procedures regarding product patents. Further, exceptions were likewise provided to prevent monopolistic and/or related trade reduction practices.[24]

IV. The WHO Has Recently Re-Emphasized the Innovative Function/Purpose of TRIPS.

More recently, the World Health Organization has sought to refocus the TRIPS equation towards the intended innovative purpose of TRIPS.[25] The WHO has stated:

[T]he need is greater than ever for innovation in health-care products, including medicines, pharmaceuticals, diagnostics, and medical devices.[26]

In addressing the purpose of TRIPS, the WHO further stated:

[I]n cases where the private sector provides the bulk of the investment for product innovation, a system of intellectual property protection serves as an important incentive for innovation, by allowing the innovator to recoup the cost of research or product development and to make a profit. Patent protection, originally varied widely in different parts of the world, WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights seeks progressively to introduce global minimum standards, whereby WTO’s 144 Member States provide patent protection for all products and processes for at least 20 years. Nonetheless, it recognizes that Members may adopt measures necessary to protect public health and nutrition. Further, by singling out pharmaceutical products for special treatment in the Doha Declaration on the TRIPS Agreement and Public Health (2001), WTO Members have also recognized that health products need to be treated differently in certain circumstances.[27]

Unfortunately, neither the original draft of TRIPS, nor the more recent WHO commentary on innovation, addresses with any detail the necessary market forces and intellectual property protections that are necessary to bring about the intended purpose of innovation.

V. The Ambiguous Pronouncements of the WHO. The WHO provides an ambiguous, yet comprehensive list of “factors” purportedly necessary to achieve the intended goal of innovation in the pharmaceutical area.[28] For example, the WHO states the following very generalized and mostly self-evident goals, but provides scant detail or analysis as to how these desirable functions might be carried out:

[A]n environment conducive to innovation has several components: adequate financial and infrastructure support for basic science; funding and investment for translating basic science into usable products, including both the means for protecting the investment of innovators and the

technical capacity to innovate; mechanisms to establish research priorities that fit public health and health care needs; and a regulatory and licensing system which facilitates innovation while adequately protecting public health.[29]

Next, the WHO reveals its political philosophy somewhat, by proposing (without the slightest hint of evidence) the demonstrably false representation that public funded entities have somehow been responsible for a substantial portion of usable drugs. In fact, and according to Kenneth Kaitin, of the 196 new pharmaceuticals approved by the FDA from 1981 through 1990, the pharmaceutical industry created 92.4 percent, while academia and government combined produced only 4.65 percent.[30] An anti-patent, or at least severely “patent-limiting”, philosophical bias is likewise apparent in the WHO’s commentary on the purpose or background of how intellectual property protections are supposed to “fit” into the innovational schema purportedly proposed.

[I]ntellectual property rights and pricing. The exclusive right to market[31] a product[32] during the life of a patent allows the holder to recoup some or all[33] of their initial investment, by charging more[34] for the product. However, the cost[35] to society, particularly in developing countries, would be high[36] if intellectual property rights were used beyond the original intent of stimulating innovation, as a commercial tool that overly[37] restricts competition. Although price is only one of the factors that determine access, it is a highly significant one. Three recent studies, each using different methodologies, predict price increases[38] of twofold or more with full implementation of TRIPS requirements in developing countries.[39] (Emphasis and footnotes added).

The WHO further pointed out that, as views vary on the potential magnitude of the alleged “price effect”, continued monitoring, -- using consistent and transparent methodologies -- would appear to be warranted.[40] Finally, the WHO ends its white paper, supposedly addressing the subject of “innovation,” with the actual theme of the piece – i.e.,the covert agenda of price:

[R]econciling the needs of patients and patent-holders is a challenge to improving access to essential health care. Given the potential impact of intellectual property rights on price, there has been a growing interest in mechanisms designed to bring about the most favourable pricing for developing countries. Relaxed patent requirements, tiered pricing, voluntary licensing, compulsory licensing, bulk

purchasing, and corporate donations have each been evaluated as potentially effective mechanisms to achieve the most favourable pricing of patented medicines in developing countries.[41] (Emphasis added)

The analysis thus suggests that these designated WHO approaches, which allegedly facilitate competition, in fact are designated to have the greatest impact on reducing price. Accordingly, these WHO approaches need to be evaluated both individually and in combination, in order to ensure that the balance between (a) exclusive patent rights, and (b) the investment stimulus they provide, is balanced against the objective of reducing prices. Also, the impact of these suggested WHO approaches needs to be monitored.

There is very little if any discussion by the WHO of possibly permitting market forces to determine the pricing of drugs. Instead, the WHO begins with the subject matter of innovation as a goal, gives no real analysis of the economic system and factors present in the country producing the largest portion of pharmaceutical innovation (i.e., the United States), and instead advocates systems used by countries that have had very little demonstrated success in promoting innovation. Thus, price controls are assumed by the WHO as self-evident self-proof, and despite all evidence to the contrary. Moreover, and as discussed below, the TRIPS approach to “innovation” is also far more concerned with reducing the price of extant drugs than it is with the production of new and more effective drugs.

However, and despite the WHO approach, two points remain clear: (1)the need for new drugs is far from static (given the phenomenon of viral and bacteriological resistance), and (2) improper emphasis upon reducing the price of existing drugs has a determinate (if unwanted) downward reduction effect upon the generation of future drugs. This principle of economics is not surprising, as constituting a special case of the “Heisenberg Uncertainty Principle” of quantum mechanics.[42] More specifically, the WHO “price reduction” approach assumes the existence and the continual creation of innovative drugs, independently of satisfactory fulfillment of the profit motive.[43] Indeed, it may be confidently stated that the diminutions in patent rights and/or the practice of substantial price regulations utilized vis-à-vis new drugs will tend to have a contra-cyclic derogative effect upon innovation for new drugs, whether immediately or as a gradual capital market phenomenon.

VI. How TRIPS and Doha Undermine Innovation.

As we have seen, TRIPS began with the seemingly noble goal of seeking to provide Intellectual Property protection to the inventions of citizens of Member States. Some may argue that the United States was most instrumental in seeking this universalization of patent, trademark and copyright rights, and did so in order to protect the markets of American companies in foreign countries. However, it may also be validly reasoned that the real underlying motive of TRIPS’ goal of “universal IP coverage” was the provision for mandatory licenses, at such times and, at such royalty rates, as a signatory State may choose in its sole discretion. Hence, the IP protections granted under TRIPS may be properly viewed as largely illusory, because they can be easily circumvented or negated -- unilaterally and without review or regulation by any Member State.

VII. The Economic Realities of the Pharmaceutical Market in the United States.

A. The Probable Negative Effects of Mandatory Licensing.

Some proposals have been made in conjunction with TRIPS or otherwise to permit the unilateral over-riding of marketing decisions of innovating drug companies, with the likely result of diminution of gross revenues. These proposals have included mandatory licensing in all countries, for any reason, and at the sole discretion of any Member State. Unless modified and more carefully controlled and/or monitored, this precipitous course of action could result in a substantial decrease in innovation.[44]

Contrary arguments have been raised that drug companies will purportedly continue their present level of investment of capital in new drug research and development, simply because that is “what they do”. While perhaps partially true, this over-simplification could have disastrous consequences for the very persons afflicted with in futuro disease.[45] In particular, there is little doubt that the level of expected investment would decrease, and probably in direct or semi-direct proportion to the reduction in revenue, and thus reduction in profit.[46] An additional question may be raised as to what the innovating drug company would do with its un-invested or “excess” capital. The easiest answer is that eventually there would be no “excess” capital, as capital markets tend to be based upon profitability, and as a result, history teaches that a reduction in earnings causes a direct and nearly immediate reduction in available capital markets.[47] In essence, the price reduction advocates play the dangerous game of heavily mortgaging the drug research and development future for present gain of a temporary price reduction.

Second, the innovative drug companies would tend to “diversify”.[48] In the past, this phenomenon of diversification has given us such things as Lilly owning Eve Arden cosmetics[49], and Bristol-Meyers owning a host of consumer product companies.[50] Suffice it to say that if those whose core business is pharmaceuticals are fleeing the business and/or reducing their presence and/or investment in the pharmaceutical field, there is scant reason to believe that others will magically appear to take up the slack.

B. The Economic Underpinnings of the Innovation Debate.

The basic economic principles at work in the innovation debate over TRIPS and its related international regulatory schemas can be brought into sharp focus by contrasting the economic systems present in Europe and Canada with those present in the United States. Quite simply, the major distinction is that European countries and Canada have price controls.[51]

Canada’s lower drug pricing due to price controls has effectuated recent proposals in Congress that would permit reimportation of American-produced drugs from Canada back into the United States, with the only apparent concern being related to safety. To date, there has been little recognition that: (1) the Canadian market for pharmaceuticals continues to be less than 10% of the American market;[52](2) the American market has been assessed payment of the fixed developmental costs; (3) the Canadian sales thus are commensurately “subsidized” through treatment as incrementally profitable, and (4) any widespread re-importation from Canada would result in subsequent shortages in Canada with proportionate increases in price from supply and demand forces; and (5) hence the Canadian “price advantage” would vanish, if under re-importation the Canadian world-wide market share did not continue to remain relatively insignificant.[53]

The chain of logic is inescapable. But the question remains, what are the market forces that dictate worldwide pricing considerations, and what can be done under TRIPS to render those forces effective to address the problems of contagious diseases in lesser–developed economies?

The ready conclusion is that importation of drugs into a Member State can be carried out, without destroying the necessary profit underpinnings of innovation, if and only if re-importation into the United States or other countries whose pricing structure supports a substantial share of overhead expenses, is prevented.[54]

VIII. What Can Be Done Under TRIPS?

Wholesale dismantling of the TRIPS structure would be unwieldy, unnecessary and largely counter-productive. Much of what is discussed, supra, deals with express or implied reasons for courses of conduct that should not be carried out – if innovation were to continue to flourish. These items include the over-riding provision that (unless total expenses can be decreased) there must be no substantial reduction in gross revenues to the innovator/patentee/ pioneering drug company.

A secondary fundamental principle at play in the international drug scene is that the assignments of “fixed versus variable” overhead, through pricing decisions made by the patent owner, must not be abrogated by re-importation of a drug into a jurisdiction having a greater assignment of fixed overhead. If this pricing parameter were not required, the negative results would be predictable and inevitable. In fact, if the counter productive practice of reimportation were permitted, the simplest mechanism to preserve recovery of expenses would be to increase the price in the “poorer” country (i.e., the non-producing country), inasmuch as any substantial increase in price in the richer (i.e., the “producing country”) would encourage yet more re-importation (or “trans-shipping”).

Additionally, the price could be increased in third-party countries, perhaps together with supply quotas, to prevent wholesale distortion of the pricing structure that may result in prices in a given jurisdiction above the ability of the citizen there to pay the required price. If this were to occur, the drug innovator would again have to increase pricing in the remaining markets to “make up for” the loss in revenue that would have resulted from the “too high” price in the poorer country.[55]

If the overall gross revenues decrease without a corresponding decrease in costs, innovation will inevitably suffer. In the material absence of “corporate charity”, if the pricing structures of the innovator are set to provide substantial revenues from any given country, by definition these prices cannot be maintained beyond the ability of the respective consumers to pay, or the sales levels would decrease, with a corresponding reduction from maximum profitability.

Mandatory licensing need not be economically destructive, but if and only if carried out in a controlled manner. However, there is no free lunch here either – the royalty fees generated by the mandatory licensing scheme must be sufficient to offset the planned-for level of revenue (for cost repayment and for return to the investor) which is being set aside in favor of anticipated revenues from the mandatory licensee. The cost to the consumer may indeed be reduced, but if and only if the total costs to the generic licensee are sufficiently low to generate an adequate profit for a non-innovator/licensee[56] while at the same time paying the necessary royalty to the pioneer innovator who did have such expenses. Such reduced costs may be reflected in geographical concerns, use of local and thus lower cost labor, reduced food and drug and other regulatory expenses in the licensed venue, etc.

Additionally, it would seem to some observers that the current emphasis is upon reducing presently existing crises to the material detriment of providing for the long term, and while ignoring the effect that declared “emergency” measures under TRIPS and Doha may have upon innovation. Accordingly, it would seem beneficial to provide for a review of any invoked “emergency” after a fixed time period, and by an independent body. A further look should also be taken at the concept of immediate “mandatory licensing” (i.e., without first giving the patent holder an opportunity to “work” the patent in the jurisdiction).[57] Due consideration should be given to matters of genuine emergency, and by definition for limited time periods only. However, the patent owner should also be given the opportunity to assist with humanitarian distribution and genuine emergency pricing before patent rights are effectively abrogated, with the resultant damage to subsequent investor confidence and other innovation destroying results.

Importation of drugs into a non-producing State under the most recent Doha understanding should be confined to the territory of the Member State experiencing the public health emergency, lest transshipping of the drugs to more affluent countries cause a material reduction in available revenue to the innovator/patent holder. In particular, declared “emergencies” should be genuine. Moreover, the humanitarian measures taken to ameliorate the suffering of the afflicted citizens should not be used as a profit-generation tool by third-world governments and/or by their “clients”[58], who by definition have not suffered the very substantial developmental costs of innovation.

IX. Conclusion.

The temptation is always present to assume that today’s drugs will be effective to treat disease into the foreseeable future, and perhaps beyond. Unfortunately, the scientific realities are otherwise. Without new pharmaceuticals, many diseases[59] will soon prove to be untreatable. Without the innovation of new drugs, human suffering is certain to increase. Such an unfortunate result is not a necessary occurrence, and will not occur if political or philosophical preferences are not permitted to undermine a sound application of the prevailing economic principles, including the avenues currently available under TRIPS and reasonable modifications thereof.

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[1] J.D. I.P., May 2004, The John Marshall Law School, Chicago, Illinois. Bachelor of Science – Molecular and Cellular Biology, The University of Arizona, Tucson, Arizona; contact z3law@aol.com.

[2] Kofi Annan, Secretary-General, United Nations UN Press Release SG/2070/AIDS/4, April 5, 2001.

[3] The Treaty for Trade-Related Aspects of Intellectual Property Rights.

[4] In November of 2001, a Declaration of the Fourth Ministerial Conference was held in Doha, Qatar. The conference dealt with issues providing a mandate for negotiations and the implementation of present pre-existing agreements.

The conference held: that “the TRIPS Council has to find a solution to the problems countries may face in making use of compulsory licensing if they have too little or no pharmaceutical manufacturing capacity, reporting to the General Council on this by the end of 2002. The declaration also extends the deadline for least-developed countries to apply provisions on pharmaceutical patents until 1 January 2016.” The Doha Declaration Explained, Doha Development Agenda. Available at: URL: <http://www.wto.org/english/tratop_e/dda_e/dohaexplained_e.htm#trips>

[5] Some examples of contagious diseases are HIV, pulmonary tuberculosis, hepatitis, schistosomiasis and SARS.

[6] Some common examples of bacteria that are involved with contagious disease are Pasteurella Multocida, Strongyloides Stercoralis, Coccidioides Immites and Bartonella Henselae.

[7] Some common examples of flesh eating bacteria are Clostridium Tertium and Clostridium. Perfringens, Clostridium. Septicum, and Clostridium Sordellii. Clostridium Tertium in Necrotizing Fasciitis and Gangrene. Emerg Infect Dis [serial online] 2003 Oct 15. Available at: URL: http://www.cdc.gov/ncidod/EID/vol9no10/03-0287.htm.

[8] Some examples of diseases caused by viral and/or viral-related elements HIV/AIDS, Meningitis, Yellow fever and SARS. Bruce Alberts, Dennis Bray, Alexander Johnson, Julian Lewis, Martin Raff, Keith Roberts & Peter Walter, Essential Cell Biology vol. 1, 298-301 (1d ed., Garland 1998).

[9] John S. James, "L-Drug" Resistance Problem; Merck Stops Single-Agent Trial, AIDS TREATMENT NEWS #139, (Nov. 22, 1991).

[10] Baxter JD and others. Final results of CPCRA 046: a pilot study of antiretroviral management based on plasma genotypic antiretroviral resistance testing (GART) in patients failing antiretroviral therapy. Antiviral Therapy 1999;4(suppl 1):43. Abstract and poster presentation 61 and 3rd International Workshop on HIV Drug Resistance and Treatment Strategies June 23-26, 1999; San Diego, California.

[11] Harvey S. Bartnof MD, Updated HIV Drug Resistance Testing Guidelines Published by International AIDS Society-USA (Part I) < http://www.aidsmeds.com/news/v05120002.html> (accessed April 18, 2004).

[12] Id.

[13] But, neither is a sufficient condition.

[14] See Agreement on Trade Related Aspects of Intellectual Property Rights (April 15, 1994).

[15] Id.

[16] See Doha Press Pack. Negotiations, Implementation and TRIPS Council Work 24 (2001).

[17] Id.

[18] Decision Removes Final Patent Obstacle to Cheap Drug Imports, WTO News: Press/350/Rev. 1 (Aug. 30, 2003).

[19] World Trade Organiztion.

[20] See supra note 9.

[21] Agreement on Trade Related Aspects of Intellectual Property Rights § 7 (Apr. 15, 1994).

[22] Twenty years after filing an application.

[23] GATT was the predecessor of the WTO. General Agreement on Tariffs and Trade.

[24] This also included the promotion of innovation, including reverse engineering in semi-conductors and software.

[25] Statement by the Representatives of the World Health Organization, WTO Council for TRIPS (Sept. 17, 2002) available at < http://www.who.int/mediacentre/trips/en/> (last accessed Apr. 18, 2004).

[26] Intellectual Property Rights, Innovation and Public Health, WHO World Health Organization (2003) available at < http://www.who.int/gb/EB_WHA/PDF/WHA56/ea5617.pdf>.

[27] Id.

[28] Id.

[29] Id.

[30] Kenneth Kaitin, The Role of the Research-Based Pharmaceutical Industry in Medical Progress in the United States, 33 J. CLINICAL PHARMACOLOGY 412, 413-5 (1993)

[31] Wrong. The patent right is the right to exclude others.

[32] Which never before existed.

[33] This would be entirely inadequate to attract the necessary capital for future development.

[34] More than what?

[35] Of not having the innovative drug at all?

[36] As compared to what?

[37] In whose Opinion.

[38] Is this an increase (a) over a price that never before existed (b) for a drug that never before existed?

[39] See The Secretariat, Intellectual Property Rights, Innovation and Public Helath, Fifty-Sixth Wordl Assembly A56/17 Provisional agenda item 14.9 (May 12, 2003); See supra note 21; cited in Scherer, FM and Watal, J. Post-TRIPS options dor access to patented medicines in developing countries. Commission on Macroeconomics and Health Working Paper Series, Paper No. WG4 (June 1 2001).

[40] Id. for Intellectual Property Rights.

[41] Id. for Intellectual Property Rights; See supra note 21.

[42] The Heisenberg Uncertainty Principle of quantum mechanics states that no part of a discrete system may be measured, regulated or touched without simultaneously and necessarily changing another part of the system, if not the entirety of the system. Davids Halliday, Robert Resnick & Jearl Walker, Fundamentals of Physics, 997, 1033-1034 (5d ed., Wiley 1997).

[43] Which in itself is a purely subjective evaluation, but one that is made by the capital investor, and not the WHO, or other economic theorists.

[44] See Gerald Mossinghoff, Progress in the Pharmaceutical Industry, INTRO TO INTELL. PROP. RTS. (“Strong patent protection for pharmaceuticals by providing economic incentives for innovation. Without international respect for pharmaceutical patents, medical innovation would suffer.”) Pharmaceutical companies typically spend over $500 million to develop one new medicine. Id.

[45] And whose interests the advocates of mandatory licensing purport to represent.

[46] See Alan Fisch, Compulsory Licensing of Pharmaceutical Patents: An Unreasonable Solution to an Unfortunate Problem, 34 JURIMETRICS J. 295, 303 (1994) (Stating only one out of 4,000 compunds that are discovered become marketable products).

[47] Other less obvious results also occur. For example, quality executive personnel tend to migrate to companies that have increasing share prices, such that the stock options frequently offered as an inducement will not be “under water” (i.e., will have a higher and thus profit point price on the exercise date).

[48] Which in this context means to put their capital into non-pharmaceutical endeavors.

[49] See < http://www.lilly.com/> (Last visited April 18, 2004).

[50] See <http://www.bms.com/alliances/data/> (Last visited April 18, 2004).

[51] During the 1960s, French and American pharmaceutical companies produced 92 and 93 new drugs respectively. German firms were about one-half, and U.K. companies were about one-quarter of this amount. In 1990-94, American firms produced 85 new drugs and French companies produced 14new drugs. Available at: <http://www.indianpatents.org.in/fac/aug01.pdf> (Last visited April 18, 2004).

[52] Andrei Sulzenko, Economics of North American Integration: A Canadian Perspective. Available at: <http://policyresearch.gc.ca/page.asp?pagenm=v6n3_art_08> (Last accessed April 18, 2003).

[53] Fundamental accounting principles prevail in the pharmaceutical industry as elsewhere. In particular, in the basic equation of sales price minus cast equals gross profit, the costs may be fixed or variable. The R &D costs (a substantial amount of all costs), the manufacturing facility “plant costs”, etc. are fixed costs. Variable costs would typically include items such as raw materials, direct labor, etc. Additionally, the repayment of fixed costs may be assessed against sales earlier in time, or in a separate market in terms of assessing profitability, with the fundamental point being that once the fixed costs are recovered, the incremental profit increases. Accordingly, if the higher price paid by the United States market includes the majority of the fixed costs, the Canadian market and/or the South African market need not be “assessed” the same level of cost as the American consumer.

Some, in Congress may argue that this is fair and that there must be a mechanism to reduce costs to the American consumer. There is such a mechanism, and in particular to increase the price to those in Canada and in less developed countries. But there is not presently any structure available that would not necessitate the recovery of the R&D funds expended on the 4,999 “dry wells”, the 2 out 3 drugs that do not make a profit and the $800 million to $1 billion necessary to bring a major drug to the world stage.

See Donald W. Light, University of Medicine & Dentistry of New Jersey ,Will Lower Drug Prices Jeopardize Drug Research? A Policy Fact Sheet,Joel Lexchin, School of Health Policy and Management, York University, Toronto, Ontario, Canada. Available at:< http://bioethics.net/journal/infocus.php?vol=4&issue=1&articleID=136>

[54] At the present, only one in 5,000 drug candidates is successful in being demonstrated to be sufficiently safe and effective to meet FDA scrutiny. Additionally, only one in 3 drugs that do make it to the market place produces sufficient revenue to make a profit. The Drug Development Process, Available at: <http://www.biotechanalytics.com/Topics/The%20Drug_Development_Process.htm>.

[55] Specifically, drugs are not free from economic laws, and the factor of price elasticity.

[56] i.e., one who has not been required to pay the very substantial costs associated with pioneer drug R & D operations.

[57] See U.S. v. Nat. Lead Co. Et. Al. 332 U.S. 319 (1947); Amchem Products v. GAF. Corp. 594 F.2d 470 (Fed. Cir. 1979); Charles Pfizer & Co. v. Federal Trade Commission, 401 F.2d 574 (6th Cir. 1968), cert. denied, 394 U.S. 920 (1969).

[58] i.e., copyists in the form of generic drug companies having close governmental ties.

[59] One example is AIDS (AIDS is caused by the rapidly mutating HIV virus).

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