The use of market segmentation to earn monopoly profits is obviously constrained by the possibility of undercutting by competitors producing generic substitutes. This possibility, and the opposition of multinational drug companies to allowing it, was dramatically illustrated by the battle between the Indian drug company Cipla and major MNC players over providing cheaper drugs for AIDS patients in Africa.

The fact that competition from generic producers will result in the lowering and levelling of prices of medicines is very clear even from the pricing behaviour of large multinational drug companies in different markets. Not only do MNCs price differently in different markets, but they tend to charge much less when generic drug substitutes are available.

This is sharply evident from Chart 3, which shows prices of Flucanazole in different markets, and Chart 4, which indicates the different prices charged by Glaxo for its anti-ulcer drug Zantac. Such pricing bears little relation to per capita income in the country concerned, but is much more dependent upon the existence of generic substitutes like Ranitidine, which is why the drug is the cheapest in India.
Chart 3 >> Chart 4 >>
 
The TRIPS Agreement
This context explains why there have been major concerns about the enforcement of the TRIPs agreement, particularly with reference to health conditions in developing countries, since the agreement is seen as increasing the power of large corporations who may be in a position to capture patents, vis-à-vis state regulatory authorities.

The agreement requires all WTO member states to grant patents for pharmaceutical products or process inventions for a minimum of twenty years.  The major shift for countries like India was that the TRIPs agreement forces upon member countries a patent regime that recognizes product patents for chemicals and pharmaceuticals. The earlier Indian Patent Act allowed for only process patents in these areas, which created the possibility of reverse engineering especially for drugs, a factor that was crucial in the rapid development of the generic drug industry in India.

Some of the most frequently expressed concerns about the adverse implications of TRIPs for public health include the following:

• Increased patent protection leads to higher drug prices, while the number of patented drugs of importance from a public health point of view is likely to increase in the coming years.

• The access gap between developed and developing countries, and between rich and poor in all countries, will continue to increase, especially as producers in developing countries have to wait for twenty years before they can have access to innovations.

• Enforcement of the WTO regulations has an effect on local manufacturing capacity and removes a source of generic innovative quality drugs on which the poorer countries depend.

• While technology transfer is actually to be discouraged, there are no incentives or provisions to ensure that increased revenues will go towards the development of essential medical technologies.

It is now much more widely recognized that there is no necessary correlation between socially desirable and necessary R&D in drug development, and a tight patent regime. Indeed, much of the major research in pharmaceuticals and medicine, both in the past and currently, is under the aegis of publicly funded institutions across the world. Table 2 indicates that R&D expenditure forms a relatively small part of the total revenues for large pharma companies, and is significantly less than marketing expenses. It is also worth noting that even in many western countries, pharmaceutical products remained unpatentable until the 1980s or even the 1990s, with no adverse implications for research.

Table 2: Financial data for top Pharma companies in 2000 Company Revenue Percent of Revenue Allocated to:   (Net Sales in millions of dollars) Profit (Net Income) Marketing/ Advertising/ Administration R & D Merck and Co. Inc 40,363 17% 15% 6% Pfizer Inc 29,574 13% 39% 15% Bristol Myers Squibb Co. 18,216 26% 30% 11% Pharmacia Corp. 18,144 4% 37% 15% Abbott Laboratories 13,746 20% 21% 10% American Home Products Corp. 13,263 -18% 38% 13% Eli Lilly and Co. 10,862 28% 30% 19% Schering-Plough Corp. 9,815 25% 36% 14% Allergan Inc. 1,563 14% 42% 13%

However, even this restrictive agreement did leave member states a certain amount of freedom in modifying their regulations.  For example, the terms invention and discovery are not defined in the agreement, yet how they are defined could have important implications, especially in the biotechnology field.  The agreement says that member states may provide limited exceptions to the patent holder’s exclusive rights in their laws. 

National public authorities may be allowed, within the conditions laid down in the agreement, to issue compulsory licences against the patent owner’s will when justified by the public interest.  The agreement does not prohibit parallel imports.  These restore price competition for patented products by allowing the importation (without the holder’s consent) of identical patented products which have been manufactured for a lower price in another country.
 

Table 3: Explanation of Article 27.1 of TRIPS   Article 27.1 Patentable subject matter Comments patents shall be available for any inventions, whether products or processes, Some countries only made available process patents for pharmaceutical inventions.  Under TRIPS, product patents must also be available; the protection of rights on a product is much broader in scope. in all fields of technology Some countries, unable to invest in R&D, have been excluding pharmaceuticals from patentability so as to allow the possibility for copies of patented drugs to be produced locally or imported - from other countries which also do not respect pharmaceutical patents - without the authorization of the company that invented the drug. provided that they are new, involve an inventive step and are capable of industrial application. Usual definition of the conditions of patentability of an invention. patents shall be available and patent rights enjoyable without discrimination as to the place of invention No discrimination between national and foreign inventions, or between foreign inventions the field of technology No discrimination between types of products - pharmaceutical or other. provided that they are new, involve an inventive step and are capable of industrial application. Usual definition of the conditions of patentability of an invention. and whether products are imported or locally produced Some countries have been issuing compulsory licences for lack of exploitation of patents.  This type of obligation was intended to require foreign companies to set up on the national territory in order to exploit their patents, with resultant transfers of technology.  The Agreement would here appear to allow these companies to import their patented product without having to transfer the related technology. Source : German Velasquez and Pascale Boulet, Globalisation and access to drugs: Implications of the WTO/TRIPS Agreement, WHO Geneva, 1999

Thus, compulsory licensing and parallel importing policies are two policy tools which can still play an important role in helping developing country governments make essential medicines more affordable to their citizens, although their use is being sought to be restricted by drug MNCs and their home country governments.

Compulsory Licensing
Compulsory licensing may occur as follows: when reasons of general interest justify it, national public authorities may allow the exploitation of a patent by a third person without the owner’s consent. This involves a government giving a manufacturer—which could be a company, government agency or other party—a licence to produce a drug for which another company holds a patent, in exchange for the payment of a reasonable royalty to the patent holder. The effect is to introduce generic competition and drive prices down, as has occurred in India. Compulsory licensing can lower the prices of medicines by 75 per cent or more. Zimbabwe, for example, could issue a license to a local company for an HIV/AIDS drug manufactured by Bristol-Myers Squibb. The Zimbabwean firm would then manufacture the drug for sale in Zimbabwe under a generic name, and pay a reasonable royalty to Bristol-Myers Squibb on each sale.

Five kinds of use without authorization of the right holder are expressly envisaged by the agreement [Correa 1999, 2000]:

• licences for public non-commercial use by the Government;

• licences granted to third parties authorised by the Government for public non-commercial use;

• licences granted in conditions of emergency or extreme urgency;

• licences granted to remedy a practice determined after administrative or judicial process to be anti-competitive;

• licences arising from a dependent patent.

In addition, since the agreement does not state that these are the only cases authorized, member states are not limited in regard to the grounds on which they may decide to grant a licence without the authorization of the patent holder.  They are in practice only limited in terms of the procedure and conditions to be followed. Thus, in principle, compulsory licences can be issued for considerations of public health as well as to prevent anti-competitive practices and possible uses connected with monopoly.