Statement of James Love Director Consumer Project on Technology Before the Subcommittee on Criminal Justice,Human Resources and Drug Policy, Committee on Government Reform on What is the United States' Role in Combating the Global HIV/AIDS Epidemic?" July 22, 1999 1. Introduction My name is James Love. I am the Director of the Consumer Project on Technology (CPT). I have been involved in a number of disputes involving health care, intellectual property and trade policy, beginning in 1994. Extensive information about these disputes is on the internet at http://www.cptech.org/ip/health. Today's hearing marks the first time the US Congress has invited the public health community to comment on US government policies on foreign trade and the protection of the public health. This inquiry is important for everyone, but particularly for the majority of the world's population that is too poor to afford access to essential medicines. The topic for the hearing is the US government's role in "combating the global HIV/AIDS epidemic." I will address a negative role that the US government has undertaken -- preventing poor countries from using policies like compulsory licensing and parallel imports to obtain less expensive essential medicines, with a particular emphasis on the current trade dispute with South Africa. I will also discuss proposals that the US government permit the World Health Organization (WHO) to use US government rights in patents invented with taxpayer funds. 2. Millions of People will die without access to essential medicines It is a horrific fact that in several Southern African countries 20 to 25 percent of the young adults are already infected with HIV/AIDS. The US Surgeon General recently estimated the current number of infected persons in Sub Saharan Africa at more than 22 million. These people will die without access to essential medicines. Indeed, these people are dying now because they do not have access to essential drugs. An estimated 1,400 persons per week in Zambia. 2,400 persons per week in Zimbabwe. The infection rates in South Africa are stunning. At the University of Durban-Westville in the Kawzula-Natal, South Africa, 25 percent of the student body recently tested positive for HIV. An estimated 45 percent of the South African military is HIV positive. A quarter to a fifth of the pregnant women in South Africa are testing positive for HIV/AIDS. There are also 6.7 million infected persons in South and Southern Asia, and 1.4 million infected persons in Latin America. 3. Poor countries cannot afford high drug prices The ability of any country to treat HIV/AIDS patients is related to the level of the country's income and the rate of infection. Table 1 provides data on the amount of national income for each person living with HIV/AIDS, as measured by 1997 Gross Domestic Product (GDP). This is a useful measure of a country's ability to pay for HIV/AIDS drugs. In 1997, Japan had an income of more than $616 million for every person living with HIV/AIDS. For the UK, France and the US, the figure were $51 million, $12 million and $9.6 million. These countries can afford to pay even very high prices for medicines needed to treat HIV/AIDS. The countries in Group 2 are much poorer, and have much higher infection rates. Thailand has GDP of $197 thousand per infected person, about 2 percent of the US income per infected person. South Africa has $45 thousand in national income per infected person, or less than one half of one per cent of US income per infected person. Zambia has $5 thousand in national income per infected person. Zambia could not afford a typical multidrug therapy for its population, even if it spent its entire national income on HIV/AIDS drugs. Table 1 National Income per person living with HIV/AIDS Group 1 Japan $ 616,210,735 UK $ 51,459,520 France $ 12,659,100 USA $ 9,553,702 Group 2 Thailand $ 197,319 India $ 93,065 South Africa $ 44,515 Botswana $ 26,684 Uganda $ 7,077 Zambia $ 5,019 Mozambique $ 2,294 Drug companies are quick to point out that drug prices are not the only barrier for HIV/AIDS patients. Certain treatment regimes require significant medical infrastructure, including laboratory tests and access to trained medical personal. However, other treatment regimes may be more appropriate, even with very modest medical services. In any event, HIV/AIDS patients will die without access to drugs. Indeed, most of the 30 million HIV/AIDS patients in poor countries will die, precisely because they cannot afford drugs or health care services. 4. US Trade Policy In the face of this human tragedy, the US government is carrying out a global battle to keep drug prices high. The US government has organized a cross agency team that is largely directed by the global pharmaceutical industry to monitor and influence legislation in virtually every country on earth. The scope of this campaign is enormous. The US government insists on having the opportunity to review and comment on regulations or legislation involving the pharmaceutical industry by any foreign government. As part of this campaign, the US government actively opposes the use of compulsory licensing and parallel imports, two important mechanisms that countries use to obtain less expensive drugs. The US government also opposes a number of other policies that would broaden the public's access to essential medicines. When the World Trade Organization (WTO) was created, member countries approved an agreement on Trade Related Aspects of International Property, known as TRIPS. The TRIPS accord sets out minimum international standards for patents, copyrights and trademarks. The TRIPS accord has specific provisions on both compulsory licenses and parallel imports. Compulsory licensing is when the government permits a third party to manufacture a product without the permission of a patent owner. This is permitted in the TRIPS agreement, as long as a country abides by the "safeguards" in Article 31 of the TRIPS. One safeguard is Article 31(h), which requires adequate compensation to patent owners, typically as a royalty of sales revenue. Compulsory licensing, combined with good procurement practices, can reduce prices of some drugs by 30 to 95 percent. Most governments already have some authority to issue compulsory licensing of patents, and the US government is no exception. Indeed, the US government can issue compulsory licensing under the Clean Air Act (42 USC 7608), for nuclear power (42 USC 2183), for public health purposes under the Bayh- Dole Act (35 USC 203), for government use (28 USC 1498) and as a remedy for anticompetitive practices under US antitrust laws. Parallel importing of medicines occurs when someone other than the authorized distributor is permitted to import a product, usually because of differences in national prices. For example, identical versions of Claritin sell for $61 in Canada and $218 in the US. Drugs prices vary significantly across markets, depending upon local market conditions, often without regarding to country incomes. Parallel importing is permitted under Article 6 of the TRIPS, under the principle of the "exhaustion of rights," also referred to as the "first sale" doctrine. Parallel imports of pharmaceutical drugs are common in several European countries. 5. The Dispute over the South Africa Medicines Act The current dispute over the South African Medicines Act provides a useful and important illustration of US government policy. In 1997 the South African Government (SAG) proposed sweeping changes in its Medicines Act that were designed to curb unethical marketing practices of pharmaceutical companies, promote the practice of prescribing drugs by generic names, and legalize parallel imports of pharmaceuticals. The South Africa government correctly perceived that it could economize on drug purchases if it purchased drugs in more competitive national markets. The large pharmaceutical companies opposed parallel imports, preferring a world where companies charge different prices in each national market. In an effort to convince the South African government that parallel imports were a bad idea, the drug companies made a number of sweeping, vague and misleading assertions that parallel imports violate patent rights. Ironically, when the South African government couldn't find anything in its patent laws that appeared to address this issue, it decided to add language, as insurance, that stated: "notwithstanding anything to the contrary contained in the Patents Act" the Minister of Health can "prescribe conditions for the supply of more affordable medicines." These provisions were included in Section 15C of the South African Medicines Act. The legislation thus came to authorize both parallel imports and compulsory licensing. As South Africa began to more fully appreciate the desperate circumstances of its AIDS patients, support for compulsory licensing began grow in that country. The drug companies turned to the United States government, a usually dependable ally on these issues, for help. The US government launched what is now a two year effort to seek the repeal or modification of Section 15C of the South African Medicines Act. Pressuring South Africa on behalf of the drug companies has been a decidedly bipartisan undertaking. The Administration lobbying efforts were coordinated by Vice President Gore, as US Chair of the US/South Africa Binational Commission (BNC). Special task forces were organized on the South Africa issue, and the Vice President frequently raised the patent issues directly with South Africa officials, including (now) President Thabo Mbeki. There was also pressure from both parties in Congress to put push on South Africa on these issues. I am including as Appendix B, a 13 page time-line of key events in the South Africa dispute. Some of these events were reported in a February 5, 1999 US Department of State to Congress, and others are based upon FOIA requests to various federal agencies and our own research. The Vice President's office has recently suggested that Al Gore was a moderating voice in the Administration's dealings with South Africa, and when compared to some administration officials, this may be true. However it is inaccurate to portray the Vice President as an innocent bystander who has been unfairly tared by this controversy, or to suggest there were no earlier efforts to address these issues. I personally have been involved in efforts to change US policy on the South Africa trade dispute since 1997, and much of this effort has been directed at the Vice President's office. On July 29, 1997, about two years ago, Ralph Nader, Robert Weisman and I wrote the Vice President to object to pressures being put on South Africa over parallel imports, the promotion of generic drug prescriptions and the marketing approval of a generic form of Taxol (Paclitaxel), an unpatented US government funded cancer invention sold in the US by Bristol-Myers Squibb. We said: The United States has a stake in sound public health policies, not only in the United States, but throughout the world. The widespread availability of pharmaceuticals and other health care inventions will be increasingly important as the United States seeks to combat infectious diseases and promote development and economic growth. The international rules for intellectual property in the health care sector are extremely important, and will bind policy makers in the United States and elsewhere. These rules are simply too important to be left up to the imagination of the pharmaceutical and biotechnology industry. A balanced dialogue must include stakeholders who represent consumers and public health officials. We asked for meeting with US officials who were working on the South Africa dispute. No one from the Vice President's office or any other federal agency ever responded to our letter. In October 6, 1997, CPT provided detailed comments on the South African Medicines Act to the South African Portfolio Committee on Health. These comments, which were highly critical of the US government's position in the trade dispute, were also distributed to US trade officials. Then on a periodic basis, we had interactions with various Administration staff on this dispute, including discussions with persons from State, Commerce, USPTO, US FDA, USTR, DHHS and the Vice President's own staff. In early 1998, the World Health Assembly (WHA) nearly exploded over a controversial "Revised Drug Strategy" resolution, that called on counties to make public health considerations paramount in trade disputes. South Africa became the most important supporter of the resolution, and the US government was initially the most important and bitter opponent. The US government eventually supported the resolution, but remained bitter at South Africa for its role in pushing for wording that was opposed by US drug companies. On February 18, 1999, the US Department of State held a briefing on the global HIV crisis, but refused to permit any discussion about US trade pressures on South Africa or Thailand on compulsory licensing of AIDS drugs. On March 26, 1999, more than sixty non-government organizations and dozens of governments and international organizations met in Geneva for a meeting on compulsory licensing and access to AIDS and other essential medicines. The US government's role in pressuring South Africa, Thailand and other countries on behalf of the drug companies was addressed often during the meetings, and reported widely in the European press. On April 8, 1998, Ralph Nader and I again wrote the Vice President on the subject of the South Africa dispute, pointing out that every request for consultation by the public health community had been rebuffed. We once again asked for a reversal of US policy, and we complained bitterly about the Administration's frequent public assertions that the South African initiatives were not permitted under the WTO TRIPS accord, while the US refused to bring its concerns to the WTO under the WTO dispute resolution framework. Three weeks later the Administration announced yet another round of trade pressures on South Africa. On April 30, 1999 USTR announced a special "out-of-cycle review" of South Africa's intellectual property policies, that would be completed in September 1999. (one of three announced out-of-cycle reviews that involved pharmaceutical drugs). In addition to the earlier US government complaints about compulsory licensing, parallel imports and the regulatory approval of Taxol, the US government identified this "barrier to trade:" During the past year, South African representatives have led a faction of nations in the World Health Organization (WHO) in calling for a reduction in the level of protection provided for pharmaceuticals in TRIPS. By elevating the act of speaking up at the World Health Assembly to a barrier to trade, USTR was sending a signal to every developing country that it would punish even the expression of dissent on US trade polices. The South African Minister of Health subsequently removed herself from a WHO Ministers discussion of policies to fight the global AIDS battle, an action welcomed by US officials. The April 30, 1999 USTR action electrified the public health community. On May 14, 1999, a public letter to the Vice President was circulated, and now contains hundreds of signatures from public health groups around the world. The letter said "It is shocking that the US government is adopting such an aggressive trade policy on behalf of US pharmaceutical companies, when all of sub-Saharan Africa is confronted with a public health crisis of historical dimensions." On June 7, a subcommittee of the Presidential Advisory Commission on HIV/AIDS held a public meeting in Washington, DC on US trade policy and compulsory licensing and parallel imports. No Administration official would accept an invitation to explain US policy. During this period, public health groups began to add a new issue to the debate. Under US technology transfer laws, the US government retains broad "public use" rights on government funded inventions, including many important AIDS drugs, such as ddI, d4T, 3TC or Ritonavir, as well as other essential medicines. The relevant statutes and regulations are 35 USC 202 (c)(4) and 37 CFR 404.7. According to these provisions, the US government retains the rights to: practice and have practiced the invention on behalf of the United States and on behalf of any foreign government or international organization pursuant to any existing or future treaty or agreement with the United States. Public health groups have asked the Vice President and other Administration officials to support efforts to give the World Health Organization the right to practice these inventions in poor countries. The US government so far has declined to do so. It is important to recognize that US policy toward South Africa is in fact, consistent with hundreds of US government actions over several years. I am attaching as appendices comments from various USTR reports on pharmaceutical policies the US government opposes in Thailand, Israel and New Zealand. In Thailand the US government was opposed to compulsory licensing, parallel imports, prices controls, and government attempts to collect economic information about drug prices and development costs. These were all considered barriers to trade. In Israel, the US government opposed parallel imports, compulsory licensing and the Israel adoption of a so called "bolar" provision, modeled after US law, to permit speeder introduction of generic drugs following patent expiration. In New Zealand, the US government declared that New Zealand's "use of reference pricing, the practice of doing trade-off deals between classes of drugs . . . can negatively affect a company's revenue return on its intellectual property." In the New Zealand case, USTR is claiming that using competition to negotiate good prices is a barrier to US trade. On June 16, 1999, the entire political environment changed when a small band of AIDS activist interrupted the Vice President's announcement that he was running for President. After the AIDS activists disrupted several campaign events, and this was reported in the news, the Vice President began to send some signals that US policy might change. The most important such signal was Vice President Gore's June 25, 1999 Letter to James E. Clyburn, the Chair of the Congressional Black Caucus, where the Vice President said: I want you to know from the start that I support South Africa's efforts to enhance health care for its people including efforts to engage in compulsory licensing and parallel importing of pharmaceuticals -- so long as they are done in a way consistent with international agreements. This letter was seen by CPT as a remarkable and welcome turn around on this issue. However, our enthusiasm was tempered by uncertainly over the phrase "so long as they are done in a way consistent with international agreements." On its face, the statement was fine, because no one was objecting to the WTO/TRIPS Article 31 safeguards for compulsory licensing, and parallel imports are freely permitted under the TRIPS. The problem was the longstanding practice of US government trade officials to make up far fetched and tenuous theories why the South African Act might violate the TRIPS. The US government was never willing to test these theories before a WTO tribunal, because it would lose. CPT then wrote the James Clyburn on June 29, 1999, asking that the Vice President clarify his June 25, 1999 statement, and tell us what it really means. What does the Vice President think the TRIPS accord actually says about parallel imports or compulsory licensing? Is this a trick to fool the AIDS activists and the Black Caucus, or is this a change in policy? 6. A note on Research and Development Incentives Providing incentives for research and development is important. However, many measures that broaden access to drugs do not have a quantitatively significant negative impact on R&D incentives. For example, by some reports, Africa is about 1.4 percent of the global market for pharmaceuticals. As Professor Richard Laing points out, for most drugs, and in particular for high priced drugs, Africa just isn't a material consideration for R&D efforts. And, for high priced drugs with no significant domestic sales, compulsory licensing is just as likely to increase company revenues, in that market. What companies are concerned about is the embarrassment of seeing a drug like Fluconazole selling for $23.50 in Italy but only $.95 in India. What drug companies say is that they are concerned that cheap prices for drugs in Thailand might undermine the willingness of governments or insurance companies to pay high prices in the US or European market. It is in this sense, a public relations issue. But how many millions should literally die of this embarrassment? Moreover, there are a large number of important drugs that were developed with substantial taxpayer subsidies, including many current AIDS drugs. It makes little economic sense to make these drugs artificially expensive, after the public has already paid for much of the development costs. Compulsory licensing is ultimately a compromise on the issue of R&D. Patents are recognized and patent owners are paid, giving rise to incentives for R&D. But the amount of the incentive is limited by the government, in order to ensure that the public health needs are met. This is a sound policy, and extremely important, given the rising death toll in Africa and elsewhere for AIDS.