This memo explains the negative consequences for European consumers that are associated with the decision to "opt-out" of the WTO provision for the import of generic medicines that are manufactured under a compulsory license.

In November 2001, the WTO approved the Doha Declaration on TRIPS and Public Health, which called upon member countries to implement intellectual property rules in a manner that promotes access to medicine for all, including TRIPS flexibilities such as compulsory licensing of patents.

Paragraph 6 of the Doha Declaration on TRIPS called upon the WTO to find a solution to the problems facing countries that lacked the domestic capacity to manufacture medicines, and thus benefit from compulsory licensing of patents. The issue is confusing to many, because the concern is for the country that needs to obtain imports of generic medicines, but the problem concerns the WTO rules for exporting medicines. Specifically, under TRIPS, normally a compulsory license must be used predominately for the domestic market. This has the practical effect of limiting exports from countries that have efficient producers of generics to countries that do not.

This deliberate effort to impose inefficiency is seen as a measure that limits the usefulness for compulsory licenses in general, but the impact is particularly harsh for countries with small domestic markets, since they will lack the domestic economies of scale to have efficient manufacture of products.

Interestingly, this issue was addressed earlier in an often-overlooked WTO case on the export of medicines using Article 30 of the TRIPS, as a limited exception. In a case brought against Canada by the European Union, the EU sought to prevent Canada from exporting small quantities of medicines to foreign countries to register generic products before the patent expired in Canada. The EU contested three parts of the Canadian "early working" exception: (1) Could Canada authorize early working for purposes for the testing associated with the registration of pharmaceutical products in Canada, (2) could it use the early working provision to also export pharmaceutical products in order to register generics in foreign markets, and (3) could it stockpile commercial quantities for the Canadian market. Canada won points (1) and (2) and lost the stockpiling issue.

In arguing the highly relevant export issue, which it won, Canada said this:

Very few countries had fully integrated brand name or generic drug industries within their borders. Even in large countries, generic producers frequently had to obtain ingredients such as fine chemicals from producers in other countries. Many countries had no generic industries at all and had to obtain generic (as well as brand name) products from other countries. Smaller countries that did have generic industries did not have domestic markets sufficiently large to enable those industries to operate on an economic scale. Those industries had to export in order to be able to manufacture in sufficient quantities to achieve economies of scale, so that domestic consumers could receive the benefits of cost-effective generic Products.. . . the market in the United States was large enough for generic producers to manufacture on an economic scale. Very few countries were in that position. "Pre-expiration testing" exceptions that had the effect of confining all activities to a single country were of little use to countries that, unlike the United States, depended on international trade to obtain generic products. (WT/DS114/R 17 March 2000 (00-1012)

The Argument by Canada is clearly true in many other cases where exceptions to patent rights are concerned.

We are concerned today about the issue of compulsory licensing of patents on medicines. We believe that it is essential that every country that grants patents has the practical ability to curb abuses of patent rights, including for example excessive pricing, a failure to supply the market in reasonable quantities or on reasonable terms, or for many other purposes.

Clearly the French government agrees, because it has a very strong statute on the compulsory licensing (including the issuance of ex officio licenses) of medical inventions, which was amended in 2004 to provide broader measures for patented diagnostic technologies, such as those relating to breast cancer screening.

Today the European Commission is putting huge pressure on countries in Africa to once more split with developing countries in Latin America and Asia on the issue of the implementation of paragraph 6 of the Doha Declaration on TRIPS and Public Health. Basically, the EC wants Africa to elevate certain aspects of the chairman's statement that accompanied the 30 August 2003 decision. As you know, the Chairman's statement is an undisguised effort to narrow, marginalize and stigmatize the 30 August 03 WTO mechanism, so that it will be rarely used. The EC is also seeking to more formally state that the members of the European Community will never use the 30 August 03 decision, even in circumstances of national emergency.

Some EC officials have told consumer groups that this will not present a problem for Europe, because it is a unified market. This is simply not true. For example, today Europe lacks the capacity to manufacture generic Tamiflu, and many member countries have inadequate stockpiles of this medicine, and would suffer in the event of a pandemic.

For purposes of the WTO TRIPS rules, each member of Europe is considered a separate country. Experts claims the EU rules on parallel trade will not extend to cases where goods are manufactured under a compulsory license, since exhaustion is limited to cases where goods are placed on the market voluntarily.

Some members of DG-Trade told CPTech in 2002 that the EC was pushing for very restrictive rules on the imports of generic medicines in anticipation of the adoption a community wide patent for Europe. With a community wide patent, and a community wide compulsory license, Europe would be less constrained by the small markets of its member countries. They claimed that the European opt-out would allow European to protect its domestic industries, by barring imports from non-EU generic producers. Unfortunately for EU member countries, however, the community wide EU patent may be a long time in coming.

We are concerned also that some EC officials appear to be dangerously uninformed about the differences between the economies of scale and capacity constraints for the manufacturing formulations and the manufacturing of the active pharmaceutical ingredients (APIs) of products. Many countries in Europe that can package and formulate medicines rely upon imports of APIs.

Finally, we are attaching a table that shows the size of domestic markets for members of the European Union and other countries. Note that Canada, a country "too small" to support efficient manufacture of APIs for its own market, has a 2004 GDP of just under one trillion USD. Only 5 members of Europe are larger than Canada. About 9 members of Europe have only 5 to 10 percent of the Canada GDP. Many of the candidates to join EU also have small domestic markets.

We don't see how Europe or France benefits by voluntarily opting out of the 30 August 2003 decision as qualifying importers of medicines. Note that under this decision, no member of Europe would be allowed to import medicines from France. France could not import medicines from another member of Europe. No European country could export medicines to the members of Europe that have lower incomes, small domestic markets or lack capacity to manufacture medicines. By tying your hands, France could not important anything, including APIs, from Switzerland, the United States, Canada, India, China or any WTO member, no matter what the circumstance were that led to the decision to issue compulsory licenses. This policy can only have the practical effect of making the patent owners immune from efforts to addresses abuses of patent rights.

The fact that a decision to put your own consumers at risk is being used to marginalize and undermining compulsory licensing in developing countries is not anything to be positive about either. We note the original position on the permanent amendment to the TRIPS by the Africa Group eliminated the protectionist opt-out mechanism altogether.

(CPTech takes the position that the opt-out provision has no place in a "free trade" agreement, because it undermines economic efficient and enables protectionism.)

We also emphasize our strong conviction that the interests of consumers in developing countries are strongly linked to the interests of consumers in higher income countries, in the following sense. As long as governments in rich countries maintain that compulsory licensing will never be used to protect consumers in rich countries, there is very strong pressure on developing countries to also forgo compulsory licensing. Indeed, the use of compulsory licensing in Brazil, South Africa and elsewhere is often presented in the press as piracy or theft of property. But when it becomes transparent that governments in rich countries also use compulsory licensing to protect consumers or otherwise deal with patent abuses, it is much easier for developing countries to act. Thus, for example, Cameroon took note when France and Belgium recently amended their patent laws to deal with abuses of the BRAC patents on breast cancer genes, and many developing countries were quick to announce actions on the Tamiflu patents after members of the US Congress pushed for a compulsory license in the United States.

Large pharmaceutical companies are asking you to set extremely high or impossible standards for issuing compulsory licenses in Europe in order to discourage developing countries from taking even modest steps to protect their own populations. A recent example of this was the intervention of the French government to oppose compulsory licensees of Sanofi patents in the Dominican Republic, a country far poorer than France. This has disastrous impacts on the poor in those countries. And increasingly this approach puts the welfare of French citizens at risk, because of the increasingly aggressive pricing of medicinal inventions in Europe.

Economies of scale are important for consumers everywhere. The greater economies of scale for AIDS drugs purchased as generics in Brazil led to lower prices, not only in Brazil, but everywhere, including Africa. Consumers in Europe and elsewhere have cheaper generic prices in part because of the low cost APIs that are available from India.

The central policy objective of access for all is universal. The prices that are excessive in France are of course much higher than the prices that are excessive in the Dominican Republic or Cameroon, but in every case, they relate to the same issue -- are the prices consistent with sustainable universal access to medicine and medical care? In 2000 Roche was asking in Germany for a compulsory license to Chiron patents on AIDS diagnostic tests. France and other European countries are fighting high prices for patented breast cancer screening technologies. Countries in Africa and elsewhere are trying to get access to less expensive AIDS drugs. More than a dozen countries are considering compulsory licenses on patents to Tamiflu in order to prepare for a possible avian flu pandemic. Politically and economically, consumer rights and interests are linked, north and south.

We look forward to your comments on this topic.

Cc: Michelle Childs, London, Thiru Balasubramaniam, Geneva