Harsh Medicine: Thai Showdown Spotlights Threat to Drug Patents

Abbott Protests Move To Buy Copycat Pills, But It Yields on Price

JAMES HOOKWAY and NICHOLAS ZAMISKA
Wall Street Journal
April 24, 2007

BANGKOK, Thailand -- This January, the Thai government sent the kind of letter that every global pharmaceutical company dreads to receive.

"Dear patent holder," read the letter to *Abbott Laboratories*, maker of the AIDS drug Kaletra. "As protected by its patent and monopolized by your company, Kaletra is very costly." Therefore, the letter went on, Thailand was preparing to break Abbott's patent so it could import or produce cheaper copies of the drug.

Since then, Abbott has been locked in a tug-of-war with Thailand that underscores how developing countries have become a battleground over patent rights.

Abbott brought on a storm of bad publicity by revoking plans to bring new drugs to Thailand, including its latest version of Kaletra. Activists called that the "nuclear option" and said it was unprecedented for a drug company to withhold medicines from a country over a commercial dispute.

Now Abbott is partly backing down. The company said over the weekend it is willing to sell the new version of Kaletra in Thailand at a deeply discounted price that it offers some other countries, so long as the government respects its patent. It's unclear whether the Thai government will accept the offer.

Global drug makers are increasingly looking to emerging markets to compensate for slowing growth in the U.S., Europe and Japan. Abbott's troubles in Thailand suggest that cracking the new markets can be tough because governments are driving a hard bargain on price. They are using the threat of breaking patents to get good deals. Thailand has won the support of nonprofit groups and world organizations while meeting little resistance from the U.S. government.

"We've been talking with the drug companies for four years about reducing the price of treatment, but with no result," says Thailand's health minister, Mongkol na Songkhla. "Now we have no choice." Thailand has already brought in its first shipment of copies of efavirenz, a Merck & Co. AIDS drug whose patent it broke.

Abbott and other drug makers argue that without protection for their intellectual property, drug makers have no incentive to develop lifesaving medicines in the first place. Teera Chakajnarodom, who represents the multinational drug industry's trade group in Bangkok, calls Thailand's move "very shortsighted."

Some pharmaceutical executives question Thailand's real motives, suggesting the government's military-installed government, which took power in a coup last year, is using populist rhetoric and policies to curry favor with the Thai people. Dr. Mongkol says that, as a physician, it's his duty to look after patients' needs. He adds, "I'm not a thief."

A number of emerging nations are working on plans to slash drug costs. Lawmakers in the Philippines are debating legislation that would permit breaking patents in certain circumstances and allow the country to use more generic drugs to fight AIDS and potential pandemics. Kenya is considering breaking patents as Dr. Mongkol has done to open the door to cheaper copies.

In an interview last week, Indonesia's U.S.-educated trade minister, Mari Elka Pangestu, said her country might introduce price caps to bring the price of branded drugs closer to the level of generic equivalents. "The difference in price between nongenerics and generics is perceived to be too high," Ms. Pangestu said.

Such moves could threaten the ambitions of drug companies in developing nations -- especially those such as Thailand that are growing wealthier. While the U.S., Europe and Japan account for the vast majority of sales at big Western drug makers, their growth is slowing. The U.S. this year will contribute about 36% of total growth in pharmaceutical sales, down from 54% five years ago, according to a forecast by IMS Health, a research and consulting firm.

Merck has said that it expects revenue in key emerging markets, including China, India and Eastern Europe, to reach $2 billion by 2010, double the 2005 level. Abbott's sales in the U.S. dropped 7.5% in 2006 to $11.5 billion, but it made up for that with 10.9% growth in international sales to $10.9 billion.

Supachai Suwannasit is typical of the patient these companies would like to attract. He is a 46-year-old administrator at a Bangkok media firm. To treat his chronic back pain, Mr. Supachai first used cheap generic drugs, which were covered by his limited insurance policy. Then he opted to spend more of his own money for brand-name drugs made by Western companies. "The brand-name drugs were much more effective in relieving the pain. It was worth paying more to use them," says Mr. Supachai.

Thailand began inching toward its confrontation with the pharmaceutical industry in 2004, when it pledged to provide free AIDS medicine to everyone who needed it. At the time Thailand was beginning to introduce a government-funded health-care system to provide basic care for all citizens, along the lines of universal health-care systems in Europe and other developed regions.

With a half-million Thais infected with HIV, the drugs loomed as a major cost. Dr. Mongkol, then a senior bureaucrat in Thailand's health ministry, discussed the issue with AIDS activist Wirat Purahong, a former sugar-cane cutter who nearly died of AIDS six years ago before he was placed on a government short list of people who could be treated. Mr. Wirat argued that breaking patents was the only way to bring down prices.

Over time, that view gained a friendly hearing. Last year, the World Bank told Thailand it would have to consider breaking patents if it was serious about including AIDS treatment in its new health program. The United Nations' AIDS agency also sent a letter of support.

When the military took power in September, exiling pro-business Prime Minister Thaksin Shinawatra, Dr. Mongkol was appointed Thailand's new health minister. He quickly seized his chance to push for cheaper AIDS drugs. In November, his deputies began sending out letters to foreign patent holders.

The letters said Thailand was planning to create what is called a compulsory license -- compelling the patent holder to license its patent to the Thai government. The move amounts to a seizing of patent rights. Once the government holds the license, it is free to import copies of the patented product or make the product itself. The Thai government has a drug-manufacturing arm that is capable of copying foreign drugs, although it typically turns first to generic-drug makers in places like India.

Thailand says it is obeying the rules of the World Trade Organization, which allows compulsory licenses in a national emergency or cases where the member country needs the drug for noncommercial use. Critics of Thailand say the loophole was designed only for extreme cases, such as a country that faces pandemic flu and needs to produce vast quantities of a patented antiflu drug.

The first letter went to *Merck* on Nov. 29, informing the company that Thailand was planning to import a generic version of its AIDS drug efavirenz. The drug is sold in the U.S. by Bristol-Myers Squibb Co. under the brand name Sustiva. Merck protested, but then dropped its price. In February it announced it was reducing the price of efavirenz by 14.5% in poor countries and in some wealthier countries, including Thailand, that have especially severe AIDS problems.

Merck says that at the current price, 65 cents a day per patient, it makes no profit. It says it is committed to reaching a negotiated agreement with the Thai government.

Nonetheless, Thailand pushed ahead with imports of generic efavirenz. The government recently received 66,000 bottles of a copycat version of efavirenz made by India's Ranbaxy Laboratories Ltd. It paid less than half the price of the brand-name drug prior to the price cut.

Two months after the Merck letter, it was Abbott's turn to receive a compulsory-license notice, this time about Kaletra. Abbott was supposed to meet with Thai health ministry officials on Monday, Jan. 29, to discuss price reductions for Kaletra, but one of Dr. Mongkol's assistants called a few hours before to cancel the meeting. The minister had made his decision clear in a letter to Abbott the previous Friday, so there was nothing to discuss.

Abbott was hoping it could still reach a deal on price that would preserve its patent. It had faced a similar battle in Brazil in 2005 over Kaletra that ended when Abbott agreed to reduce the price by 46%. Brazil withdrew its threat to revoke the patent.

In the summer of 2006, Abbott cut the yearly price of Kaletra in some countries, including Thailand, to $2,200, and it says it was prepared to make further reductions. The drug costs about $7,000 a year in the U.S. Senior Abbott executives flew to Bangkok and met Feb. 8 with a Thai team led by Suwit Wibulpolprasert, special adviser to Dr. Mongkol.

According to Jennifer Smoter, an Abbott spokeswoman, Dr. Suwit told the company that "regardless of wherever you price this drug, we will continue the compulsory license." Abbott criticizes this stance, saying it shows Thailand's contempt for patents and unwillingness to negotiate.

"Some would like to make this an HIV issue, but the fact is, it's not," Miles White, Abbott's chief executive, said Sunday in an interview. "It's clear that this continues to be about compulsory licensing and the potential for its abuse."

Thai officials, while not commenting directly on the recent discussions with Abbott, say they tried to get the company's attention for years and the best way to ensure low prices now is to move ahead with breaking the patent. Dr. Suwit says it's risky to commit to a fixed-price deal with drug companies because what looks like a good buy now may become less so if the cost of the drug in generic form goes down.

The U.S. government has mostly stayed on the sidelines during the dispute. In a January letter to a congressman who had expressed concern about the efavirenz move, U.S. Trade Representative Susan Schwab said Washington isn't accusing Thailand of breaking world-trade rules and has "taken care to respect fully the Thai government's ability to issue compulsory licenses" in accordance with WTO obligations.

On Feb. 12, Dr. Mongkol held a news conference in Bangkok and told reporters that Thailand was considering breaking patents on 11 other drugs, including treatments for AIDS, infections, cancer and heart problems. Abbott executives in Chicago heard about the news conference from an article in an English-language Thai newspaper the following day.

Thai officials quickly backed away, saying that while they reserved the right to break patents, they didn't have any immediate plans to do so broadly. Abbott took the newspaper report at face value. "This told us that price doesn't matter, that this is about busting the patent system," says Mr. White.

Abbott decided to strike back. It was in the midst of seeking approval for seven drugs at Thailand's Food and Drug Administration, but it pulled all seven applications. They included drugs for arthritis, high blood pressure and other conditions. One of the applications was for Aluvia, a new version of Kaletra. The active ingredients in the two drugs are identical, but Aluvia is formulated so that it doesn't need to be refrigerated. That's a big advantage in Thailand and other developing countries where many people don't own a refrigerator.

Doctors Without Borders and other activist groups let loose on Abbott, calling its strategy callous. Paul Cawthorne, Doctors Without Borders' representative in Bangkok, says: "I think Abbott got some very bad advice from their PR people."

Together with Mr. Wirat and his group, Doctors Without Borders has been organizing a consumer boycott of Abbott's existing products in Thailand. In the U.S., a handful of Abbott investors in faith-based investment groups also criticized management's decision, saying it could damage the company's reputation and hurt business prospects in developing countries.

On April 10, Abbott showed signs that it was preparing to back down, at least partially. After talks with the World Health Organization, Abbott said it was willing to sell Kaletra to several developing countries, including Thailand, for $1,000 so long as they kept its patent intact.

Dr. Mongkol and Mr. Wirat were unimpressed. At that point, Abbott was still refusing to reinstate its application in Thailand to sell Aluvia, the heat-resistant version of Kaletra. "It's just a business tactic to make them look better," Mr. Wirat complained in an interview at the time.

Under Abbott's most recent concession, it has offered to reinstate its Aluvia application and, when approved, sell the drug for $1,000 a year in Thailand if its patent is respected. However, Abbott continues to hold back the other six applications. "We are willing to have discussions to come to a solution, but we have not backed down on" protecting intellectual property, says Melissa Brotz, a spokeswoman for the company.

The matter remains unresolved. If Thailand were to accept Abbott's offer, it would have to undo the compulsory license, which it has shown no signs of being willing to do.

Cipla Ltd. of India makes a copycat version of Kaletra and is working on a copy of Aluvia. "Let the multinationals go," says Yusuf Hamied, Cipla's chairman. "We will supply whatever drugs the Thai or other governments may want."