By Richard Ryan
Posted: Friday, November 1, 2002
ARTICLES
Publication Date: November 1, 2002
Is it sound policy or just politics that's pushing pharmaceutical companies to provide cheap AIDS drugs to African nations?
That question was raised again after a recent announcement by the American pharmaceutical giant Merck that it was slashing the price paid for its leading AIDS-fighting drugs by consumers in the developing world. On October 22nd, the company issued a press release stating that the cost of the antiviral medication Stocrin was dropping by 30% to $0.95 a day for anyone living in a country in the lowest category on the UN's global development index. Merck also indicated that the drug would be available in a new formula that only needs to be taken once a day, a significant benefit for AIDS patients, who typically have to adhere to complex schedules, taking multiple drugs around the clock. The company said that changes in the manufacturing process made the price cut possible.
This was the second time in a little over a year that Merck had lowered the cost of Stocrin to poorer countries, which may have less to do with economics or philanthropy than with wise public relations. With this pricing plan, Merck's leading AIDS drug costs less for patients in the developing world than a comparable generic medication made in India — and that's a crucial claim, given the mounting pressure on the pharmaceutical industry to deliver inexpensive versions of life-saving drugs. Following the Stocrin price cut, a senior Merck executive told the Financial Times, "Our pricing policy shows that generics are not always the cheapest products."
The controversy over the availability of AIDS drugs for Africa is part of an even-larger battle now being waged in U.S. courts and Congress over accelerated access to generic medication. It was probably no coincidence the Stocrin pricing announcement came one day after the White House announced its own pro-generic drug policy. On October 21st, President Bush declared that he intended to push for new rules curtailing the ability of brand-name drug makers to prevent generic drugs from coming to market after the original manufacturers' patents have expired. Addressing the brand-name companies in unusually strong words for this pro-business president, Bush told them: "You deserve the fair rewards of your research and development. You do not have the right to keep generic drugs off the market for frivolous reasons."
African Urgency
While the general contest over generic drugs involves subtleties of intellectual property law and biochemistry, the subject of AIDS in Africa has an undeniable urgency. The sheer quantity of human suffering involved dwarfs all but the most cataclysmic of wars. According to 2001 UN estimates, there are at least 28.5 million persons infected with the AIDS virus in Africa alone. The current projection is that most of those infected with the virus will be dead within ten years, with 2.2 million deaths occurring this year. These death rates will accelerate as the disease gathers momentum. What this means in countries like Botswana, Zimbabwe, and South Africa, where as many as a third or more of the working-age population are thought to be infected, can scarcely be imagined.
The anger AIDS activists are now directing at the pharmaceutical industry is, of course, a reflection of the humanitarian dimensions of the crisis, but also in some measure a tribute to the progress the medical establishment has made in fighting the illness. After a decade of intensive research into the causes the disease, AIDS went from being in the early 80s a little-understood death sentence to being, in the mid-90s, a treatable condition with life expectancies measurable in years or decades. The medical battle was revolutionized with the widespread introduction of retrovirus inhibitors (drugs that break the subtle replication cycle that HIV exploits when it infects a carrier's immune system). And it is the cost and availability of these anti-retroviral drugs (ARVs) that has been the focus of much of the policy debate surrounding AIDS treatment in the developing world.
As the possibility of Western medicine providing effective treatments for AIDS has grown, so too have the calls for the major drug corporations to provide potentially life-saving medications to AIDS sufferers at or below cost. African governments have asked those same corporations to abandon patent infringement claims against countries willing to buy pirated generic alternatives. After initially resisting such calls, the pharmaceutical manufacturers have responded both by slashing prices and by suspending intellectual property claims against the offending governments. But such price cuts and patent suspensions have been made on an ad hoc basis, with prices and policy varying by company and by country. To date, no coherent or effective global policy for the distribution of AIDS medicine has been advanced by either the drug industry or its critics.
The Current Drug Mess and Its Origins
What now exists is a complicated patchwork of aid and pricing programs of dubious effectiveness, though the cost of AIDS medication has continued to drop. In the late 90s, a year's treatment with the required combination of ARV medications — the well-known retroviral "cocktail" — typically ran anywhere from $10-15,000 per person, an unthinkable cost for patients at poverty level. When companies in Brazil and India — in apparent violation of the World Trade Organization patent protections — began to manufacture the drugs in much cheaper generic forms, many African governments saw an opportunity to force the West's hand. South Africa announced it would re-export generic ARVs sent to South Africa from any supplier. Zimbabwe went further, declaring its right to produce the drugs domestically without a license. In response, thirty-nine multi-national pharmaceutical companies banded together to seek damages under the relevant intellectual property protections of the World Trade Organization.
South Africa responded by asserting that WTO treaties made explicit allowance for member nations to manufacture or purchase generic versions of patented drugs used in the treatment of "life-threatening diseases," as long as such drugs were used in a "non-commercial setting." In the United States, the Clinton administration took up the cause of the pharmaceutical companies, placing South Africa on a "watch list" of free-trade violators and leaving in place punitive tariffs on its exports, which would have otherwise been lifted under liberalized trade laws. Vice President Gore was involved in this effort and made the issue of pharmaceutical patents "a central focus" of his discussions with South African officials, according to one State Department report.
The result, however, was a public relations disaster for the Clinton administration and the drug companies. By then running for the presidency, Al Gore was followed by hecklers and AIDS activists throughout 1999 (even at the Tennessee appearance where he launched his campaign). The hecklers chanted slogans about "medical apartheid," greedy drug companies, and the companies' financial support for Gore. By May 2000, the U.S. was backing down: the Clinton administration issued a directive stating that it would not seek sanctions against any country that differed from the America position on "intellectual property law or policy...that regulates HIV/AIDS pharmaceuticals or medical technologies."
In effect, the drug companies were on their own. "We've told them that they can't count on us to pressure countries where they have disputes," an anonymous trade official told Wired magazine. Later in the year, five major drug companies — Boehringer Ingelheim, Bristol-Myers Squibb, Glaxo Wellcome, Merck, and F Hoffman-La Roche — began discussions with UN health officials on substantial price cuts in their leading AIDS medications. And beginning in March of 2001, many companies began slashing their prices for ARVs by up to 70% or 80%. Without U.S.-led pressure on countries that were openly flaunting patents, there was little the pharmaceutical manufacturers could do other than bring their brand-name price in line with the costs of comparable generics.
Political pressure to lower drug prices can take other forms. Take for example the ARV Zerit, produced by Bristol Meyers Squibb. The company cut its price by over 80% in the spring of 2001 (although it was still five times as expensive as comparable generics). At the time, a BMS spokeswoman told UPI that the price reduction had more to do with the company's ongoing commitment to addressing the AIDS epidemic in Africa than with "all the recent noise" about lowering drug costs in developing countries. That explanation seemed less than convincing if you knew that the patent for the drug was held jointly by Bristol-Myers Squibb and Yale University, where students had been forcefully protesting their school's economic interest in profits from life-saving medicines (Yale made $40 million on the drug in 2000). The company as much as acknowledged the role of Yale students in the pricing cut when it issued a press release stating "the patent for Zerit, rights to which are owned by Yale University and Bristol-Myers Squibb, will be made available at no cost to treat AIDS in South Africa under an agreement the company has recently concluded with Yale."
Prices Are Partly a Function of Development Costs
One issue that makes rational pricing of AIDS drugs difficult is that each drug may have a radically different development history. According to a widely-quoted figure used within the pharmaceutical industry, it can cost as much as $500 million to bring a new drug to market, a fact often pointed to as a reason that drug prices must be high to make profits possible. On the other hand, a large part of the development cost (which of course can vary widely from drug to drug) is in the pre-clinical development stage, and in the case of the fourteen major ARVs now on the market, the U.S. government funded a significant portion of pre-clinical development, through research at state universities and national health organizations — a point sometimes used to argue for a government role in pricing or distribution decisions.
That said, Western governments themselves could do more to provide a friendly, predictable regulatory climate for the drug companies operating in the developing world. For example, when drug companies and the UN were negotiating the first round of ARV price reductions in 2001, U.S. anti-trust statutes meant the size and the implementation of the cost-cutting had to be negotiated by each corporation individually: U.S. regulations against monopolistic "price-fixing" prevented drugs makers from negotiating price cuts as an industry. The result was predictably chaotic pricing. Consider the example of Latin America (where AIDS health programs are actually having some discenable positive effects): a recent UN study found that the price of ARV medications varied from country to country by as much as a factor of ten.
Progress and Prices
Despite this cost crazy-quilt, Latin America has moved forward in creating effective AIDS treatment policy. A report by the Pan American Health Organization, a regional branch of the World Health Organization (WHO), indicates that the region has made significant progress in treating HIV infections. In Latin America and the Caribbean, about 170,000 people now receive anti-retroviral treatment, the majority concentrated in Brazil. Compare that to the less than 30,000 people receiving treatment in Africa, where the health crisis is far greater. The progress being made fighting AIDS in the Western hemisphere suggests that great gains could be made in Africa, and it would be tragic to let bureaucratic wrangling over pricing policy delay such progress.
Absurd side effects can result when a patchwork of regulations and subsidies produce wildly varying prices, as was shown by an appalling story in the London Guardian. On October 4th, it reported that as much as $18 million worth of low-cost medicine bound for Africa had been diverted back to Europe (probably by unscrupulous European middlemen and corrupt African airport employees), where it was being re-sold at retail value for a huge profit. The report went on to cite WHO figures indicating that only 27,000 people out of millions of African AIDS victims have received drugs under the UN's Accelerated Access program, a two-year old initiative of the WHO. Normally a paper with a left-wing slant, the Guardian dryly noted that some critics had warned that under-pricing expensive medications for impoverished economies would inevitably create just such a black-market in AIDS drugs. Exactly how those most in need will get the treatment they need without undermining the profits of the companies that create those treatments (and research future ones) remains to be seen, but current efforts to skirt the laws of economics do not seem to be doing the trick.
Richard Ryan is a business consultant and journalist who writes on economics, politics, and culture from New York City.
