Healthy IPRs

Healthy IPRsA forward look at pharmaceutical intellectual property

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Healthy IPRs A forward look at pharmaceutical intellectual property

Manuel Campolini, Conal Clynch, Joseph Cook, Trevor Cook,

Cathy Garner, Jacques Gorlin, James Killick, Douglas Lippoldt,

Matt Lowe, Pedro Velasco Martins, David Monk, Peter Pitts,

Emily Bishko Radel, Patrick Ravillard, Richard Rozek,

Stefan Szymanski, Nikolaus Thumm, Eskil Ullberg,

Jayashree Watal, Tommaso Valletti, Hiroko Yamane

Introduction by Meir P. Pugatch

Edited by Meir P. Pugatch and Anne Jensen

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First published in Great Britain in 2007 byThe Stockholm Network35 Britannia RowLondon N1 8QHwww.stockholm-network.org

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Contents

About the contributors viii

Introduction: Why pharmaceutical IPRs? xix

by Meir P. Pugatch

List of acronyms xxii

part 1 Economic aspects of pharmaceutical IPRs 1

1 IPRs, pharmaceuticals and Foreign Direct

Investment 3

Douglas Lippoldt

2 Parallel imports of patented medicines 13

Stefan Szymanski and Tommaso Valletti

3 Strategic use of IPRs by pharmaceutical SMEs in

developing countries 21

Cathy Garner

4 Antitrust and patent settlement investigations 31

Joseph Cook and David Monk

5 A new approach to trade-related pharmaceutical

IPRs: IPRs as tradeable goods 39

Eskil Ullberg

part 2 Pharmaceutical IPRs in the international arena 49

6 The WTO, IPRs and access to medicines 51

Jayashree Watal

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7 Pharmaceutical IPRs and the TRIPs Agreement:

past, present and future 62

Jacques Gorlin

8 The WTO Decision of 6 December 2005 on the

amendment of the TRIPs Agreement 72

Patrick Ravillard

9 The WHO Commission’s Report on Intellectual

Property Rights, Innovation and Public Health: a

missed opportunity 79

James Killick

10 The EU’s approach to the enforcement of

pharmaceutical IPRs: multilateral, bilateral and

domestic perspectives 88

Pedro Velasco Martins

11 The threat of counterfeit medicines: a new

approach to policy 98

Peter Pitts

part 3 Contemporary topical issues 107

12 The Convention on Biodiversity (CBD) and

Intellectual Property Rights 109

Hiroko Yamane

13 A statutory research exemption for patents 116

Nikolaus Thumm

14 Patenting biotechnology 124

Trevor Cook

15 Patent wars and authorised generics in the USA:

assessing the issues 130

Emily Bishko Radel, J. Matthew Lowe and

Richard P. Rozek

16 IPRs and the support for biomedical innovation:

the case of combination products in Europe 141

Manuel Campolini

17 Supplementary Protection Certificates (SPCs) 148

Conal Clynch

Notes 155

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viii ix

About the contributors

Manuel Campolini has been a member of the Brussels Bar

since 1989 and has worked at national, European and inter-

national levels in the areas of commercial/unfair competition

law and IPRs, including patent/SPC, trademarks and data exclu-

sivity. Within the law firm Stibbe, he is a member of the Intel-

lectual Property and Life Science Department, with a practice

that focuses on legal assistance, strategic advice and litigation

related to pharmaceutical issues (IP, regulatory and registration

matters, pricing and reimbursement, clinical trials, parallel

trade etc.). Between 1997 and 2001 he was the manager of the

legal department at the European Federation of Pharmaceutical

Industries and Associations (EFPIA). He was more particularly

involved in TRIPs-WTO issues and ran the EFPIA WTO Priority

Action Team.

Conal George Clynch is a legal adviser at the EU Commis-

sion. He studied engineering at Brunel University from 1994

to 1998 and joined the UK Patent Office as a patent examiner

in 1999. He moved to the Intellectual Property and Innova-

tion Directorate (IPID) in 2005 and became policy adviser on

biotechnological and pharmaceutical legislation. Part of this

About the contributors role involved dealing with policy matters relating to Supple-

mentary Protection Certificates (SPCs) and included meetings

with stakeholders and the EU Commission on issues relating

to SPC legislation. He joined the EU Commission in January

2007 as a seconded national expert, dealing with intellectual

property policy and legislation.

Joseph Cook is the vice president of NERA Economic

Consulting and specialises in antitrust, complex commercial

disputes, intellectual property, and auctions and market design.

He has testified on economic and econometric issues relating

to market design, intellectual property, contract damages,

and merger-related competitive effects. In the pharmaceutical

industry, he has written and consulted on off-label promotion,

life-cycle management, patent settlements and generic entry,

authorised generics, pricing and reimbursement, price-fixing,

and the competitive effects of mergers. He has also worked

on intellectual property litigation and class actions relating

to medical devices. He has published in the Journal of Political

Economy, the Journal of Economic Behavior and Organization and

Antitrust Law Journal, among other journals, and has also served

as an academic journal referee.

Trevor Cook is a partner at Bird & Bird, which he joined in

1974 with a degree in chemistry from Southampton University.

He was admitted as a solicitor in 1977 and joined the intellec-

tual property department in 1981. His practice covers all aspects

of intellectual property, technology and regulatory law. He is

treasurer of the UK Group of the AIPPI (The International Asso-

ciation for the Protection of Industrial Property), a member of

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the Council of the Intellectual Property Institute and secretary

to the British Copyright Council Standing Committee on

Copyright and Technology.

Cathy Garner is the chief executive of Manchester: Knowledge

Capital. She has a background in university–business links and

technology transfer, and extensive experience of urban regener-

ation, education and knowledge-based business development.

She is a trustee of the UK registered charity, MIHR (The Centre

for the Management of Intellectual Property in Health Research

and Development), based in Oxford, and was its founding CEO

until 2004. She established and ran the Research and Enter-

prise Office at the University of Glasgow in Scotland, led the

establishment of the Scottish Institute for Enterprise and was

a founder director of the Scottish North American Business

Council. She is a member of the Association of University

Technology Managers (AUTM) in the USA and served as their

inaugural vice president for International Relations.

Jacques J. Gorlin is president of The Gorlin Group and a

recognised expert on the nexus between intellectual property

and trade policy. He has been a consultant to the research-

based pharmaceutical industry for over twenty years. He is vice-

chair of the Industry Trade Advisory Committee on Intellectual

Property Rights (ITAC 15), a private sector group that advises

the secretary of commerce and the US trade representative on

trade policy, and is a member of the Commission on Intellec-

tual Property of the International Chamber of Commerce. He

also serves as president of the American BioIndustry Alliance

(ABIA). He was an industry adviser to the US delegations to both

the 2003 (fifth) and 2005 (sixth) ministerial conferences of the

World Trade Organization held, respectively, in Cancun and

Hong Kong.

James R. M. Killick is a litigator with a broad range of

European law experience, notably in competition law and

pharmaceuticals. He has been involved in pleading a number

of leading cases in the European courts, including Microsoft

v. Commission (abuse of dominant position − compulsory

licensing, treatment of trade secrets); Hanner (Swedish retail

monopoly on pharmaceuticals); Forum 187 v. Commission (fiscal

state aids); Pfizer v. Council (precautionary principle applied to

pharmaceuticals); IMS Health (compulsory licensing); Nintendo

v. Commission (fining policy); Servier v. Commission (banning of

pharmaceutical products); Cheil Jedang v. Commission (fining

policy); and Du Pont v. Commission (GSP). He has taken a

particular interest in cases which establish where the boundary

should lie between intellectual property and competition law.

He is a partner at the legal firm White & Case.

Douglas Lippoldt has been an international economist with

the Organisation for Economic Co-operation and Develop-

ment (OECD) in Paris since 1992. His current assignment in

the Trade and Agriculture Directorate gives particular emphasis

to the so-called BRIC countries (Brazil, Russia, India and China)

and a variety of cross-cutting trade and development issues

such as trade-related IPRs. During the 1990s, he managed a

number of projects related to economic transition in Russia and

Eastern Europe, producing a series of publications on adjust-

ment-related topics. He has also been a contributing author to

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a series of labour market studies of OECD member countries.

Prior to coming to the OECD, he worked for ten years for the

US government as an international economist on trade policy,

labour market and economic development issues.

J. Matthew Lowe is an analyst for NERA Economic Consulting

and has co-authored numerous valuation studies for tax, litiga-

tion, and business planning purposes. He has extensive experi-

ence in valuing tangible and intangible property for transfer

pricing studies across a variety of industries including phar-

maceuticals, agricultural chemicals and automobiles. For these

transfer pricing studies, he has used accounting, financial,

statistical and econometric analyses to identify arm’s-length

prices consistent with US and foreign tax guidelines. He

appeared before the Internal Revenue Service to discuss his

statistical models for an intangible property transfer pricing

study of which he was a co-author. He has prepared quanti-

tative pharmaceutical market research for litigation matters

involving patent validity.

Pedro Velasco Martins is a principal administrator in the

Directorate General for Trade at the European Commission.

He is responsible for the IPR enforcement strategy for third

countries, as well as for IPR-related bilateral and multilateral

relations with North and South America, the ASEAN countries,

and the G8 and OECD countries. He is the Commission negoti-

ator for the IPR chapter in ongoing trade negotiations between

the EU and third countries. Previously, he worked in the area of

trade defence instruments (anti-dumping) for six years. Before

entering the European Commission, he practised as a lawyer for

three years, between 1993 and 1996. After becoming a member

of the Lisbon Bar Association, he was a partner in the law firm

Macedo Vitorino & Associados.

David Monk is vice president of NERA Economic Consulting

and has conducted economic research and analysis primarily in

the areas of antitrust, contract disputes, and the measurement

of damages. He has presented his work to the US Federal Trade

Commission and Department of Justice and has submitted

expert testimony in New York State Court. He has developed a

model to analyse patient origin data to help identify relevant

geographic markets in the healthcare industry and has analysed

a variety of other healthcare issues concerning pharmaceuti-

cals, health insurance, hospital services, physician privileges,

home healthcare services, rising medical costs, and medical

equipment. In addition, he has analysed mergers involving

acute care hospitals, physician groups, long-term care hospitals,

medical diagnostic equipment manufacturers, and health

insurers.

Peter Pitts is president of The Center for Medicine in the

Public Interest and senior vice president, director for global

health affairs for Manning Selvage & Lee. From 2002 to 2004

he was the US Food & Drug Administration’s (FDA’s) associate

commissioner for external relations, serving the senior commu-

nications adviser to the Commissioner. He provided executive-

level policy and programme direction for the FDA’s interactions,

information exchanges and liaison activities with the agency’s

stakeholders and other external audiences. He supervised the

FDA’s Office of Public Affairs, Office of the Ombudsman, Office

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of Special Health Issues, Office of Executive Secretariat, and

Advisory Committee Oversight and Management, and served

on the agency’s obesity working group and counterfeit drug

taskforce. His comments and commentaries on healthcare

policy issues appear regularly in the media.

Emily Bishko Radel is a consultant at NERA Economic

Consulting and specialises in transfer pricing and other matters

relating to antitrust and intellectual property across a variety

of industries. Since joining NERA, she has published articles

and given presentations on transfer pricing and other matters

relating to the pharmaceutical and healthcare industries. She

has co-authored numerous reports for clients under Section 482

and OECD guidelines relating to transfer prices for intangible

and tangible property, manufacturing services, and research and

development functions. She has also prepared expert reports in

a variety of litigation matters. She has conducted public policy

studies in healthcare industries and has prepared reports for

submission to regulatory agencies and trade associations.

Patrick Ravillard is a principal administrator in the

Directorate General for Trade at the European Commission,

having joined the unit responsible for intellectual property in

September 2004. His responsibilities include multilateral nego-

tiations on IP matters (TRIPS), in particular public health and

biodiversity, as well as bilateral relations with China. Prior to

his current post, he served as a counsellor at the Delegation of

the European Commission to the international organisations

in Geneva. In this position, he was in charge of negotiations

related to IP and government procurement in the World Intel-

lectual Property Organization and the World Trade Organiza-

tion. Prior to joining the European Commission, he served as

an inspector at the legal department of the French Directorate

General of Customs and Excise, at the Ministry of Finance in

Paris, from 1986 to 1992. He is a doctor in law and received a

diplôme d’études approfondies (DEA) in Community and European

Law from the University of Paris I Panthéon-Sorbonne.

Richard Rozek is senior vice president at NERA Economic

Consulting and works on projects involving intellectual

property, antitrust, and transfer pricing across a variety of

industries. Prior to joining NERA, he held senior positions in

the Bureau of Economics at the US Federal Trade Commission,

where he served as deputy assistant director for antitrust, and

at the Pharmaceutical Manufacturers Association (now called

the Pharmaceutical Research and Manufacturers of America).

He was also an assistant professor of economics at the Univer-

sity of Pittsburgh. He has written over 45 articles for profes-

sional journals, such as the American Economist, Contemporary

Policy Issues, Electricity Journal, Energy Journal, Economics Letters,

Journal of Economic Integration, Journal of Economics, Journal of

Research in Pharmaceutical Economics, Journal of World Intellectual

Property, Mathematical Modelling, Research Policy, and Tax Notes

International.

Stefan Szymanski is professor of economics at Tanaka

Business School, Imperial College London, and has specialised

in studying the economics and business of sport. He completed

his PhD at Birkbeck College, London, in 1988 before working at

London Business School’s Centre for Business Strategy for five

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years. He then joined the Tanaka Business School at Imperial

College London. He has published over 50 academic articles,

two edited books and three authored books, including the

recently published National Pastime: How Americans play Baseball

and the Rest of the World Plays Soccer, co-authored with Andrew

Zimbalist. He has consulted for a wide range of commercial

and government organisations, including the UK Treasury

Department, the Department for Culture, Media and Sport, the

Department of Trade and Industry, the Office of Fair Trading,

Ofcom, and the Fédération Internationale de l’Automobile.

Nikolaus Thumm is senior economic counsellor at the Swiss

Federal Institute of Intellectual Property and represents the

institute in different expert groups with the European Commis-

sion, the Organisation for Economic Co-operation and Devel-

opment, the World Intellectual Property Organization and the

European Patent Office. He is an evaluator of European research

projects and is involved in research exploitation and tech-

nology transfer activities in Switzerland and with the European

Commission. He was chairman of the United Nations Advisory

Group on the Protection and Implementation of Intellectual

Property Rights for Investment. Previously, he worked for the

European Commission in Spain and spent time as a researcher

at the European University Institute in Florence, and with

Europa Kolleg in Hamburg. He is an industrial engineer by

training and holds a PhD in economics from Hamburg Univer-

sity. He has published extensively in international journals and

is a frequent speaker at international workshops and confer-

ences in the field.

Eskil Ullberg is a management consultant and research

scholar with twenty years’ experience, of which the past ten

have been in senior consulting positions, working with top

management and decision-makers in international organisa-

tions, government agencies and corporations. For the last

seven years he has been researching the management of risk

and uncertainty in relation to intellectual property, in partic-

ular patents, and its strategic use by companies and economies

to create competitive advantages, turning inventions into

economics and growth. He is also a research scholar, currently

at the Interdisciplinary Centre for Economic Research, ICES, at

George Mason University (2007). The focus of his research is on

investigating new markets for trading IPRs such as patents.

Tommaso Valletti is a professor of economics at the Univer-

sity of Rome and Imperial College London, a research fellow at

the Centre for Economic Policy Research and a research affiliate

of the Global Consortium for Telecommunications (London

Business School). He is an expert on industrial economics, regu-

lation and telecommunications economics, and is an economic

adviser to Ofcom, the UK communications regulator. He has

advised numerous bodies, including the European Commis-

sion (economic expert on remedies in mobile telephony − 2003;

economic expert on market definition − 2006), the Organisation

for Economic Co-operation and Development and the World

Bank, on topics such as network interconnection, mobile termi-

nation and spectrum auctions. He gained a magna cum laude

degree in engineering from Turin University in 1990 and holds

an MSc (1994) and a PhD (1998) in economics from the London

School of Economics, where he also taught until 2000.

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Jayashree Watal is a counsellor at the World Trade Organiza-

tion and has more than 22 years of experience in government in

India, of which 10 were devoted to policy, diplomacy, research

and administration on Intellectual Property Rights. She worked

in the Ministry of Commerce as director, Trade Policy Division,

New Delhi (1995−1998) and represented India at a crucial stage

in the Uruguay Round TRIPS negotiations from 1989−1990.

She has researched and published articles on issues related to

IPRs. She was a visiting scholar at the Center for International

Development at Harvard University, and at the Institute for

International Economics in Washington, DC and at the George

Washington University Law School.

Hiroko Yamane is a professor at the National Graduate

Institute for Policy Studies (Japan) and teaches international

economic law, competition and intellectual property rights at

the National Graduate Institute for Policy Studies in Tokyo,

Japan. She has written widely about competition and regula-

tions, TRIPS implementation in developing countries, biotech-

nology invention and public health. She was a member of

the World Health Organization’s Commission on Intellec-

tual Property, Innovation and Public Health. She gained her

BA at Tokyo University and her MPhil at Yale University and

completed her diplôme d’études approfondies (DEA) at the Univer-

sity of Paris.

Both Intellectual Property Rights (IPRs) and phar-

maceuticals are intrinsic to human history and

progress. IPRs characterise the shift in human productivity

from agrarian to industrial production − placing the individual

at the heart of human innovation and creativity. Indeed, the

patent system has its roots in ancient Greece and was first intro-

duced in 1474 in Venice. Pharmaceuticals have revolutionised

healthcare, enabling treatments or cures for otherwise unstop-

pable diseases, harnessing chemistry, biology and mass produc-

tion technologies in the quest for the discovery, research, and

development of new medicines.

The combination of IPRs and pharmaceuticals has become

one of the most important tools in modern society. One could

identify the granting of US patent number 64407 to Felix

Hoffmann on 6 March 1889 − a patent for the wonder drug

Aspirin − as the most notable starting point of this partnership

between pharmaceuticals and intellectual property.

Since then, pharmaceutical IPRs have been discussed and

Introduction

Why pharmaceutical IPRs?Meir P. PugatchDirector of Research, Stockholm Network

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Healthy IPRs Why pharmaceutical IPRs?

xxi

debated in academic, professional, political and societal

circles. Such discussions were (and still are) as emotional as

they are rational. Are pharmaceutical IPRs a barrier to access to

medicines or are they essential to it? Do pharmaceutical patents

prevent or enhance pharmaceutical research and development?

Are compulsory licences a legitimate tool for price negotiations

or are they a predatory mechanism aimed at circumventing the

rights of drug developers? Is there any hope at all for multilat-

eral IP negotiations, and for whom? Are pharmaceutical IPRs a

zero-sum game or can they lead to win–win results? These are

but a few of the questions being debated today.

The field of pharmaceutical IPRs is complex and multi-

dimensional. It encompasses significant challenges, including

the issue of access to medicines. Indeed, the debate over IPRs

and access to medicines in developing and least developed

countries is one of the most sensitive and complicated issues to

be discussed under the auspices of the World Trade Organiza-

tion.

Healthy IPRs does not ignore the various challenges

currently faced by the field of pharmaceutical IPRs. Yet without

denigrating the importance of the IPR debate in general, and

the issue of access to medicines in particular, it is essential to

keep the big picture in mind: Pharmaceutical IPRs work. They

are part of the solution and not part of the problem.

By providing a more comprehensive and realistic overview

of the many aspects of pharmaceutical IPRs, this compendium

seeks to underline this message.

Healthy IPRs includes concise and informative contributions

from seventeen distinguished experts, including academics,

policymakers and practitioners. It is structurally divided into

three sections. The sections which deal with the economic

aspects of pharmaceutical IPRs and with pharmaceutical IPRs

in the international arena provide a broader view of the field,

while the section dealing with contemporary topical issues

focuses more closely on some of the specific aspects that are

currently being discussed.

We hope you will enjoy the compendium and find it to be

a useful tool in understanding the complex issues now at the

heart of the health-related IPR debate.

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xxii xxiii

Acronyms

ANDAs Abbreviated New Drug Applications

ADR Adverse Drug Reaction

API Active Pharmaceutical Ingredient

CBD Convention on Biodiversity

CIPIH WHO Commission on Intellectual Property Rights,

Innovation and Public Health

DSB Dispute Settlement Body

EC European Community

EPC European Patent Convention

EPO European Patent Office

EU European Union

FDA US Food & Drug Administration

FDI Foreign Direct Investment

FTAs Free Trade Agreements

FTC US Federal Trade Commission

GATT General Agreement on Tariffs and Trade

IPRs Intellectual Property Rights

LDC Least Developed Country (or Countries)

MFN Most Favoured Nation

NDAs New Drug Applications

NCEs New Chemical Entities

Acronyms NICs Newly Industrialising Countries

OECD Organisation for Economic Co-operation and

Development

PPPs Public–Private Partnerships

R&D Research and Development

SMEs Small- and Medium-sized Enterprises

SPC Supplementary Protection Certificate

TK Traditional Knowledge

TRIPS Trade-Related Aspects of Intellectual Property Rights

UNCTAD United Nations Conference on Trade and

Development

WHO World Health Organization

WIPO World Intellectual Property Organization

WTO World Trade Organization

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part 1

Economic aspects of pharmaceutical IPRs

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�

In response to the challenges and opportunities of

globalisation, the pharmaceutical sector has evolved

to become one of the most dynamic and rapidly internation-

alising sectors in the world.1, 2 One key dimension of globalisa-

tion for the sector has been the development of enhanced rules

under the multilateral trading system, enabling pharmaceutical

firms to better capitalise on their intellectual property. These

rules have expanded the range of economic opportunities for

firms in the sector by opening markets and providing improved

protection for intellectual property. Many firms appear to have

moved to adjust their investment strategies to take advantage

of the improved environment for Intellectual Property Rights

(IPRs).

Recent intellectual property developmentsParticular impetus to the strengthening of IPRs arose from the

advent of the World Trade Organization’s (WTO) Agreement

1

IPRs, pharmaceuticals and Foreign Direct InvestmentDouglas Lippoldt

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IPRs, pharmaceuticals and Foreign Direct Investment

on Trade-Related Aspects of Intellectual Property (TRIPS

Agreement), which entered into force in 1995 (Park and Lippoldt,

2005). 3 The TRIPS Agreement covers the main types of intellec-

tual property,4 establishing more effective − and geographically

inclusive − international minimum standards of protection

for IPRs than had existed previously. The Agreement specifies

WTO member obligations to enforce IPRs. And through the

WTO framework for trade policy reviews, dialogue and dispute

settlement, the TRIPS Agreement also provides pathways for

redress among WTO members in cases of non-compliance by

governments. Additional strengthening of IPRs in recent years

has come under initiatives of the World Intellectual Property

Organization (WIPO), various regional trade and investment

accords, and unilateral actions. Supporters have endorsed the

various efforts to strengthen IPRs, underscoring the incentives

this offers for innovation and subsequent ‘real-world’ applica-

tion of new ideas.5, 6

The potential relationship of IPRs to investmentThe preamble to the TRIPS Agreement recognises the devel-

opmental and technological objectives of national systems for

the protection of intellectual property. One way that this can

operate is by encouraging foreign holders of intellectual property

to trade and invest. A country that enhances its IPR regime

may attract additional knowledge-intensive product imports

otherwise unavailable on the domestic market, or it may attract

inflows of Foreign Direct Investment (FDI); in either case, inter-

national technology transfer is likely to flow as a consequence.

Likewise, improved protection of IPRs in foreign markets may

provide a given country’s investors and traders with improved

opportunities to enter those markets while shielding their intel-

lectual property from undue imitation.

The pharmaceutical sector is a particularly high technology

Figure 1 Pharmaceutical sector expenditure on R&D, selectedOECD countries

Source: OECD Health Division, OECD Research and Development Expenditure in Industry database.Note: The data refer to manufacture of pharmaceutical, medicinal chemicals and botanical products.They cover R&D activities undertaken by the corporate sector in order to develop new compoundsto correct somatic or physic dysfunction or to improve an individual’s state of health, irrespectiveof the source of funding.

1970 1974 1978 1982 1986 1990 1994 1998 2002

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

US$,

mill

ions

, PPP

exc

hang

e ra

tes

Australia

Belgium

Canada

Denmark

France

Germany

Netherlands

Sweden

United Kingdom

United States

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sector as evidenced by its rate of investment in Research and

Development (R&D). When viewed in relation to either produc-

tion or value added, pharmaceutical sector R&D expenditures

are more than three times as high as those for manufacturing as

a whole.7 Moreover, the absolute volume of R&D expenditure

in the sector has risen significantly in recent years (Figure 1).

Given the scale of investment, it is clear that the industry has a

lot at stake with respect to the intellectual property generated

through R&D. The ability of innovators in the sector to ensure

a return on their R&D investment depends in part on their

ability to defend and capitalise on the resulting intellectual

property.

Foreign Direct Investment and the pharmaceutical sectorFDI refers to cross-border investments made with the objective

of establishing a lasting interest in an entity that is resident in a

market other than the investor’s home market.8 The investment

may consist of equity capital, reinvested earnings and other

capital contributions. Flows of FDI have exhibited impressive

growth in recent years, particularly since 1990, but with signifi-

cant year-to-year variation. OECD countries attract the bulk of

the inflows, but China has grown in importance and has been

a top destination in recent years (accounting for about 10% of

global net inflows in 2002).

Table 1 presents FDI inflows and outflows with respect to

the pharmaceutical sector in several OECD economies. The

size and variability of the flows (including reversals) is quite

striking. These data provide an indication of a continuation of

the restructuring in the sector that was quite pronounced in

the 1990s and partly motivated by the high and rising costs of

drug development.9 FDI flows related to merger and acquisition

activity account for a large share of the total. An OECD study

found that all of the top 15 pharmaceutical companies were

involved in merger and acquisition transactions during the

1990s.10 Mergers and acquisitions have become an increasingly

Table 1 Direct investment in the pharmaceutical, medicinal chemical and botanical products sector (US$, millions)

2002 2003 2004

A. Inflows

Belgium 110.2 527.5 385.1

Czech Republic n.a. –105.3 159.4

Finland n.a. –124.2 -86.9

France 2,459.7 910.5 –515.5

Hungary n.a. 21.3 –32.4

Mexico n.a. n.a. 327.3

USA –4,132.0 7,917.0 1,566.0

B. Outflows

Belgium –16.0 371.6 4,813.0

Czech Republic n.a. 3 1.9

France –752.9 1,503.6 1,003.8

Hungary n.a. 3.5 20.6

USA 4,411.0 4,403.0 5,969.0

Source: OECD (2006) International Direct Investment Statistics, Paris. Notes: 1) Inflows can turn negative because of net repatriation of investment by foreign owners; outflows can turn negative because of a net repatriation of investment by domestic owners. 2) n. a. = not available.

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important strategy for lowering the high cost of R&D and

achieving economies of scale.

Most of the pharmaceutical sector R&D takes place in the

most advanced economies, but there is an increasing volume of

R&D activity in developing countries that have created a favour-

able regulatory environment, including with respect to IPRs.

This is an important development for these countries because

multinational pharmaceutical firms can play a significant role

in technology transfer through the interaction of the parent

firm and affiliates, which can in turn have positive effects on

the national economy (e.g. via productivity-enhancing applica-

tion of new technologies). Several countries have implemented

national strategies to encourage pharmaceutical and biotech-

nological FDI with a view to promoting further technology

transfer to their economies through spillovers or local partner-

ships.11 Where they have been successful in the pharmaceutical

sector, such strategies have tended to include strengthening

the IPR regimes. Singapore, for example, has implemented a

successful strategy to attract and develop biotech and pharma-

ceutical R&D activities, one with an explicit element of IPR

protection.12

Business decisions to invest are complex and based on

a variety of considerations, with higher level considerations

sometimes trumping lower level concerns.13 While an effective

IPR regime alone may not be sufficient to attract pharmaceu-

tical FDI, an inadequate IPR regime can be, in some cases, a deal-

breaker for a technology firm that is looking to invest. On the

other hand, depending on the technology concerned, it may be

that a strategy of trade secrecy can adequately protect the firm’s

intellectual property, even in the face of some weakness in the

local IPR system. In some cases, factors such as market scale

(i.e. access to a large market) or strategic positioning prove to

be dominant factors motivating investment.14 These factors, for

example, may help to account for the large number of pharma-

ceutical FDI projects in China (which has had a mixed perform-

ance on IPR enforcement, despite joining the WTO in 2001).15

Moreover, variation in IPR strength may influence not

only the volume of FDI but also the nature of the project

(e.g. for distribution, production and/or R&D). For example,

Smarzynska conducted an analysis using firm-level data from

a worldwide survey of companies conducted by the European

Bank of Reconstruction and Development (EBRD) in 1995

concerning FDI undertaken in Eastern Europe and the republics

of the former Soviet Union.16 She found that weak IPR regimes

tended to discourage foreign investors in technology-intensive

sectors that rely heavily on IPRs. In all sectors, weak IPR regimes

tended to deter investors from undertaking local production

and rather focus on distribution of imported products. In an

earlier study of intellectual property managers from 94 major US

firms, including several pharmaceutical companies, Mansfield17

and Lee and Mansfield18 presented empirical analysis revealing

that IPRs mattered less for protecting sales and distribution

outlets than for protecting production and R&D facilities. The

proportion of FDI invested in production and R&D facilities was

positively and significantly related to the perceived strength of

IPRs. In addition, they found that the firms regarded strong

IPRs as being more important for decisions concerning transfer

of advanced technology than for FDI decisions as a whole.

Using regression analysis, Park and Lippoldt19 considered the

relationship of an index of the strength of patent rights during

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the 1990s to FDI and trade.20 Overall, their analysis revealed a

positive relationship.21 For pharmaceuticals, they found that

a 1% increase in the indicator for patent rights in the destin-

ation market was associated with about a 0.24% increase in the

stock of US outward FDI in the market (Table 2). The results are

perhaps a bit surprising in that the coefficients for the pharma-

ceutical sector are somewhat smaller than those for industry

as a whole. The authors suggest that one possible explanation

may be related to variation in the propensity to invest abroad

according to the nature of the investment.

Given that the pharmaceutical sector is R&D-intensive and

that proximity to the home office has in the past been a factor

in R&D locational decisions, it may have been the case that

there was a certain lack of responsiveness in pharmaceutical

R&D investment to improved IPRs in foreign markets.22 On the

other hand, for other types of investment by the pharmaceu-

tical industry (e.g. distribution) there may have been less ‘sticki-

ness’ in investment decisions and better responsiveness to local

changes in the regulatory environment including IPRs. Such

a segmentation of investment strategy by type of investment

may account (at least partly) for the smaller, but still significant

coefficients found with respect to patent strength and FDI in

the sector.

In the same study, Park and Lippoldt also assessed the

relationship between imports and the strength of patent rights

(Table 2). Here as well, they found a positive relationship, with

the coefficients for pharmaceutical products being somewhat

higher than those for industrial goods as a whole. The positive

relationship is in line with the notion that as IPRs were strength-

ened during the 1990s, firms were better able to appropriate a

return on their technological investments and therefore had

greater incentive to export into these markets.

ConclusionThe pharmaceutical sector is facing a changing economic

Table 2 Estimates of the relationship of FDI and imports to strength of patent protection, 1990–2000

Economicindicatorandsectoroforigin

Countryofdestination

Coefficientestimate

N R2

I. US outward FDIAll industries All countries

Developing countries

0.568*

0.708*

224

127

0.13

0.12

Pharmaceuticals All countries


0.242*

0.361*

153

77

0.12

0.16

II. ImportsAll industries All countries


0.315†

0.243*

154

83

0.46

0.55

Pharmaceuticals All countries


0.436†

0.372*

154

83

0.44

0.56

Source: Derived from Park and Lippoldt (2003), Tables 7 and 8. Notes: The coefficient estimates measure the relationship of the economic indicators to the destination country’s strength of patent rights, controlling for various factors such as other economic influences (e.g. level of GDP per capita) and unobserved country-specific factors. The coefficients were calculated using regression analysis and a pooled sample of observations across countries. They can be viewed as indicating in percentage terms the average change in the respective sector’s outward-FDI-stock-to-GDP ratio or imports-to-GDP ratio per 1% change in an index of patent rights for the destination country. Asterisks indicate statistical significance with moderate degree of confidence; daggers indicate a high degree of confidence. N denotes the number of observations and R2 the fraction of the variation in the data explained by the model.

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environment characterised by the deepening of globalisation

for OECD countries and the increasing integration of many

developing countries into the mainstream of the international

economy. One dimension of this changed environment is an

international strengthening of IPRs. Given the critical role that

technical innovation plays in the sector and the role that IPRs

play in the ability of the pharmaceutical sector to capitalise on

that innovation, it is not surprising to find a positive relation-

ship between IPRs and FDI in the sector. The strength of IPR

protection appears to be one important factor – among others

– influencing trade and investment decisions in the sector.

Moreover, as IPR standards in some developing countries begin

to approximate those in OECD countries, one could reasonably

anticipate further geographic diversification in pharmaceutical

sector investment, including with respect to R&D.

Parallel trade is both a contentious and confusing

issue in international trade. However, the under-

lying economic principles are relatively straightforward. In this

chapter we seek to set out the basic issues in a simple and non-

technical manner.

To understand parallel trade, it is first necessary to under-

stand some basics associated with ordinary trade. Trade

involves the exchange of goods and services where something

(e.g. clothing, electrical goods, or a pharmaceutical product)

is usually exchanged for money. In exchange for the payment

the buyer becomes the owner of the good, free to dispose of it

as he or she wishes. In particular, if a buyer paid US$1 for the

good, but then discovered that someone else was now willing to

purchase the same good from her for US$2, then in general he

or she would be free to resell it. Certainly, one does not imagine

that the original seller would still have any right to dictate the

terms of the resale. This is, in part, what we mean by free trade,

and this is now generally upheld by national and international

2

Parallel imports of patented medicinesStefan Szymanski and Tommaso Valletti

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Parallel imports of patented medicines

law throughout the world, and in particular by competition

law. The existence of free trade also implies something that

economists call ‘the law of one price’. This states that if a good

is freely traded, then its price in the market must be the same

everywhere (possibly allowing for differences arising out of

transport costs for bulky items and for differences in national

taxation). For example, the price of gold this second is exactly

the same in London, New York and Tokyo. If it were not, there

would exist a profitable opportunity to buy gold where it is

cheap and sell gold where it is expensive. This would be an

easy way to profit – what economists would call an arbitrage

profit – and such profits seldom exist, precisely because free

markets mean that such opportunities are instantly exploited

by traders.

The important point to note about this is that the original

seller is not likely to gain from free trade. If one buyer is prepared

to pay US$2 and another US$1, then the original seller would

like to trade directly with each, rather than allowing arbitrage.

For example, if buyers were located in different countries, and

economic conditions were such that the most profitable retail

price was US$2 in country A and US$1 in country B, then the

seller would like to charge different prices in each country

while ensuring that buyers in country B were not able, directly

or indirectly, to resell what they buy at US$1 to customers of

country A. This is what economists call price discrimination.

Arbitrage, if there is enough of it, puts a stop to price discrimi-

nation. If enough buyers in country B are willing to resell at a

price lower than US$2 in country A, then the price in country

A must fall. At the same time, the ability to profit from reselling

will create demand in country B and push up the price there.

With enough arbitrage, the law of one price will hold, and the

price will settle somewhere between US$1 and US$2. Moreover,

if the original seller is aware that arbitrage is possible, he will fix

the original price at this intermediate level.

This is essentially the story of parallel trade. Suppose a

seller in country A exports to country B. Absent free trade,

and suppose the price in country A is higher than the price in

country B because of price discrimination. Buyers in the low

price country will want to resell – so the product will move

back in the opposite direction (overall, the product flows from

A to B and back to A). This is the sense of the word ‘parallel’

as used here. Note that the goods in question are the genuine

product of the original manufacturers and are not being traded

as anything else – hence they are not counterfeit or otherwise

black market goods. However, they are often called ‘grey market’

goods. This may be a somewhat unfair label. Parallel trade is

either legal or illegal, depending on the product, the country

and the precise origin and destination of the trade. While a lot

of money has gone into legal battles, the legal position seems

relatively clear.

Parallel trade, IPRs and pharmaceutical products – the legal situationBy and large, parallel trade is a lawful activity. The principal

exception to this relates to goods protected by trademark and

by patent. When it comes to pharmaceuticals, most of the cases

concern parallel trade of patented products.

Clearly, pharmaceuticals sell for very different prices in

different countries due to the complexities of national health

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systems where governments and/or insurers tend to be the

main purchasers of the goods. Of course, once a patent expires,

anyone can produce a generic version and price variations often

have to do with the extent of such activities. Some countries,

notably India and Brazil, have developed a strong generic phar-

maceutical industry partly by ignoring patent rights. However,

under the TRIPS (Trade-Related Aspects of Intellectual Property

Rights) Agreement at the World Trade Organization (WTO),

recognition of patent rights was agreed internationally. Hence,

if prices of pharmaceuticals under patent vary internationally,

this is largely because producers are selling at different prices to

different countries.

Why, then, would arbitrage be illegal? This goes back to

the roots of patent law, which is essentially a national right

(inventors must take out patents in all countries where they

want protection). A patent grants a monopoly in a particular

territory (e.g. the UK) and prohibits all rival sellers of the

product in that territory. A legal decision in the English courts

in the nineteenth century established that this right extended

to the re-importation of legally exported consignments of the

product – hence parallel trade of goods under patent became

illegal.1

This peculiarity of patent law has come in for widespread

challenge, most obviously from buyers in countries where the

patent owner is trying to sell at above average prices. They tried

to persuade courts that this was contrary to competition law,

since it enabled a monopolist to maintain an artificially high

price, or even an infringement of human rights, since it limited

the freedom of the buyer to dispose of her property as she saw

fit. Some countries did not adopt such a ruling. Most notably

the USA has upheld ‘first sale doctrine’ – meaning that all rights

to control property are surrendered when it is sold.

However, when it comes to pharmaceuticals, parallel trade

can be prevented by the manufacturers thanks to the regulations

of the US Food & Drug Administration (FDA). These regulations

require that any parallel trader obtain permission to re-import

into the USA from the original pharmaceutical manufacturer.

Not surprisingly, such permission is seldom granted, since US

manufacturers prefer to control domestic supply themselves.

Hence, when US citizens cross the border into Canada to buy

patented prescription drugs at low prices and then take them

back into the USA, or when Internet traders buy consignments

from Canada and resell them in the USA at discounted prices,

they are usually breaking the law.

A slightly different situation emerged in the EU. While the

EU recognises the right of a patent-holder to prevent parallel

trade, the free movement of goods within the EU overrides

this. The proprietor of industrial property ‘exhausts’ its right

to object to the marketing of its product anywhere in the EU

once it has consented to the marketing of its product in one of

the European Economic Area (EEA) states. The principle applies

whether or not the intellectual property right is protected in

the first or second EU state of importation. Hence, a UK phar-

maceutical company can prohibit the resale of pharmaceuticals

in the UK that it has exported to Russia, but not the resale in

the UK of products it has exported to Poland.

Pharmaceutical companies have relied on trademark rights

to prevent repackaging by parallel traders in the country of

import. In response, the European Court of Justice (ECJ)

has ruled that the essential function of the trademarks is to

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guarantee to the consumer the identity of the product’s origin

by enabling the consumer to distinguish it without any risk

of confusion from products of a different origin.2 Essentially,

repackaging cannot be opposed by a trademark owner if: the use

of the trademark would contribute to artificially partitioning

national markets; the repackaging does not adversely affect the

original condition of the product, is not liable to damage the

reputation of the trademark, and clearly identifies the manufac-

turer and importer; and the trademark owner is notified before

the repackaged product is marketed.

Thus, the ECJ’s case law has severely limited the ability of

pharmaceutical companies to rely on their intellectual property

rights to prevent parallel trade. As a result, pharmaceutical

companies are increasingly seeking recourse to other commer-

cial practices, some of which may come into conflict with com-

petition law.

Economic considerationsPrice discrimination is largely seen by the public as a negative

phenomenon, especially by those forced to pay the higher

prices. One important and obvious consequence is that it raises

profitability, by enabling the seller to charge a high price to

those who can pay more (efficient exploitation). However, price

discrimination can also extend the market to a larger audience

among those less able or willing to pay (efficient distribution).

The first effect is largely negative because it distorts the market.

However, the second effect is generally good for everyone

because extending the market can reduce prices, even for the

high price bracket, if it brings down average costs. Hence, from

an economic perspective, price discrimination can be a good

thing if it extends the market enough, but is a bad thing if it is

simply causing rich consumers to be charged high prices. This

analysis then extends to parallel trade. Parallel trade (which

prevents price discrimination) is a good thing if it simply

enables more consumers to enjoy low prices. However, it can

be bad thing if preventing price discrimination causes some

customers to be priced out of the market.

To decide whether parallel trade is good or bad, therefore,

requires some consideration of the specific case. If US citizens

get cheaper drugs from Canada, what will be the consequences?

At one extreme, US pharmaceutical companies might refuse

to supply Canada, denying all Canadians the benefits of the

drugs, or obliging them to travel to the USA, where they would

now have to pay the high price.

Critics object that such a threat is not credible, since the

Canadian government could issue a compulsory licence within

the rules laid down by the WTO if the US companies refused

to supply. More likely, the pharmaceutical companies would

charge the same price in Canada and the USA, and Canadians

would pay higher prices on average. The Canadians them-

selves have now recognised this threat, and some have started

to advocate rules prohibiting parallel trade. Pharmaceutical

companies argue that Canada only receives low prices in the

first place because trade is negotiated with the central govern-

ment, which uses its bargaining power to impose low prices.

Similar arguments are made about legal parallel trade in the EU.

The consequence of this is a tendency for prices to fall to a level

consistent with the bargaining power of the strongest player.

The pharmaceutical companies point out that their profits are

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21

required to recover high Research and Development (R&D)

costs, and hence parallel trade will end up reducing the amount

of R&D and therefore pharmaceutical innovation.

However, the impact of parallel trade between relatively

rich countries is, in general, likely to be limited. More extreme

effects are likely to be found in relation to trade between the

very rich and very poor nations. Most sensitive has been the

trade in Aids-related drugs to Africa, where pharmaceutical

companies have been under pressure to reduce prices, which

are in the region of US$10,000–$20,000 for an individual in

a developed country. A significant difficulty has been the fear

that consignments of these drugs will be parallel traded – and,

indeed, cases of such trade already exist. For critics, this merely

indicates the inappropriateness of the patent system for dealing

with medicine and such critics advocate alternative ways to

support investment, generally through the state. Supporters of

the patent system argue instead for greater protection against

parallel trade, and some steps have been taken at the WTO to

limit potential for such trade.

While the policy analysis may be a little more complicated,

the essential issue is whether one considers it right for customers

in different countries to pay different prices for the same goods

(price discrimination). If you think this is wrong, then you are

in favour of parallel trade; if you think price discrimination

serves some positive purpose, then you will be less favourably

disposed towards it.

Small- and Medium-sized Enterprises (SMEs)

involved in the production of pharmaceuticals in

developing countries need to be aware of the complexity and

scale of the process which is required to deliver successful new

medicines in today’s context. With a very long timescale for

development and estimated costs in excess of US$800 million,

it is a game for large companies with deep financial pockets. As

these large companies have adopted strategies to mitigate their

risk, opportunities have opened up for SMEs to play important

and rewarding roles in the process of drug development. In

developing countries there are some specific factors which

provide opportunities for SMEs to engage profitably. The over-

riding caveat to successful engagement is, however, the SME’s

ability to manage intellectual property appropriately. This paper

sets out to describe these opportunities and the considerations

which need to be given by SMEs to IP management.

�

Strategic use of IPRs by pharmaceutical SMEs in developing countriesCathy Garner

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Strategic use of IPRs by pharmaceutical SMEs in developing countries

Intellectual property as a business development toolThe pharmaceutical industry places greater importance on

patent protection than other industries. Mansfield estimated

that some 65% of new drugs would not have been produced

had no patents been in place. This compares with 30% of new

chemical products and 4% of electrical products.1 The invest-

ment risk is high with an estimated level of attrition of 99 out

of 100 new compounds failing to be developed into products.2

A clear demonstration of the importance of patents for success

in global markets in the pharmaceutical industry has been

observed in the rapid change of behaviour by those Indian

companies that have grown large through the production of

generic medicines. Following the implementation of the TRIPS3

Agreement in 2005, the Indian generic manufacturers quickly

became increasingly focused on global markets and patented

technologies.4 Robust intellectual property protection and

management are essential for SMEs that wish to create value in

their companies in the pharmaceutical sector.

The pharmaceutical industry’s reliance on strong patent

protection is also a consequence of the nature of the drug devel-

opment process where many players are involved in a chain of

relationships that need to be governed by contractual obliga-

tions, mutual trust and shared risk. The patent system provides

security and the ability to contract. The need for strong patent

protection in the pharmaceutical industry has developed as a

corollary of the research and development (R&D) paradigm,

which has emerged with the ever increasing complexity of

science and the need for specialist contractors in different parts

Table 3 Multiple players in the stages of drug development

Proc

ess

Targetidentification

Drugdiscovery Drugdevelopment(1)

Drugdevelopment(2)

Discoveryofthebiologicalmechanismsimplicatedinthecauseofadisease

Useofenablingtechnologiestoscreenmillionsofpotentialdrugcandidatesorrationaledesigntoproducenewtherapeutics

Thecreationofapharmacologicallyeffectivemeansofformulatinganddeliveringthenewtherapeuticagenttoitssiteofaction

Demonstrationsofefficacyandsafetytogainregulatoryapproval

Org

anis

atio

ns a

nd te

chno

logi

es in

volv

ed

Universities Universities Drug delivery Large pharmaHospitals Large pharma Large pharma HospitalsLarge pharma Biotech

companiesBiotech companies

GMP

Biotech companies

Contract analysis GMP Biostatistics

Bioinformatics Contract manufacture

Animal models Phase II trials

Chemical synthesis

Biostatistics Phase III trials

Animal models Toxicology Packaging companies

Bioinformatics Phamacokinetics Regulatory bodies (e.g. FDA)

CROs Consulting organisations

Phase I trialsIn

sup

port Patent agents, lawyers, business

support agencies, NGOs

Source: By permission of IPR Ltd, 2003

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of the process. Table 3 summarises the wide array of players

and stages of the process involved in the development of new

medicines.

In addition to the many organisations and the complex web

of inter-relationships which comprise this process, it must also

be recognised that contractual relationships must pertain over

a period of many years. On average, a new drug takes 8–10

years from potential lead compound to entering the market.

The time frame for vaccines is dramatically higher: an average

of 35 years. The reality is, therefore, that either the entire

process has to be held within the same company and governed

by corporate responsibility (and/or trade secrets) or by strong

contractual and proprietary rights.

Strategic decision points on IP for small- and medium-sized pharmaceutical companiesFrom this elaboration of the drug development process it is

clear that SMEs need to make strategic decisions with regard to

IP management. The diagram in Figure 2 shows where the key

stages of IP management decisions need to be taken in relation

to the drug development process. Important contractual situa-

tions where high-quality IP management is of vital importance

include:

➤ The acquisition of ‘drug candidates’ for further

development;

➤ The in-licensing of products to manufacture under license;

➤ The protection of intellectual property developed in

the process of development, be that data or new active

ingredients;

➤ The onward-licensing or assignment of ‘promising

drug candidates’ to ‘big pharma’ or alternative drug

development agencies for testing on a large scale and

registration with the appropriate regulatory body.

Figure 2 Key IP considerations in the drug developmentprocess and their implications for access to medicinesby the poorest

Regulatoryapproval

Leaddiscovery

Pre-clinical

Clinical:Phase I

Phase 2

Phase 3

Regulatoryapproval

Marketing

LAUNCH

PROCESSDEVELOPMENT

CONCEPTTESTING

IDEASCREENING ➤ patent or not to patent

➤ license – to whom,where and for whichuse(s)

➤ consideration of publicgood access needs

➤ co-developmentagreements

➤ data protection rights➤ new patents

➤ licensing for marketing➤ licensing in unused

technologies with use inthe treatment ofneglected diseases

➤ access for public healthbenefit

➤ control over appropriateuse by authoriseddistributors

1 Consideration of thefuture impact of currentIP managementdecisions

2 Maintaining controlover IP to ensure thatthe intended benefit tothe company and/orpublic health isachieved

3 Greater potential fornew health productsand technologies toreach their intendedmarket as a result ofgood licensing and IPmanagement practices

4 Potential for sub-contracts from majorproduct developers toincrease supply

DRUG DEVELOPMENT PROCESS IPM DECISIONS IMPLICATIONS FOR ACCESS TOESSENTIAL HEALTH PRODUCTS

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The acquisition of ‘drug candidates’SMEs can be sub-divided into two groups in relation to the

acquisition of new pharmaceutical materials for development:

the imitative and the innovative. The former is focused primarily

on the development of generic forms of existing drugs whereas

the latter include those which are truly part of the global drug

discovery and development paradigm.

For imitative SMEs which have traditionally been involved

in the production of generic drugs, using either ‘off-patent’

formulations or reverse engineering either under the ‘Bolar’

exemption5 or through non-patenting in their territory, the

implementation of the TRIPS Agreement makes it increasingly

difficult to obtain either a new molecular entity or an Active

Pharmaceutical Ingredient (API) which is not subject to patent

protection. For example, in India, where SMEs have been able

to work on APIs to create generics, there are now some indica-

tions that the sector is beginning to suffer. This illustrates not

only the importance of a strategic approach to IP management

but also its urgency.

Few innovative SMEs have the resources to undertake the

complex and high volume biochemistry required to isolate

potential new molecular entities or new active substances. It is

therefore likely that these will be obtained under licence from

another entity which has undertaken the basic ‘discovery’

research. Innovative SMEs have to be adept at business deals and

contracts with those undertaking research, be it with univer-

sities worldwide, public research establishments such as the

Indian Council for Medical Research or R&D companies, which

may be willing to out-license compounds for further develop-

ment due to market focus or political pressure. In addition,

depending on their focus, SMEs may wish to consider seeking

licenses to natural products or traditional medicines. This can

be an important strategy in developing countries.

Contractual agreements to in-license materials include the

protection of commercially sensitive information and materials

under ‘Non-Disclosure’ and ‘Materials Transfer Agreements’, in

addition to agreements which involve clauses for the future

filing and prosecution of patent applications.6

Companies have traditionally looked to ‘own’ their materials

(under assignment) rather than license, because this has often

been a requirement of obtaining risk finance. However, univer-

sities and public research institutions are being encouraged as

‘good practice’7 to license rather than to assign their discoveries,

in order to control and determine the ‘public good element’.

This is especially important when the potential drug is for use

in the developing world.

The ‘in-licensing’ of products for local productionA strategically important route for SMEs in developing countries

is to show that they have the ability to work with large pharma-

ceutical companies ‘under licence’ to produce a local version

of a drug at either a lower cost or because the company wishes

to establish a local facility for a future lucrative market (for

example, in India or China). Companies that can demonstrate

a high level of competence, including in their management of

IP, can secure important contracts.

There are also many Public–Private Partnerships (PPPs)

which are developing medicines to tackle neglected diseases

and are seeking local partners to undertake the drug develop-

ment.8 The product-development PPPs are an important new

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source of potential licences for SMEs in developing countries as

they have missions which frequently incorporate ‘public-good

provisions’ for health and economic development.

The protection of findings during the development processSMEs can gain valuable intellectual property rights during the

process of their work if they develop the capacity to identify

opportunities for its disclosure, its protection and its value in

the market place.

There are three key areas which should be considered:

1 Data collected as part of any clinical trials. This has

become an area of contention in relation to the extension

of data exclusivity by pharmaceutical companies against

the production of generic medicines. However, SMEs in

developing countries which acquire any data on toxicity

and other trials should note the potential value of these

data and the potential for their protection.

2 Process IP that is developed during the testing of

drug candidates. This might be of value to others and

could be protected through the use of ‘utility models’ rather

than through the patent system.

3 Development of APIs from natural products or

traditional medicine. These should be protected and

may be valuable for company growth and development.

Information on approaches to the protection and manage-

ment of IP such as the above are available from many sources,

including the MIHR Handbook and through the World Intel-

lectual Property Organization (WIPO).9

The onward-licensing or assignment for clinical testing and productionMany SMEs that have been built around the development of

one specific therapeutic agent in the biotechnology sector are

subject to a trade-sale to the larger pharmaceutical companies,

which are seeking to feed their pipeline of innovative leads. The

trade-sale is effectively a purchase of the IP of that company,

be it formal IP-like patents or the know-how of its employees.

‘Big pharma’ will, however, be scrupulous in their due-diligence

of that IP and deals will only proceed if the IP is ‘clean’. The

standard of past IP management may make or break the deal.

For imitative SMEs and those that want to grow, it will still be

necessary to out-license their drug candidates to large companies

or to one of the product-development PPPs. The terms and

conditions of that licence can make or break the SME.

Specific conditions pertaining to health products for developing countriesThere has been some false expectation that SMEs in devel-

oping countries might focus on diseases specific to, or rela-

tively prevalent in, the developing world.10 However, although

SMEs in developing countries operate in the same marketplace

as those in the developed world, there are still some specific

areas where SMEs in developing countries can find comparative

advantage from having a business focus on endemic diseases.

First, the markets are local and often small by definition,

which means that the larger pharmaceutical companies will be

less interested either in direct provision or widespread patenting

– thus offering a gap in the market.

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Second, SMEs in developing countries may be able to get pref-

erential support from public sector agencies that are concerned

to address local health problems whilst supporting general

economic development. SMEs that can offer local employment

as well as health benefits make a double-bottom-line contribu-

tion and are valuable in this context.

Finally, with the millions of dollars of investment being

channelled into the development of medicines for neglected

diseases and for the provision of medicines to the poorest in

developing countries, there is a significant opportunity to gain

resources, skills and experience.

ConclusionStrategic IP management by pharmaceutical SMEs in devel-

oping countries is an essential part of their business develop-

ment. Following the implementation of the TRIPS Agreement

in all but the least developed countries (LDCs), there is little

alternative but for these companies to embrace the system and

to use it in their business development.

This chapter has provided an overview of some of the most

important areas and opportunities for SMEs in IP management.

Guidelines on the practicalities of IP management are becoming

increasingly available through WIPO and through non-govern-

mental organisations such as MIHR. Yet, implementation by

SMEs is the remaining imperative.

The policies of antitrust and intellectual property

are, in a sense, at odds. The owners of intellectual

property are generally given the right to exclude others from

the use of that property, or at least attempt to exclude others, in

the hope that such endowments will foster competitive benefits

in the form of increased numbers of innovative new products

and services. However, these rights do not last forever. Eventu-

ally, the innovations should pass into the public domain. In

essence, intellectual property is a compromise.

Another compromise was apparently made in 1984, when

the US Congress passed the Drug Price Competition and Patent

Term Restoration Act (Hatch-Waxman Act). Branded pharma-

ceutical companies complained that the drug approval process

overseen by the US Food & Drug Administration (FDA) took

too long. By the time a new drug was actually able to clear the

regulatory process and reach the market its patent was close

to expiration. When these patents expire, generic firms enter

with lower-priced products and sales shift from the branded to

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Antitrust and patent settlement investigations Joseph Cook and David Monk

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Antitrust and patent settlement investigations

the generic product. This relatively short period of ’exclusivity‘

was particularly problematic for branded firms, as they rely on

being able to maintain whatever competitive advantage they

may gain with their patented innovations for long enough to

pay for the costs of bringing their product to market.

Responding to the complaint, however, would have meant

hindering generic entry and the low-price alternatives it

offered the consumer. Perhaps in order to offset this hindrance,

the Hatch-Waxman Act offered generic firms an additional

incentive, while allowing the branded firm to maintain its

exclusivity. The first generic firm able to successfully file its

application with the FDA, for a generic version of an existing

branded product and without infringing the branded firms’

patents, would get an added bonus. That firm’s application

would be the only one granted, so as to allow entry for six

months. In this way, the first generic could be said to have a

‘180-day window of exclusivity’.

Why is generic entry such an important issue in pharma-

ceuticals? At least part of the answer lies in the institutional

and regulatory structures of pharmaceutical markets. These are

different relative to other markets in that the attributes of the

consumer are divided: the patient that actually uses the product

is typically not the one who chose it, nor the one that directly

paid for it – if the patient is insured. Rather, the physician is

the driving force behind the choice of therapy. In the case of

generic drugs, at least in the USA, it is typically the pharma-

cist that will decide among the various generic alternatives,

choosing which manufacturer’s product is selected. Many states

have mandatory substitution laws that require the pharmacist

to dispense a generic version of a branded product prescribed.

Other states clarify that the pharmacist can elect to make this

substitution, and even encourage it. If the physician wishes to

prevent substitution, he must write that the prescription is to

be ‘dispensed as written’.

All of this leads to competition on different levels in the

marketplace. There is competition, typically among different

branded drugs, for the prescription, and this competition

seeks to inform the physician of the medical benefits of one

chemical compound over another. There is also competition

at the dispensing level, typically among different generic drugs

vying to be used to actually fill the prescription.

When a branded product is ‘genericised’, there are a few likely

effects. To begin with, the branded product’s position at the

dispensing level has changed. Prior to the entry of the generic,

all prescriptions for that drug were filled with the branded

product. After generic entry, and especially in mandatory substi-

tution jurisdictions, the situation is reversed and all prescrip-

tions will be filled with a generic. This reduces or eliminates

the incentive of the branded firm to promote its product at the

prescribing level, as any success the branded firm may have in

encouraging physicians to write prescriptions for its product

will be undermined by substitution at the pharmacy.

The loss of the branded drug’s position at the dispensing level

leaves little incentive to promote the product at the prescribing

level. Neither investments in marketing nor price cuts make

much sense as these would likely only lead to increased sales

for the generic firm. Nor is there a clear means to reward invest-

ments in developing additional on-label indications for the

branded drug, as the sales associated with these uses would also

largely fall to the generic firms. Thus innovation, at least with

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respect to the genericised drug, is stymied. In addition, while

the average price of the genericised drug falls (averaging the

branded and the generic), the net competitive effect in these

markets can be a complex issue.

All of this helps to create an interesting backdrop from which

to consider the implications of settlement agreements for

alleged infringement of pharmaceutical patents. Most civil liti-

gation settles, and patent infringement cases are no exception.

However, the settlement agreements reached by branded and

generic pharmaceutical companies over the last several years

have contributed to a rather high-profile policy debate.

On 26 June 2006, the US Supreme Court denied a request

by the US Federal Trade Commission (FTC) to review a case

against drug companies involved in settlements of patent

infringement suits.1 The underlying patent suits, brought by

Schering-Plough against two generic firms, Upsher-Smith and

ESI Lederle, involved Schering’s potassium chloride product,

K-Dur. The basic facts in these patent suits were not unusual.

Neither, perhaps, was the basic structure of the settlements

between the parties. However, concerns at the FTC have led

to investigations of several settlements of patent infringement

suits.

In general, these patent settlement cases begin with a

branded drug manufacturer filing suit against generic manufac-

turers that are seeking FDA approval to market a generic version

of the branded drug. The generic manufacturers argue that no

valid patents are infringed by their entry, and, therefore, they

should be granted FDA approval before the expiration of the

patent(s).

Generally, the FTC is concerned by settlements that include a

negotiated entry date that is before the expiration of the patent,

though not immediate, and is accompanied by an ancillary

agreement by the branded manufacturer to pay the generic

manufacturer some amount of money. The FTC is concerned

that such settlement agreements are likely to have anticompeti-

tive effects.

Many of these investigations have resulted in consent agree-

ments with the FTC. In May 2000, Abbott Labs settled with

the FTC over the drug Hytrin.2 In May 2001, Hoescht Marion

Roussel settled with the FTC over the drug Cardizem CD.3 In

April 2003, Bristol-Myers Squibb settled with the FTC over three

different drugs, BuSpar, Taxol and Platinol.4

The K-Dur case was different, however and perhaps not least

because it was litigated to the fullest extent. The FTC filed suit

on 2 April 2001, alleging that the parties’ agreements to settle

these suits, which included an agreed date of entry somewhere

midway between the time of the dispute and the expiration of

the patent, ‘were agreements not to compete that unreasonably

restrained commerce’.5

The case went to trial and was heard by an administrative

law judge (ALJ) at the FTC, who decided the case in favour

of the pharmaceutical company. The ALJ found that the FTC

staff’s claims required ‘a presumption that [the patent] was not

valid or that Upsher-Smith’s and ESI’s products did not infringe

[the patent]’.6 The court found that there was ‘no basis in law

or fact to make that presumption’.7 Moreover, the court also

found that the FTC staff had not met its burden of ‘proving the

relevant product market or that Schering had maintained an

illegal monopoly’. 8

A refusal to accept presumptions of validity and non-

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infringement meant that, at least according to the ALJ, such

cases would require the FTC staff to try to prove such asser-

tions and look at the merits of the underlying patent litigation.9

The Commissioners would disagree with the ALJ on this point

when the case was brought to them on appeal by the FTC staff.

The Commission found that the ALJ had erred in finding that

the underlying patent litigation had to be examined in order

to determine whether the agreements were anticompetitive.

More particularly, the Commission found that the payments

from the patent-holder to the alleged infringers that were

included in those agreements ‘were likely to have anticom-

petitive effects because they delayed generic entry beyond the

dates that would have been agreed upon in the absence of the

payments’.10 The Commission also found that the method of

evaluating the likelihood of anticompetitive effects argued for

by the ALJ, including the definition of a relevant market, was

‘not the most appropriate way to proceed … where more direct

evidence of competitive effects is available’.11

The defendants then appealed the case to the 11th Circuit

Court of Appeals, which set aside the Commission’s opinion.12

The 11th Circuit seemed to interpret the Commission as having

effectively adopted a per se prohibition on ‘settlements under

which the generic receives anything of value and agrees to defer

its own research, development, production or sales activities.’13

The 11th Circuit stated that ‘the proper analysis of antitrust

liability requires an examination of: (1) the scope of the exclu-

sionary potential of the patent; (2) the extent to which the

agreements exceeded that scope; and (3) the resulting anticom-

petitive effects.’14 The 11th Circuit then went on to find ‘the

terms of the settlement to be within the patent’s exclusionary

power’.15 In the end, the court based its decision, at least in

part, on policy, saying that ‘given the costs of lawsuits to the

parties, the public problems associated with overcrowded court

dockets, and the correlative public and private benefits of settle-

ments, we fear and reject a rule of law that would automatically

invalidate any agreement where a patent-holding pharmaceu-

tical manufacturer settles an infringement case by negotiating

the generic’s entry date, and, in an ancillary transaction, pays

for other products licensed by the generic’.16

As noted at the outset, the Supreme Court has refused to

review this decision by the 11th Circuit. In so doing, it has let

stand an opinion that is a rejection of a presumption against

patent-holders who may elect to settle infringement suits with

negotiated entry dates and ancillary payments. Prior to its

refusal to hear this case, the Supreme Court held in Independent

Ink that there would no longer be a presumption of market

power for patents in antitrust cases.17 Perhaps taken together

these decisions reflect a desire by the Supreme Court to move

away from overly simplistic rules that side-step a more careful

analysis of all the relevant facts and circumstances – particu-

larly in the intersection of the law and policies of intellectual

property and antitrust.

The area is likely to remain contentious, at least in the

immediate future. Pressures on the branded and the generic

firms can create a high-stakes situation. For a branded firm, an

innovative drug can represent a substantial profit stream in a

market with few close competitors. The branded firms can rely

on profit streams such as these to pay not only for the innovator

drug’s development but also to offset less successful efforts and

help make the firm profitable as a whole. Generic firms are in a

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race to be the first firm to be ready to enter the market and gain

the ‘first-mover’ advantages offered by the Hatch-Waxman Act.

Having made these investments in the race to market, generic

firms, particularly those with few products, can recognise early

entry as the clearest means of recouping these investments in

a timely way. Compounding these tensions is the possibility

that the revenues of the generic firm may not be enough to

compensate the branded firm if the entry was later found to be

infringing.

The combination of these factors is likely to continue to

encourage branded and generic firms to reach settlement agree-

ments that attract the scrutiny of the FTC, notwithstanding the

decisions of the 11th Circuit and Supreme Court. Intellectual Property Rights (IPRs) give the owner

the right to exclude others from using an idea or

invention. The excluding part of the right provides the legal

basis for the transferring part, which might also be known as

the market part. Many studies have been done in the area of

exclusion of others from doing what is protected under the

right, but less attention has been given to the trade-related

aspect of IPRs from a market perspective.

By trade-related we mean the strategic possibility of a firm to

transfer the right to use the IPR to another party, earning profits

from that transaction or series of transactions related to the

use by others, rather than using it themselves. The issue is thus

not primarily the invention process, the manufacturing process

or the using process, but the transferring process in a market

context of the IPR. This transfer is increasingly being carried

out through licensing contracts. It opens up opportunities for

specialisation between different actors: inventors, producers,

intermediary traders and investors. Specialisation may lead to

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A new approach to trade-related pharmaceutical IPRs: IPRs as tradeable goodsEskil Ullberg

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A new approach to trade-related pharmaceutical IPRs

increased productivity, which then ultimately increases the

gains from trade and also, by extension, social welfare.

This chapter will apply an institutionalised market perspec-

tive to the tradeability of IPRs in order to potentially increase

social welfare. It will also discuss possible ways of finding exper-

imental facts about this trade and outline relevant policy issues

in relation to the issue.

Today, many large pharmaceutical companies are experi-

encing increasing problems with the performance of their new

drug delivery and are no longer turning out blockbusters at

the speed they used to. Finding new substrates with potential

healing effects has proven to be an increasingly difficult,

expensive and risky investment. For the past decade, a new

impetus has been provided by specialised research companies

and in particular biotech companies, who are using biotech

engineering skills to develop new substrates. These substrates

form the basis for further development of drugs to be used

by humans, thus providing an important source of inventive

input for those companies that are good at developing, clini-

cally testing and marketing the final drugs.

The biotech companies make use of the patentability and

tradeability features (including licensing) of the patent rights

to create a new business model, which does not rely on their

own production to extract the value of the IPR invented

and protected. Instead, the model functions by selling ‘raw

materials’ for potential new drugs to be developed by the

pharmaceutical companies. To increase the success rate of the

potential future drugs there may be additional agreements

made for joint development projects. The model allows, in

principle, for an inventor firm to trade with competing or non-

competing producer firms (from different fields), extracting the

maximum gains from trade by allowing the invented asset to be

used by the company which can extract its highest value. This

is a very good example of the trade aspect of patents, which

brings together often highly specialised companies with the

common goal of producing (new) drugs.

The biotech example of early trade may be relatively new,

but in fact a boom of specialised inventors appeared, trading

their IPRs with producers using the help of specialised patent

attorneys, as far back as the time of the first modern US patent

law in 1836.1

Risk – and the market’s way of dealing with itSuccessfully developing and trading technology in this raw

format is a question of finding the best way to deal with risks

and uncertainty. Firstly, risk and uncertainty from investments

in research move from the large pharmaceutical companies,

which focus more on marketing and sales, to the new high-tech

bioengineering companies, which often focus more on research

and development (R&D). The producers therefore have a way of

getting ideas from inventors without having to hire them. The

risk-bearing for the invention process is done by the specialised

companies, and the risk-bearing for the marketing and sales

falls to the producing companies. This is a good solution for

producers, who can choose from different competing sources of

raw ideas. There is also less of a moral hazard as the returns from

inventions may be more closely connected to the inventors in

the research-focused company. Competition gives incentives to

innovators to meet real users’ needs.

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But the specialised inventors, who typically do not have all

the complementary production assets of the larger pharma-

ceutical companies, can be blocked or held up by a producer

if there is not a competitive market for their ideas. There is

therefore a market-access risk for the inventors to overcome.

Their problem is how to sell their inventions at a competitive

price, which maximises social welfare – in other words, which

maximises benefits for all economic actors. These are typical

market issues dealt with through trading rules and, if deemed

of public interest, government regulations in formal market

institutions.

Recent surveys by the US/Canadian Licensing Executive

Society, including data from the health industry, provide some

input on hindrance to licensing.2 The 2003 and 2004 surveys

identify:

➤ Difficulties in finding buyers (sellers);

➤ Difficulties in getting internal approval to sell (sellers);

➤ Difficulties in agreeing on financial terms, terms of

geography, exclusivity, milestones, etc.

These are all problems that an institutionalised market, for

example the New York Stock Exchange, typically solves by

means of suitable rules of trade and commodity contracts. A

marketplace allows buyers and sellers to meet at the same time.

Thus, instead of having bilateral negotiations, all sellers and

buyers meet simultaneously and negotiate contracts under

agreed rules through prices. The rules of a marketplace decide

how the traded IP assets are allocated. Typically, these nego-

tiations are in auction format. Buyers and sellers may have

different preferences on location and exclusivity for certain

fields of use (from claims).

A market also has another very powerful feature: it consoli-

dates all information about the potential value of an idea and

puts that value in the bids, leading to a clearing price of the

market in ideas.3 We thus see that a formalised market provides

an important tool to help further the development of new drugs

based on the trade aspect of pharmaceutical IPRs. The market

institution is used to manage the business risks by reallocating

the risk-bearing to the most appropriate actor, whether this is

the inventor, producer or trader. The actors attain this competi-

tive advantage in risk-bearing through specialisation, investing

their time and money (or other resources for that matter) in

knowledge and systems (information) to manage their special-

ised risks.4

Another new and interesting market is the information

market, which allows participants to trade in the probability of

certain future events. An example of this could be the validity

of a patent.

Hindrances to a market in ideas in pharmaceutical IPRsThere are many questions that need to be addressed in order to

develop a market in ideas in pharmaceutical IPRs, and particu-

larly in the transaction markets. These include the tradeability

of the patents, what rules give the right incentive to invent,

and whether there should be one or several such institutions

for different technology areas. Traditionally, patents have

been obtained with the sole purpose of blocking others. This

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is the basis for trade (that you can exclude and thereby sell the

excluding right for further exclusion), but the question of how

to structure the idea in different patents, and particularly when

writing the patent’s claims for tradeability, may be a new issue

for many.

The purpose should be to divide the invention(s) embodied

in the patent application into claims which are as separate as

possible, allowing for potential trade in different fields of use,

and for maximum blocking within each patent claim or set

of claims. The strategic issue of separation of invention and

production mentioned initially may then have more impact

on the way claims are written. For example, the claims could

be written as independent fields of use or by building on a

common, more general claim and then specialising. The latter

would necessitate a non-exclusive right to everyone licensing

a more specialised field, so creating a standard for an industry

where several use the same basic claims and then compete on

the specialised claim. This approach has traditionally been used

with interdependent technologies both in basic versus applied

technology, and first- and second-generation technology.

Another area of concern is to separate the right to use in

production (or non-production, i.e. blocking) from the right

to do further research, licensing the different rights to different

actors.

The point is that a trade-focused strategy by the users of

the patent system puts more emphasis on the value of the

used right in a globally specialised commercial setting. Patent

offices, however, may not always make this distinction between

economic use and technical knowledge when granting the

patents. The issue may boil down to a critical survey of the

patent-granting process and to establishing what information

on economic use is present. In patent terminology, the ‘capable

of industrial application’ or ‘useful’ criteria may need to incor-

porate some new meaning when patents are primarily used first

to trade and then used as ‘capable of industrial trade’/’useful

for trade’. In the pharmaceutical setting this may mean that

larger sets of claims may be necessary (the current discussion

and trend from the patent offices being to have fewer claims

for each patent). A special study of these possible implications

from the increased trade-use may be needed by legal scholars

in conjunction with (micro) economists, trade specialists and

others disciplines to examine what can be done through the

patent system to facilitate the trade-related aspects of pharma-

ceutical IPRs.

Experimental economics as a test bed for achieving markets in pharmaceutical IPRsSo, how can one test for these rules, commodities and features

of patent rights? Over the past 40 years a new discipline in

economics has developed, called experimental economics.

Experimental economics is the study of what people do. An

experimental economic environment is set up in a laboratory

where real people interact with each other, typically through a

computer-based market of some sort.5 Experimental economics

can thus be used to study the market conditions under which

trade in pharmaceutical IPRs can be achieved and the gains

made, thus leading to maximised social welfare.

The experimental lab provides a way to control envi-

ronmental factors and so provides a means of repeating the

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experiment under identical conditions. Lessons can then be

learned from the experimental economy outcomes, which

share essential, but often simplified, characteristics with trade

in the more complex, real world. The issue here is to use this

elaborate tool to study the problematic aspects of formalised

markets in pharmaceutical ideas. Some studies have been done

relating to the invention process (patent races) prior to getting

and using the IP right,6 but not on the use.

In particular, the rules under which trade leads to socially

desired outcomes can be studied. In markets the institution

matters because the rules matter, and the rules matter because

incentives matter. The potential here is to create the incentives

for specialised trade in pharmaceutical IPRs, rules that overcome

some of the more important hindrances discussed, and an insti-

tutional framework which can transform the current initial

trade of bilateral licensing into a multilateral dimension.

ConclusionThe market in pharmaceutical IPRs, particularly patents, has in

recent years developed a more specialised approach to research

and delivery of drugs using the trade-related aspect of the

patent right more extensively. This development mimics the

developments of the modern US patent system in the early days

of the industrial era.

Private market institutions may provide an important tool

for companies to manage the further risk and opportunity in

this industry (both in transactions and in information markets).

They can use the institution as a risk transfer mechanism,

allowing both inventors and producers in pharmaceutical IPRs

to benefit most from this exchange. From this follow questions

regarding the tradeability of patents. The outcome may prove

valuable to maximise gains from trade in IPR-based instru-

ments, increasing social welfare or, in our case, the potential

flow of new medicines and treatments.

Lastly, experimental studies and data may provide powerful

ways of testing outcomes of market-oriented policies, including

in the area of pharmaceutical IPRs.

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part 2

Pharmaceutical IPRs in the international arena

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This chapter describes the relevant provisions of the

Agreement on Trade-Related Aspects of Intellectual

Property Rights (TRIPS Agreement) and the subsequent instru-

ments adopted in the World Trade Organization (WTO) with

respect to access to medicines. The focus of this paper is on

the provisions that are relevant for pharmaceutical inventions,

focusing in particular on the patent protection standards. To

set this discussion in context, it is useful to recall three basic

features of the TRIPS Agreement:

➤ that, together with some 25 other legal texts, it is an

integral part of the Agreement Establishing the WTO (and

therefore subject to the WTO dispute settlement system);

➤ that it covers not only patents but all the other main areas

of Intellectual Property Rights (IPRs); and

➤ that it lays down not only the minimum substantive

standards of protection that should be provided for in

each of these areas of intellectual property, but also the

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The WTO, IPRs and access to medicinesJayashree Watal1

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(Article 7) and ‘Principles’ (Article 8), several of the flexibilities

in the provisions relevant for pharmaceutical inventions, such

as those relating to patents and test data, were influenced by

developing-country negotiators.

Provisions of the TRIPS Agreement relevant to public healthAlthough many aspects of the TRIPS Agreement could poten-

tially bear on access to medicines, such as trademarks, copyright,

industrial design and enforcement of IPRs,3 the focus here is

on the sections on patents and the protection of undisclosed

information.

The TRIPS Agreement requires member countries to make

patents available for all inventions, whether products or

processes, in all fields of technology, subject to the normal tests

of novelty, inventiveness, and industrial applicability. It also

requires that patents be available and patent rights enjoyable

without discrimination as to the place of invention, field of tech-

nology or whether products are imported or locally produced

(Article 27.1). Thus, no longer is it possible for members to

exclude entire sectors of technology, such as pharmaceuticals

or chemicals, from the grant of patents nor to discriminate

against such patents once these are granted.

There are three permissible exclusions from patent grant

even where the inventions meet the criteria for patentability.

One is for inventions contrary to ordre public or morality; which

explicitly includes inventions that are dangerous to human,

animal, and plant life or health, or that are seriously prejudicial

to the environment. The use of this exclusion is subject to the

procedures and remedies that should be available to enable

rights-holders to enforce their rights effectively.

Finding a balance in the protection of intellectual property

between the short-term interest of maximising access and the

long-term interest of promoting creativity and innovation is

more difficult at the international level than at the national

on account of differing levels of economic, technological and

social development. Perhaps nowhere do these issues excite

stronger feelings than in regard to pharmaceutical patents,

where tension between the need to provide incentives for

research and development (R&D) into new medicines and the

need to make existing medicines as available as possible can be

acute.

The negotiators of the TRIPS Agreement attempted to

find an appropriate balance both within the Agreement and

within the single undertaking that incorporated the results

of the Uruguay Round. Even if not all developing countries

participated in these negotiations in equal measure, it would

be fair to say that the developing countries’ perspective was

represented. As is widely acknowledged, the TRIPS Agreement,

in an effort to strike a proper balance between the differing

interests of the participating countries, provides for significant

flexibility in the protection to be given. This flexibility, which

went considerably further than some of the demandeurs in the

negotiations would have liked (and indeed were achieving in

bilateral agreements at the time), resulted from a compromise

achieved through negotiation by developing countries acting

collectively and making issue-based alliances in a multilateral

context.2 In addition to the provisions entitled ‘Objectives’

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tion in the application of the regime and excludes this subject

from the WTO dispute settlement processes.

Members may provide limited exceptions to the exclusive

rights conferred by a patent, provided that such exceptions

do not unreasonably conflict with a normal exploitation of

the patent and do not unreasonably prejudice the legitimate

interests of the patent-owner, taking into account the legiti-

mate interests of third parties (Article 30). This provision has

been the subject of a dispute settlement decision in the WTO

wherein the act of using the patented pharmaceutical invention

to obtain regulatory approvals for marketing was considered

to be a permissible exception.4 Finally, the term of protection

available shall be a period of at least twenty years counted from

the filing date (Article 33).

Members shall require that an applicant for a patent disclose

the invention in a manner sufficiently clear and complete for

the invention to be carried out by a person skilled in the art.

Members may require the applicant to indicate the best mode

for carrying out the invention known to the inventor at the

filing date or, where priority is claimed, at the priority date of

the application (Article 29.1).

Compulsory licensing and government use without the

authorisation of the right-holder are allowed, but they are

subject to conditions aimed at protecting the legitimate

interests of the right-holder. Mainly contained in Article 31,

these conditions include the obligation, as a general rule, not

to grant such licences unless an unsuccessful attempt has been

made to acquire a voluntary licence on reasonable terms and

conditions within a reasonable period of time. The requirement

to pay remuneration that is adequate in the circumstances of

conditions that the commercial exploitation of the invention

must also be prevented and that this prevention must be

necessary for the protection of ordre public or morality (Article

27.2). This means that if a member country decides to exclude

certain types of inventions from patent grant, for example,

processes of human cloning, it cannot then allow the commer-

cial exploitation of these inventions in its territory.

The second exclusion is for inventions that are diagnostic,

therapeutic, and surgical methods for the treatment of humans

or animals (Article 27.3(a)). For example, an eye surgeon who

invents a novel, more effective method of removing a cataract

may not be granted a patent if a country opts to incorporate

this option in its law.

The final exclusion is for inventions that are plants and

animals (other than micro-organisms) and essentially biological

processes for the production of plants or animals (other than

non-biological and microbiological processes). However, any

country excluding plant varieties from patent protection must

provide an effective sui generis system of protection. Moreover,

the whole provision was made subject to review four years after

the Agreement came into force (Article 27.3(b)).

A product patent must confer the following exclusive rights

on the right-holder: making, using, offering for sale, selling,

and importing the patented product. Process patent protection

must give exclusive rights not only over the use of the process

but also over products obtained directly by the process. Patent-

owners shall also have the right to assign, or transfer by succes-

sion, the patent and to conclude licensing contracts (Article 28).

The exclusive right of importation must be read with Article 6

on the exhaustion of IPRs, which obliges only non-discrimina-

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implement Article 39.3 was through market exclusivity, while

others disputed this.5

Clarifications and flexibilities regarding TRIPS and public healthOn the issue of TRIPS and public health (including access to

patented medicines), the WTO has adopted three instruments:

1 The Doha Declaration on the TRIPS Agreement and Public

Health, November 2001;

2 The Decision on the Implementation of Paragraph 6 of

the Doha Declaration on the TRIPS Agreement and Public

Health, Geneva, August 2003;

3 A Protocol amending the TRIPS Agreement, December 2005.

1. The Doha Declaration on the TRIPS Agreement and Public HealthThe Doha Declaration on the TRIPS Agreement and Public

Health6 responded to concerns about the possible implications

of the TRIPS Agreement for public health, in particular with

regard to access to patented medicines. As mentioned earlier,

the TRIPS Agreement allows countries to take various kinds of

measures to qualify or limit IPRs, including for public health

purposes. However, some doubts had arisen as to whether the

flexibility in the TRIPS Agreement was sufficient to ensure that

it supported public health. It was unclear whether it promoted

affordable access to existing medicines while supporting R&D

into new ones.

each case, taking into account the economic value of the licence,

must also be observed, as must a requirement that decisions be

subject to judicial or other independent reviews by a distinct

higher authority. Another important condition is that such use

must be made predominantly to supply the domestic market.

Some of these conditions are relaxed in the case of public non-

commercial use and when compulsory licenses are employed to

remedy practices that have been established as anticompetitive

by a legal process or in cases of emergency.

The Agreement also contains provisions to protect undis-

closed information. It requires that a person lawfully in control

of such information must have the possibility of preventing it

from being disclosed to, acquired by, or used by others without

his or her consent in a manner contrary to honest commercial

practices (Article 39.2).

In addition, undisclosed test data and other data that govern-

ments require to be submitted as a condition of approving

the marketing of pharmaceutical or agricultural chemical

products that use New Chemical Entities (NCEs) must be

protected against unfair commercial use where the generation

of such data has involved considerable effort. Members must

protect such data against disclosure, except where necessary

to protect the public or unless steps are taken to ensure that

the data are protected against unfair commercial use (Article

39.3). While market exclusivity for the originator of such test

data is not explicitly required, members cannot meet their

obligation to protect such data against unfair commercial use

simply by protecting it against disclosure. In the run-up to the

Doha Ministerial meeting in 2001, some members expressed

their view in the TRIPS Council that the most effective way to

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effect through decisions of the TRIPS Council and the General

Council.7 In November 2005, the TRIPS Council extended the

time given for these countries to implement other provisions of

the TRIPS Agreement to July 2013.8

2. The implementation of Paragraph � of the Doha DeclarationAs explained in Chapter 8 by Patrick Ravillard, the Doha

Declaration recognised the problem of countries with insuf-

ficient or no manufacturing capacities in the pharmaceutical

sector in making effective use of compulsory licensing. The

WTO General Council therefore adopted, on 30 August 2003,

a Decision9 that waives, in certain circumstances, Article 31(f)

and (h) of the TRIPS Agreement. This Decision was adopted

in the light of a Chairman’s statement10 that sets out several

key shared understandings of members on how the Decision

would be interpreted and implemented. The Decision covers

any patented pharmaceutical products, or pharmaceutical

products manufactured through a patented process, needed

to address public health problems recognised in Paragraph 1

of the Doha Declaration on the TRIPS Agreement and Public

Health, including active ingredients necessary for their manu-

facture and diagnostic kits needed for their use.

The Decision went into effect on 30 August 2003. Interest-

ingly, there have been no notifications made to the WTO to use

the system.11 There are a number of reasons of a transitional

nature which can explain the lack of use of the system so far.

One is that WTO members, especially the ones exporting under

the system, usually have to amend primary legislation in order

to be able to use the additional flexibility. This inevitably takes

The Declaration responds to these concerns in a number

of ways. First, it emphasises that the TRIPS Agreement does

not and should not prevent members from taking measures to

protect public health. Second, it makes it clear that the TRIPS

Agreement should be interpreted and implemented in a way

that supports WTO members’ rights to protect public health

and, in particular, to promote access to medicines for all. Third,

it clarifies some of the flexibilities contained in the TRIPS

Agreement. The Declaration makes it clear that each member

is free to determine the grounds upon which compulsory

licences are granted and also clarifies that each member has the

right to determine what constitutes a national emergency or

other circumstances of extreme urgency. It declares that public

health crises, including those relating to HIV/Aids, tubercu-

losis, malaria, and other epidemics, can represent such circum-

stances.

With regard to the exhaustion of IPRs and a member’s right

to permit parallel imports, the TRIPS Agreement states that a

member’s practices in this area cannot be challenged under the

WTO dispute settlement system. While emphasising the flex-

ibility in the TRIPS Agreement to take measures to promote

access to medicines, the Declaration also recognises the impor-

tance of IP protection for developing new medicines and

reaffirms the commitments of WTO members in the TRIPS

Agreement.

With regard to the Least Developed Countries (LDCs) of the

WTO, the Declaration agrees to provide them with an extension

of their transition period until January 2016 for protecting

and enforcing patents and rights in undisclosed information

with respect to pharmaceutical products. This was given legal

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�1

ConclusionThe WTO is often portrayed by its detractors as a club for rich

countries meant to perpetuate their world dominance. The

TRIPS Agreement, particularly with its obligation to provide

patents for pharmaceuticals, is often cited as an example of

this. However, a plain reading of the Agreement, and of the

subsequent WTO instruments relating to public health, shows

that a balance has been sought between the interests of right-

holders and those of users of IPRs, including patents. It is up to

members to use the flexibilities offered to them in the TRIPS

Agreement and the subsequent instruments to obtain more

affordable access to patented medicines, and those choosing

to do so need not fear any challenge under the WTO dispute

settlement mechanism.

time and, as of July 2006, members have modified their laws/

regulations to enable exports under their legislation. A second

reason is that there is no need to use the system to import drugs

from non-patent sources. Most important drugs currently on

the market are still available from such sources, since some

countries that are significant suppliers of generic drugs, such

as India, only started providing product patent protection for

pharmaceutical products from the beginning of 2005. A third

point is that, as is well known, a compulsory licensing system

can have a great effect in influencing prices, even if the system

is never used.

�. A Protocol amending the TRIPS AgreementParagraph 11 of the August 2003 Decision called for the TRIPS

Council to prepare an amendment, based, where appropriate,

on the Decision that would replace its provisions. Agreement on

such an amendment was reached on 6 December 2005, when

the General Council adopted a Protocol amending the TRIPS

Agreement and submitted it to WTO members for acceptance.

In substance, the amendment tracks the August 2003 text. The

Decision on the amendment was also taken in the light of a re-

reading by the General Council Chairman of the statement of

August 2003. The Protocol will enter into force upon acceptance

by two-thirds of the members. To date, the USA, Switzerland

and El Salvador have accepted the amendment.12 The waiver

provisions of the August 2003 Decision remain applicable until

the date on which the amendment takes effect for a member.

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�2 ��

Pharmaceutical IPRs and the TRIPS Agreement

The pharmaceutical industry and TRIPS The principal enforcement tool available to the industry twenty

years ago, i.e. the lonely fight of patent lawyers in the courts of the

infringing countries, bordered on the futile in the face of almost

non-existent laws or enforcement. In addition, the only inter-

national patent treaty at the time – the World Intellectual Prop-

erty Organization’s (WIPO) Paris Convention – did not contain

any substantive patent obligations. Nor did it have any dispute

settlement provisions to adjudicate differences among countries.

In seeking the launch of a multilateral, intellectual property

standards-setting exercise, the pharmaceutical industry had

a very limited geographic focus: it sought to gain improved

protection for its intellectual property not in all developing

countries, regardless of their level of economic development,

but in the more advanced developing countries, the so-called

Newly Industrialising Countries (NICs). While the research-

based pharmaceutical companies had adequate and effective

intellectual property protection and enforcement in the

developed countries, they did not have similar protection in

the NICs, which were the home of the copiers of their pharma-

ceutical products. To gain such protection – that is, to get these

countries to enact national intellectual property legislation

along the lines found in the developed countries – the pharma-

ceutical industry sought a multilateral venue where improved

intellectual property protection in the NICs could be traded off

for access to the markets of the developed countries for NIC

exports. The obvious candidate for this venue was the GATT,

which in 1986 was in the process of launching a new round of

multilateral trade negotiations.

The pharmaceutical industry, being research based,

has a business model which relies heavily on the

incentives provided by the limited market exclusivity resulting

from intellectual property protection. This permits it to recoup

its upfront investment in Research and Development (R&D) of

innovative drugs. It should, therefore, come as no surprise that

the industry was at the forefront of the international push that

resulted in the negotiation of the Agreement on Trade-Related

Aspects of Intellectual Property Rights (TRIPS Agreement) in

the GATT (General Agreement on Tariffs and Trade) Uruguay

Round of multilateral trade negotiations.1

This chapter will seek to draw some broad conclusions about

the implementation of the TRIPS Agreement in the light of the

pharmaceutical industry’s original objectives and expectations

in seeking the negotiation of an intellectual property agreement

in the GATT. To understand where we are today, and where we

are going, it is important to recall where we were.

�

Pharmaceutical IPRs and the TRIPS Agreement: past, present and future Jacques Gorlin

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term was set at twenty years from the date of patent applica-

tion. The Agreement also included an obligation to provide

data exclusivity.

To understand the impact of the TRIPS Agreement on

the protection of those Intellectual Property Rights (IPRs) of

concern to the pharmaceutical industry, one needs to take into

account what TRIPS was and was not.

First, it is critical to recall that the TRIPS Agreement was a

snapshot in time. It was essentially completed in December

1991 and dealt with those IPR-related issues facing the pharma-

ceutical and other intellectual property-dependent industries

that were identified in the late 1980s and early 1990s. It was

never intended to be a static document.4

Furthermore, it was never the intention of the TRIPS nego-

tiators to establish an international patent law harmonisation

treaty by agreeing to specific or detailed language that had

to be incorporated verbatim into national laws.5 Rather, they

negotiated an agreement that contained minimum standards

of protection and enforcement and, where possible, used recog-

nised terms of art and abbreviated language. The TRIPS nego-

tiators left national implementation to the determination of

the individual WTO members so long as the measures met the

TRIPS obligations.6

While the TRIPS negotiators wanted to give the devel-

oping and Least Developed Country (LDC)7 members of the

WTO additional time to move their national laws to the TRIPS

standards, the so-called ‘transition provisions’ that they crafted

were essentially fixed delays in TRIPS implementation. They

did not provide for any gradual transition from weak intellec-

tual property systems to TRIPS-compatible systems akin to the

The initial focus of the pharmaceutical industry was on the

development of internationally recognised standards of protec-

tion and enforcement for patents, specifically with respect to

patent protection for pharmaceutical products; limitations on

the issuance of compulsory licences; and adequate patent term.

Only later, once the negotiations had been launched, did the

pharmaceutical industry seek the protection of the proprietary

information provided to regulatory authorities to demon-

strate the safety and efficacy of its products, which came to

be included in Article 39 of the TRIPS Agreement (‘Data Exclu-

sivity’).

The TRIPS AgreementThe TRIPS Agreement, which came into effect on 1 January

1995, is viewed as one of the major achievements of the

Uruguay Round and is considered by some to be the most signif-

icant intellectual property accord of the twentieth century.2

It was the first international agreement to provide both for

minimum standards of protection for intellectual property and

for minimum standards of how countries were to enforce those

substantive obligations. In addition, the TRIPS Agreement

provided for international dispute settlement to determine

whether a World Trade Organization (WTO) member’s intellec-

tual property system met these international standards.

Although it had some lacunae,3 the TRIPS Agreement essen-

tially met the goals of the pharmaceutical industry. WTO

members were required to provide product patent protection

to pharmaceutical products and to follow established proce-

dures when issuing compulsory licences. The minimum patent

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It was, therefore, surprised by the failure of many developing

countries – including the very NICs that were the industry’s

principal targets in seeking a TRIPS Agreement – to implement

key TRIPS provisions. These failures also rendered ineffec-

tive the TRIPS dispute settlement process, which was not at

all suited for challenges to the core of a country’s intellectual

property system.

This failure to meet the industry’s original expectations was,

in part, due to a number of factors:

➤ Yesterday’s minimum standards became today’s

maximum standards. The view that the TRIPS

negotiators had of TRIPS as an agreement containing

minimum standards is in stark contrast to today’s view

of TRIPS as a set of maximum standards, beyond which

even bilateral agreements should not go. This perception

of TRIPS as a set of maximum standards is encapsulated in

the term ‘TRIPS-plus’, which many developing countries

and supportive NGOs have used derogatorily to oppose

calls for strong intellectual property protection and which

the pharmaceutical industry, on the other hand, argues is

consistent with, and the logical extension of, TRIPS Article 1.

➤ Routinisation of intellectual property. The

convergence among the four principal developed countries

– the USA, Canada, Japan and the EC – in support of

intellectual property during the TRIPS negotiations failed

to carry over into the implementation stage. Intellectual

property had been accepted as the last issue on the

Uruguay Round agenda and the TRIPS Agreement had

been successfully negotiated due to the wide acceptance

transition provisions ending the quotas under the Multi-Fiber

Textile Agreement that were negotiated at the same time. Thus,

a developing country did not face any sanctions if it had the

same TRIPS-incompatible protection on 31 December 1999

that it had had on 1 January 1995, but it did face sanctions if it

failed to have TRIPS-compatible protection the next morning,

on 1 January 2000. As a result, many WTO developing country

members, notwithstanding the threat of possible sanctions, did

not have in place TRIPS-compatible regimes at the end of the

TRIPS ‘transition periods’.

TRIPS implementation and industry expectationsAfter more than ten years’ experience of TRIPS implementation

we can now see that some of the original expectations that the

pharmaceutical industry had for TRIPS were not realised. From

the very outset of the negotiations, the industry had believed

that stronger intellectual property protection was a ‘win–win’

situation: while providing greater commercial certainty to the

developed world, it would also provide economic benefits to

the developing countries, especially the NICs, which had the

necessary infrastructure and generic pharmaceutical manu-

facturing capacity in place to take advantage of the incentives

contained in the TRIPS Agreement. In 1995, the industry had

expected that the TRIPS provisions would be faithfully imple-

mented by all countries according to the transition schedules

set out in the agreement and that the TRIPS dispute settlement

provisions would be used to fill in any isolated gaps when

countries converted their TRIPS obligations into national law.

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meetings. The ‘Paragraph 6’ issue on compulsory export

licences had its origins in the theoretical problem raised

by the inability of WTO members that lacked a domestic

generic pharmaceutical capacity to take advantage of the

TRIPS compulsory licence provisions, which were, after all,

only exceptions to the patent right.

➤ WTO’s inability to differentiate among developing

countries. Developed and Least Developed Countries8

are recognised by the WTO as distinct country groupings.

All other countries are grouped as developing countries,

whether they are middle-income countries ranked just

below the OECD countries or low-income countries ranked

just above the least developed. This inability to differentiate

within the WTO between, for example, China, Brazil or

Argentina on the one hand, and Papua New Guinea or

Kenya on the other, made it difficult for the industry to

structure WTO implementation strategies specifically for

the advanced developing countries.

➤ The Aids crisis in southern Africa. The impact of

the Aids crisis in southern Africa on the debate over

TRIPS implementation in all developing countries cannot

be overestimated. It permitted countries like Brazil,

which had the infrastructure and resources to cope with

the crisis, to avoid meeting their TRIPS obligations by

exploiting the heart-wrenching scenes from the southern

African countries, which had neither the resources nor

the infrastructure to deal with the pandemic. The access-

to-medicines debate that the Aids crisis in southern

Africa engendered, when coupled with the takeover by

the lawyers of the TRIPS implementation process and

of the view that weak intellectual property protection

constituted a trade barrier. These countries, also known

as the Quad, used political chits and made critical trade-

offs to gain the Agreement. But the political convergence

quickly dissipated and the only developed country

willing to use the WTO dispute settlement process to

gain TRIPS implementation was the USA. The other three

country groupings failed to keep pace and serious TRIPS

implementation, both with original WTO developing

country members and key acceding candidates, therefore

became the sole preserve of the USA.

➤ Takeover by the lawyers. The impact of the

strengthened GATT dispute settlement procedures that

were negotiated in the Uruguay Round went beyond

the process itself. Coupled with the lack of political will

among some of the Quad countries to seek the expected

implementation of the TRIPS Agreement, the new Dispute

Settlement Mechanism, with its Dispute Settlement

and Appeals Bodies, created an environment in which

legal arguments gained prominence in the debate over

TRIPS implementation. Minimum standards were no

longer a shorthand for the type of protection expected

at the national level. Rather, the TRIPS obligations were

scrutinised as if they were treaty language. The vocabulary

of the debate also changed. ‘Exceptions’ found in the

TRIPS Agreement became ‘flexibilities’ that countries were

permitted to turn into legal norms of intellectual property

protection when enacting their domestic legislation.

Theoretical arguments on the meaning of TRIPS provisions

took over the debate at Ministerial and TRIPS Council

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intellectual property challenges require the industry to move

beyond the WTO.

The industry has thus come full circle. While it will continue

to support multilateral efforts to ensure that the TRIPS

Agreement is properly implemented, the current stalemate in

the WTO, caused by the confluence of the forces described in

this chapter, has led the industry to focus on bilateral measures,

such as Free Trade Agreements (FTAs), as the current preferred

mechanism for gaining the strong intellectual property protec-

tion that it continues to need. While admittedly less efficient

than a multilateral mechanism, FTAs have the advantage that

they are freely entered into by the parties and, as a result,

provide the negotiating leverage to gain the requisite levels of

protection.

While current protection of pharmaceutical IPRs is firmly

rooted in the achievements of the TRIPS Agreement and the

multilateral process that it engendered, the future protection of

pharmaceutical IPRs will incrementally build on that founda-

tion step-by-step in individual countries.

the WTO’s inability to differentiate among developing

countries, led to a qualitative change in the very legitimate

debate over whether the NICs were meeting their

pharmaceutical-related TRIPS obligations. These individual

strands came together in the 2001 Doha Declaration on

TRIPS and Public Health, which legally did not change

any of the TRIPS obligations, but nevertheless represented

a political watershed in the implementation of the

pharmaceutical-related provisions of the Agreement. In

that Declaration, which had its origins in the institutional

desire of WTO trade ministers to demonstrate that they

were contributing to the fight against Aids in southern

Africa, the trade ministers signalled to all developing

country members of the WTO that the WTO dispute

settlement mechanism would no longer be used against

them to enforce the TRIPS Agreement.

Conclusion: the future of pharmaceutical IPRsThe pharmaceutical industry’s business model has essentially

not changed over the last twenty years and the industry will

thus continue to be dependent on strong intellectual property

protection. The history of the last twenty years demonstrates

that the industry’s search for improved intellectual property

protection is a dynamic process. Twenty years ago, the search

led the industry to the GATT and the negotiation of what

became the TRIPS Agreement in the WTO. While the TRIPS

Agreement represented a major milestone in that search, and

will continue to set the standard for the basic level of intel-

lectual property protection that the industry seeks,8 today’s

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The WTO decision of 6 December 2005

The Doha Declaration on TRIPS and Public HealthOn 14 November 2001, in Doha, the WTO ministerial confer-

ence adopted the Declaration on the TRIPS Agreement and

Public Health. The ministers had instructed the TRIPS Council

to find an expeditious solution to the problem faced by members

with insufficient or no manufacturing capacities in the phar-

maceutical sector, who also could not import the medicines

they needed.1 An amendment was needed because the original

TRIPS Agreement provided that compulsory licences2 could

only be authorised to supply the domestic market.

The Waiver Decision of 30 August 2003On 30 August 2003, the WTO General Council adopted the

provisional Decision allowing WTO members to export patented

medicines to third countries with insufficient or no manufac-

turing capacities in the pharmaceutical sector, by making use of

compulsory licences. To give comfort to the USA, this Decision

was accompanied by a Statement made by the chair of the WTO

General Council, describing members’ ‘shared understanding’

of how the decision was to be interpreted and implemented.

The Decision was a provisional waiver,3 which was replaced by

a permanent amendment to the TRIPS Agreement in 2004.

Following the adoption of the Waiver Decision, the European

Commission proposed a Regulation on compulsory licensing

of patents relating to the manufacture of pharmaceutical

products for export to countries with public health problems.

The objective was to create a legal basis, at the European Union

After more than two years of intensive debate about

how to transpose a provisional decision, origi-

nally adopted on 30 August 2003, the World Trade Organiza-

tion (WTO) members agreed on 6 December 2005 to amend

the Agreement on Trade-Related Aspects of Intellectual

Property Rights (TRIPS Agreement). This allowed the granting

of compulsory licences for the purposes of manufacturing

pharmaceutical products for export to countries facing public

health problems.

The WTO General Council submitted the proposed

amendment to the WTO members for acceptance. Once

accepted and in force, the amendment completed a process

that began in 2001 with the ministerial Declaration on the

TRIPS Agreement and Public Health. It represents the first time

that a core WTO agreement has been amended.

�

The WTO Decision of � December 200� on the amendment of the TRIPS AgreementPatrick Ravillard

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adopted a ‘pick-and-choose’ approach, as their proposal failed

to address several provisions of the Waiver Decision, while

redrafting others. The rationale was that a number of the Deci-

sion’s provisions would be either redundant in the context of

an amendment or otherwise served by existing TRIPS provi-

sions on compulsory licences and enforcement.

Other developing countries generally welcomed the African

proposal as a good basis for further discussion. Their main

concern was the status of the Statement, which they did not

want to involve in the amendment process at all.

The USA, while agreeing on the technical approach,

sought to incorporate (or refer to) the Statement in the TRIPS

Agreement. In particular, they suggested that a reference to the

Statement could be made in a footnote of the Agreement. In

March 2005, they circulated a submission7 asking to preserve

an explicit reference to the Statement in the amendment or the

principles included therein, while arguing that they did not

seek to elevate the legal status of the Statement.

Due to a lack of real progress, the EC informally circulated

a paper in the WTO in September 2005 outlining its ideas on

how the Waiver Decision should be incorporated into the

TRIPS Agreement. The initiative injected new momentum into

the discussion. Technically, the amendment should consist of

an exception to Article 31(f), allowing WTO Members to issue

compulsory licences for export under the conditions agreed in

August 2003. These conditions would be inserted in an annex

to the TRIPS Agreement, so as not to overload the body text of

the Agreement. As to the Statement, the EC proposed it should

be reiterated by the Chairman of the General Council at the

time of adopting the amendment.

(EU) level, to enable the member states to grant compulsory

licences for the production of pharmaceuticals and their export

to eligible importing countries. The Regulation was adopted on

17 May 2006.4

The negotiations on the amendmentThe negotiations on the amendment were more difficult

than expected and WTO members were unable to respect the

deadline scheduled in the Waiver Decision. Indeed, certain

members attempted to re-open discussions on substantive

issues. The debate focused on the legal form and content of the

future amendment.

From the outset, the European Community (EC) took the

view that the nature of the amendment process should remain

essentially technical in order to avoid having to re-open the

discussions on substantive issues.5 The amendment should

reflect what had been agreed in the Waiver Decision, because

it was the result of a delicate balance that had been difficult to

strike. In any event, the fact that the TRIPS Agreement should

be amended meant for the EC that textual changes would have

to be made to the Agreement itself, in order to translate the

relevant paragraphs of the decision into TRIPS language. As to

the WTO General Council Statement, the EC held that while the

relationship between the Waiver Decision and the Statement

should be preserved, the legal status of the Statement should

not be upgraded.

The African Group saw an opportunity in the amendment

exercise to re-open the discussions on substantive issues and

tabled a proposal for an amendment in December 2004.6 They

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closely as possible and is composed of three parts. First, there

are five paragraphs under Article 31bis of the TRIPS Agreement

(i.e. an additional article after Article 31), including the one

which allows pharmaceutical products made under compul-

sory licence to be exported to developing countries in need.

Other paragraphs deal with avoiding double remuneration to

the patent owner, regional trade agreements involving Least

Developed Countries (LDCs), non-violation and situation

complaints, and retaining all existing flexibilities under the

TRIPS Agreement.

A further seven paragraphs have been included in a new

annex to the TRIPS Agreement, which set out terms and condi-

tions for using the system. Finally, an appendix to the annex

deals with assessing the lack of manufacturing capacities in the

importing country. This was originally an annex to the Waiver

Decision.

In order to preserve the legal meaning and weight, and the

relationship between the Statement and the new rules, the

Statement has not been incorporated in the amendment but

was reiterated by the Chairman of the WTO General Council

prior to the adoption of the proposal for an amendment. This

reflects the approach of the EC during the negotiations.

Later, a group of developed countries and the EC announced

that they would not use the system to import. High-income

developing countries announced separately that if they used

the system as importers, it would be for emergency situations

only.10 All WTO members have the right to act as exporters.

While the EC proposal was not formally submitted to the

TRIPS Council, it served as a basis for further consultations

conducted by the Chairman of the Council. Consultations also

took place between the EC, the African Group and the USA

in order to narrow down differences between the respective

approaches. The positions of the EC and the African Group

with regard to the amendment were actually very similar and

both wished to find a solution to clear the ground before the

Hong Kong Ministerial Conference scheduled for December

2005.8

The Decision of 6 December 2005Work intensified in the run-up to the Hong Kong Ministe-

rial Conference and the WTO members finally reached an

agreement on 6 December 2005. The new rules were formally

incorporated into the TRIPS Agreement and allow any WTO

member to export medicines made under compulsory licence

for the purpose of supplying developing countries in need.

The amendment takes effect for the WTO members that have

accepted it when two-thirds of the WTO members accept the

amendment and thereafter for each other member upon accep-

tance.9 The members have set themselves until 1 December

2007 to do this. The Waiver Decision remains in force for

each member until the amendment becomes effective for that

member.

The contents of the amendmentThe amendment is designed to stick to the Waiver Decision as

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Introduction In February 2004, a World Health Organization (WHO)

Commission on Intellectual Property Rights, Innovation and

Public Health began ‘an analysis of intellectual property rights,

innovation, and public health, including the question of appro-

priate funding and incentive mechanisms for the creation of

new medicines and other products against diseases that dispro-

portionately affect developing countries’. Its members were

politicians, academics and officials – but, surprisingly, only

one had practical experience of private sector research in the

pharmaceutical industry. The Commission reviewed over 50

expert submissions, organised several workshops and an open

forum in Geneva, held consultations with stakeholders in eight

cities worldwide and commissioned 22 studies. Its final report,

which runs to over 200 pages, was published in April 2006. The

�

The WHO Commission’s Report on Intellectual Property Rights, Innovation and Public Health: a missed opportunityJames Killick1

Acceptance of the amendment by the ECThe EC played an important role in the negotiations on the

amendment. As the EC is competent to conclude agreements

in the field of commercial aspects of intellectual property,11

the amendment had to be accepted on behalf of the EC.

On 27 April 2006, the European Commission presented a

proposal for a Council Decision accepting, on behalf of the

EC, the amendment. This new initiative, together with the

newly adopted Regulation on compulsory licences of patents

relating to the manufacture of pharmaceutical products for

export to countries with public health problems, demonstrates

the commitment of the EC to the WTO process and confirms

its willingness to truly facilitate access to medicines for poor

countries.

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The WHO Commission’s Report on IPRs, Innovation and Public Health

Section 3 analyses the way drugs are developed, pointing

out that it is likely to cost less than the industry average to

develop products to treat diseases that mainly affect developing

countries.

The report calls for work to improve clinical trials and regu-

latory procedures in developing countries, which could then

evaluate products using their own risk-benefit standards, which

might differ from those in the developed world. It cites a US

decision to withdraw a rotavirus vaccine because of a 1 in

10,000 risk of an obstruction in the bowel – odds which devel-

oping countries, where 600,000 children die every year from

severe rotavirus diarrhoea, might be willing to tolerate.2

The report finds no evidence that implementing the TRIPS

requirement for all WTO members to introduce patent regimes

would significantly boost R&D for Type III diseases, as the real

problem is insufficient market incentives. It suggests that an

open source approach, similar to the software industry, might

be useful for tackling biomedical research problems in devel-

oping countries.

Section 4 examines the problems of delivering medicines to

patients in developing countries, notably inadequate health

infrastructures and emigration of healthcare workers. It suggests

making greater use of traditional medicine practitioners in

developing countries.

The report gives the startling estimate that up to 25% of

medicines taken in the developing world are counterfeit or

substandard,3 and proposes tackling this problem through

good manufacturing practices and supply chain management.

It calls on the pharmaceutical industry to maintain transparent

and consistent pricing policies, arguing that prices of patented

report’s findings, which are summarised below, have been the

subject of significant – and justified – criticism.

The report’s findingsSection 1 of the report notes the relative lack of research into

Type III diseases, such as African river blindness, which occur

almost entirely in developing countries whose governments

and patients lack purchasing power. Patents and similar market

incentives do not stimulate research and development (R&D)

into new drugs to treat such diseases, since developing countries

generally have neither the scientific infrastructure nor a private

sector capable of innovation. And the huge cost of developing

new drugs makes it difficult to market them at affordable prices

for developing countries.

Section 2 analyses the process of discovering new drugs. The

report suggests the WHO should establish a permanent forum

of governments, companies, academics and patients to enable

organised sharing of information and greater coordination.

More controversially, it proposes that the WHO should act to

make companies’ libraries more accessible, with a view to iden-

tifying compounds for use against diseases that affect devel-

oping countries. (Of course, as the report itself notes, these

libraries are a key factor in competition between companies,

which may be reluctant to accept this suggestion.) It suggests

that the WHO and World Intellectual Property Organization

(WIPO) encourage patent pools and promote research, notably

through research exemptions in patent legislation and compul-

sory licences under the Agreement on Trade-Related Aspects of

Intellectual Property Rights (TRIPS Agreement).

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patent protection, thus delaying generic entry).8 It proposes

government action to avoid barriers to legitimate generic

competition, and gives the example of the Indian Patent Act

2005, which only allows patents on variants of a known drug if

they have greater efficacy.

Section 5 recommends improving innovative capacity

in developing countries. It calls for technology transfers to

increase production, and for more clinical trials, provided their

regulatory framework is improved.

The report also notes the trend of reverse pharmacology,

taking advantage of known therapeutic methods in traditional

medicine to accelerate the process of discovery. It suggests that

digital libraries of traditional medicinal knowledge should be

incorporated into the minimum search documentation lists

of patent offices, so that such knowledge is considered when

patent applications are made. Holders of Traditional Knowledge

(TK) should benefit from any commercial exploitation of the

information in these digital libraries.

Section 6 sets out the report’s recommendations. It notes

that in developed countries, incentives for R&D in the private

sector are generated by the market for healthcare products and

by public and private demand. Private sector innovation is also

supported by research in publicly funded universities, while

intellectual property protection ensures private companies are

financially rewarded for their innovation. Owing to lack of

demand, this innovation cycle usually does not exist in devel-

oping countries at present, leaving them dependent on products

designed to meet healthcare needs in developed countries. The

possibility of a patent may not stimulate innovation when the

market is too small, or scientific and technological capability is

products and generics should be reduced for all low- and

middle-income developing countries, not only those in sub-

Saharan Africa.

Regarding IPRs, the report suggests that companies should

‘adopt patent and enforcement policies that facilitate greater

access to medicines needed in developing countries’, i.e. they

should not file for patents in developing countries or should

grant voluntary licences.4 Developing countries should provide

for compulsory licences under the TRIPS Agreement and the

Doha Declaration, while governments should adopt price

controls and promote generic competition, ‘given the leverage

to determine prices that patents confer’.5 The report considers

that because developing countries have limited innovative

capacity and ability to pay, there are unlikely to be public health

justifications for them to provide more than the minimum

protection established under the TRIPS Agreement for regula-

tory data protection. It states that Free Trade Agreements (FTAs)

should not incorporate ‘TRIPS-plus’ protection (see Chapter 7).

The report goes on to argue that developing countries should

implement competition laws to balance intellectual property

and competition policy, and should apply the pro-competitive

measures allowed by TRIPS.6 All countries should take measures

to promote generic entry as soon as a patent expires. The report

also advises measures to promote greater competition between

generics, regulate prices and replace brand-name drugs by

generics.7

The report discusses whether new products are necessarily

better than existing medicines, and examines so called ‘ever-

greening’ practices (the name given to the scenario where a

patent-holder uses a minor improvement to seek additional

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In contrast, however, the report discusses a number of issues

that are of limited importance to developing countries. For

example, the issue of ‘evergreening’, the use of competition

laws against patent-holders (compulsory licensing) and the use

of laws to promote generic entry. None of these issues seems

particularly relevant to developing countries, given that it is

relatively rare for pharmaceutical companies to seek patent

protection in developing countries. They tend not to file for

patents there for the simple reason that the market is too small

to justify the effort (a fact acknowledged in the report). Yet each

of the three issues was discussed at length.

Put bluntly, the report overlooks key issues for developing

countries and instead weighs into the debates currently taking

place in those countries which already have effective health-

care systems, but which are trying to find methods to reduce

their healthcare budgets.

The report’s proposals for action to improve the situation

reflect its focus on the wrong issues, as well as the Commis-

sion members’ lack of practical experience. In fact, the only

member with hands-on industry experience made a number of

dissenting comments, as follows:

➤ Introducing competition law regimes in developing

countries to use against patent-holders would entail major

investments, notably in training specialists to enforce the

regime, especially as the interface with intellectual property

is one of the most complex areas of competition law. It

would surely be better to use the money to treat patients.

➤ Creating digital libraries of therapeutic methods in

traditional medicines for use in prior art searches before

lacking. The report concludes that the monopoly costs relating

to patents make patented products too expensive for most

patients in low-income countries, and calls on the WHO to

develop a ‘Global Plan of Action’ to overcome this problem.

The plan of action must ensure more and sustainable funding

to develop and make available medicines to treat the diseases

that particularly affect developing countries.

Analysis of the reportThe most significant criticism of the report seems to be that it

failed to address the right issues. For example, it barely discusses

two of the most important questions with regards to IPRs and

developing countries – the elephants in the room, as it were.

First, how relevant are IPRs to developing countries where

so many people die due to lack of access to basic medicines

that went off patent long ago?9 It is submitted that patents

are not the biggest issue for people who fall sick in developing

countries. Getting access to any type of medicine, in particular

generic medicines, is the real issue.

Second, the report notes that 25% of all drugs consumed

in developing countries are counterfeit. This is a horrendous

statistic: it suggests that 25% of all expenditure on drugs in

developing countries is wasted. Solving this problem would

bring about an immediate improvement in public health at

next to no cost (based on the reasonable assumption that

governments/patients pay the same price for counterfeits as for

genuine drugs). This is clearly an IP issue of immediate impor-

tance, which should have been given high profile in the report.

Yet it is discussed in less than one page.

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ConclusionThe WHO Commission’s Report on Intellectual Property Rights,

Innovation and Public Health has achieved the important goal

of focusing the world’s attention on the problem of the lack of

drugs to treat diseases that primarily affect developing countries.

However, its analysis contains a number of serious flaws. As a

result, the report often fails to address the real problems faced

by developing countries – such as counterfeit medicines – and

instead addresses issues like competition law, generic entry

and evergreening, which are of limited (if any) relevance to

developing countries. Because of this lack of focus, a number of

the solutions proposed by the report are not relevant or would

be counter-productive. It is a pity that so much well-meaning

effort has led to such a disappointing result. This was indeed a

missed opportunity.

patents are granted could actually be counter-productive.

If a search showed that no patent could be granted,

pharmaceutical companies would not invest the hundreds

of millions of dollars needed to get a drug approved and no

new medicine would emerge.

➤ Equally counter-productive could be the idea contained

in the Indian Patent Act 2005, namely that patents would

only be granted on variants of a known drug if they have

greater efficacy. As the report admits, this test is wholly

impractical: clinical trials will not have taken place when

the patent application is filed, so it will be impossible to

demonstrate superior efficacy. And the risk is that no trials

would ever be carried out in such an uncertain regulatory

environment.

➤ Open source software (OSS) is backed by some of the

world’s largest computer firms, which offer consulting

services relating to OSS (e.g. IBM) or sell hardware

incorporating it (e.g. HP). Without government support

on a similar scale to that given by HP, IBM and others,

open source methods are unlikely to succeed in the

pharmaceutical industry.

➤ The recommendations for price controls and compulsory

licensing make the mistake of assuming that a patent

gives the holder power to set prices. Patented products

normally compete with other patented products and

generic drugs that produce a similar therapeutic effect.

Only in the relatively small number of cases where there is

no alternative product does a patent give monopoly pricing

power.

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The EU’s approach to the enforcement of pharmaceutical IPRs

The current situationFew products have as much potential to cause serious damage

as fake medicines: counterfeit blood plasma, retro-virals or anti-

paludism tablets can have ravaging effects in terms of public

health. Victims of such products reach thousands each year and

the poorest people in the Least Developed Countries (LDCs) of

the world are particularly affected. Most of the 800,000 pharma-

ceutical products seized on the borders of the European Union

(EU) in 2004 – a twofold volume increase over the previous year

– were only in transit and were ultimately destined to reach

third countries, particularly in the developing world.

Reports of the seriousness of the situation are overwhelming.

According to the authors of an article published in The Lancet,2

fake medicines were recognised as responsible for the deaths of

192,000 people in China alone in 2001. The Chinese govern-

ment subsequently closed down 1,300 factories and investi-

gated 480,000 cases involving products with an estimated value

of US$57 million. In August 2006, Shanghai police disman-

tled a criminal network dedicated to selling a false version of a

popular anti-flu vaccine over the Internet. More than 400kg of

tablets ready to be shipped worldwide were seized.

A general legal framework for a specific problemIn view of this worrying situation, it is perhaps surprising to

find that there are very few rules in the legal framework of Intel-

lectual Property Rights (IPRs) enforcement specifically made to

address counterfeiting of pharmaceutical products. Looking at

In the eyes of the public, counterfeiting is often still

seen as something innocent and harmless. Everyone

enjoys a bargain. But it is far too easy, and also wrong, to write

off counterfeiting as harmless. Production of and trade in fake

products are big business for criminal organisations and they

undermine entire sectors, including the most creative and

competitive, of the economy. And when pirates move into fake

medicines, we move from rip-offs to potential tragedy.

The purpose of this chapter is to give a description of the

tools available in European countries to protect citizens against

the consumption of counterfeit pharmaceutical products and

right-holders against the infringement of their intellectual

property.

10

The EU’s approach to the enforcement of pharmaceutical IPRs: multilateral, bilateral and domestic perspectivesPedro Velasco Martins1

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to a very high standard. The most ‘operational’ responsibili-

ties and the majority of the means and resources available to

fight against piracy and counterfeiting are the competences

of the individual Member States. Therefore, the most visible

and immediate results in this fight will always be achieved by

the national customs authorities, police, courts, and adminis-

trations, and regulated by the different national legislations.

This is why the level of enforcement within the European

Community is different among Member States, and also why

some countries still need to do more to improve the present

situation by cutting down the remaining production and sale

of pirated or counterfeit goods.

Before describing in more detail the laws that have already

been harmonised, it is important to note that Europe is far

from being one of the regions most affected by the traffic of

counterfeit pharmaceuticals.3 To a large extent, this is due

to the health systems predominant in EU countries, where

the distribution and sale of most pharmaceutical products is

tightly regulated and monitored by public authorities. Further-

more, contributions by public health schemes to the price of

medicines provide little incentive for consumers to buy cheap

products through unofficial channels. But the risk is present for

certain products for which the price participations are harder

to obtain or are in risk of shortage (pharmaceuticals like Viagra;

or Tamiflu, in the wake of the avian flu reports of 2005). There

is also, as mentioned above, a considerable traffic of fake phar-

maceutical products originating in Asia and destined to reach

developing and least developed countries in Africa and South

America, making the journey through Europe and occasionally

being successfully seized here.

the most comprehensive set of IPR rules in force at the multilat-

eral level, the Agreement on Trade-Related Aspects of Intellec-

tual Property (TRIPS Agreement), we find that the mechanisms

foreseen in its Enforcement chapter (Part III) for administrative,

civil, criminal and customs proceedings apply in general to any

infringements of copyright or trademarks.

The same is the case for the legal instruments available to

combat infringements of IPRs in the EU, as well as the sets of

rules included in bilateral agreements between the EU and third

countries. Therefore, from a strict point of view, counterfeiting

a pair of sports shoes will be subject to the same mechanisms as

faking a pharmaceutical product.

Pharmaceuticals are different, however, because of the

potential gravity of the effects of counterfeiting on the user.

This means that in many situations the producers and distribu-

tors of a fake medicine will actually be involved in criminal

practices that extend well beyond those of counterfeiting, such

as homicide, physical offences, corruption of medical products,

poisoning and others. These crimes are covered by their own

legal regimes and sanctions foreseen for their practice are in

many cases much harsher than those applicable to the more

‘simple’ infringement of an IPR. In some countries where the

distribution of fake pharmaceuticals leads to loss of human life,

the pirates may in fact incur the death penalty.

Legislation and enforcement mechanisms in the EUGenerally speaking, the European Union (EU) and its Member

States are acknowledged for protecting and enforcing IPRs

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include, among others, injunctions to halt the sale of coun-

terfeit or pirated goods, provisional measures such as precau-

tionary seizures of suspected offenders’ bank accounts,

evidence-gathering powers for judicial authorities, and powers

to force offenders to pay damages to right-holders to compen-

sate for lost income. To a large extent, the measures foreseen

provide a higher level of protection than that given by the TRIPS

Agreement. However, because some aspects of the criminal law

still remain a competence of each Member State, the Enforce-

ment Directive does not contain any measures relating to

enforcement by penal means.

Since then, the EU has been working on a proposal to

harmonise Member States’ national legislations insofar as

criminal sanctions on counterfeiting and piracy are concerned.6

The text currently being discussed foresees that offences must

incur a maximum term of at least four years’ imprisonment

when they are committed under the aegis of a criminal organi-

sation. The same applies where the offences carry a health or

safety risk. For legal entities the penalties include criminal and

non-criminal fines up to a maximum of 100,000 euros. Fines

will be raised up to a maximum of 300,000 euros for offences

carried out by a criminal organisation and/or offences which

carry a health or safety risk.

c) Enforcement in third countriesIPR infringements occurring outside the territory of the EU,

and thus outside the scope of EU laws, are obviously a major

source of concern. This is why enforcement initiatives at the

international level have gained considerable momentum in

recent years, and not only from Europe but also from countries

It is worth presenting an overview of the intellectual property

regime applicable in the EU to IPR infringements in general and

to counterfeit pharmaceuticals in particular.

a) Enforcement at the external borderComing back to the IPR enforcement rules applicable at EU level,

the EU adopted the ‘Customs Regulation’ in 1984, setting out

the conditions under which customs authorities may intervene

in cases where goods suspected of infringing IPRs reach the

external borders of the EU. The law applies to infringements

of all IPRs and regardless of whether they are being imported,

exported or are in transit. It also sets out the steps to be taken by

the authorities when goods are found to be illegal. This Regula-

tion was revised and improved in 2003.4

It is one of the most effective instruments available against

IPR infringements at the external EU border. Seizures in 2004

increased by almost 1,000% compared to 1998. Customs now

seize more than 100 million articles per year, and the number

of customs operations involving fakes more than doubled to

22,000 from 2003 to 2004. Most important of all, the Regula-

tion foresees simple and cost-free mechanisms of cooperation

between legitimate right-holders and customs authorities.

b) Enforcement within the EUAnother key legal tool is the ‘Enforcement Directive’,5 adopted

in 2004. This Directive covers infringements of all IPRs (both

copyright and industrial property, such as trademarks or

designs), which have been harmonised within the EU under

European law. The Directive is based on best practices in the

Member States, which are extended throughout the EU and

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the topic, and they often go beyond the minimum standards

required by the TRIPS Agreement. The EU announced in

September 20069 that it was entering into a new era of ambitious

bilateral agreements with partners such as India, ASEAN and

Korea, and that it intended to include stronger provisions for

IPRs, modelled on those in place within the EU (such as the

2004 Enforcement Directive).

d) Access to affordable medicinesIt is worth making reference in this regard to an instrument that

regulates the flow of pharmaceutical products between Europe

and certain third countries, known as ‘The Tiered Price Regula-

tion’.10 This Regulation is intended to enable producers of key

medicines to significantly increase their supplies at lower, so-

called ‘tiered’ prices, to 76 poor countries, while keeping higher

prices for the same items in Europe. While the purpose of the

Regulation is not to deal with counterfeit pharmaceuticals, it

contains a series of measures destined to prevent the traffic of

these low-priced products back into the EU. Products sold to

beneficiary countries must be marked with a logo and manu-

facturers should also make them look different from those sold

in developed markets (for instance by using different colours,

sizes or shapes).

Multilateral enforcement initiativesAt the multilateral level, the topic of counterfeit pharmaceuti-

cals is attracting considerable attention at the highest political

stages.

During the Russian presidency of the G8, the G8 leaders

such as the USA, Japan and some of the most important inter-

national and multilateral organisations.

Europe’s basic approach was set out at the end of 2004, in the

‘Strategy for the Enforcement of IPR in Third Countries’.7 Since

then, the EU has substantially increased its work in this field,

creating specific dialogues with some of the key players such

as China, Russia and the Ukraine (one of the first dialogues

with China was dedicated to the pharmaceutical sector). The

EU has also addressed the issue at the World Trade Organization

(WTO)/TRIPS Council, shifted technical assistance resources

to enforcement, and established reinforced cooperation with

countries sharing its concerns, such as the USA and Japan. Like

Europe, these countries identified the evolution and growth

in piracy and counterfeiting in the global economy as a top

political priority.

In October 2006, the EU announced additional steps related

to enforcement. Based on an extensive survey of European busi-

nesses about their experience with IPR enforcement around the

world, the EU established a list of priority countries and regions

on which to focus activity and resources in the fight against

piracy and counterfeiting. They identified China as the main

priority, but also singled out Russia, the Ukraine, Turkey, Chile

and Korea, and the ASEAN and MERCOSUR trading blocks.

The results of the Enforcement Survey are publicly available8

and contain detailed information about counterfeiting in over

40 countries, including reports about infringements relating to

pharmaceutical products.

Bilateral trade agreements are increasingly becoming another

weapon in the war against piracy and counterfeiting. There is

a shift towards the inclusion of detailed sections dedicated to

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ConclusionCombating counterfeit medicines does not necessarily require

IPR enforcement rules tailor-made for the purpose. Instead,

given that drug counterfeiting is a phenomenon whose conse-

quences largely transcend the negative effects of ‘ordinary’

counterfeiting, it needs to be tackled by laws and implementa-

tion mechanisms extending beyond the intellectual property

framework. A strong regulatory system for the authorisation

of new medicines and clear rules for their licensing, manu-

facturing and distribution is required. Then, if or when these

regulations are infringed, there is a need to educate patients

and healthcare workers, execute effective action and coordina-

tion between different law enforcement agencies, and impose

sanctions proportionate to the crime. For those countries

lacking the means to put such a system in place on their own,

urgent assistance will be needed.

approved a statement on the enforcement of IPRs at the St

Petersburg Summit. They committed themselves to substan-

tially reduce global trade in pirated and counterfeit goods and

to combat the trans-national networks supporting this trade.

The G8 members also agreed to cooperate among themselves

in areas such as customs controls, antipiracy crime strategies,

public awareness-raising, and assistance to third countries

through sharing of best practices, training and technical assist-

ance.

For its part, the Organisation for Economic Co-operation

and Development (OECD) has decided to conduct an extensive

study to assess the impact of piracy and counterfeiting on the

global economy. There are few credible overall assessments of

the impact of counterfeiting on the world economy and the

OECD is certainly the institution best placed to do this. One

of the sectors to be analysed in detail is the pharmaceutical

sector, and a particular emphasis will be placed on the risks to

consumers.

Last, but not least, an International Medical Products Anti-

Counterfeiting Taskforce (IMPACT) has been created by the

World Health Organization (WHO) following an international

conference in February 2006. It consists of governmental, non-

governmental and international institutions, and aims to raise

awareness about the problem, establish cooperation, promote

exchange of information among the entities concerned, and

offer legislative, administrative and technical solutions to

combat counterfeit drugs.

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The threat of counterfeit medicines: a new approach to policy

has warned that an increase in the risks of counterfeits entering

the EU supply chain is ‘obvious’.4

The Center for Medicine in the Public Interest estimates that,

globally, counterfeit drug commerce will grow 13% annually

through 2010. That means counterfeit drug sales will grow at

nearly twice the rate of legitimate pharmaceutical commerce.

In 2010 this illegal business will generate US$75 billion in

revenues – a 92% increase from 2005.5 The profits are high and

the risks are low. And that is a deadly combination.

A large proportion of the world’s counterfeit medicines

originate in Asia and end up in the USA and EU. In the EU,

between 1998 and 2004, there has been a 1,000% increase in

seizures of counterfeit prescription drugs.6

China, in particular, is a production centre. In 2001 it was

reported that Chinese authorities closed 1,300 factories while

investigating 480,000 cases of counterfeit drugs worth US$57

million. It is estimated that in China between 200,000 and

300,000 people die each year due to counterfeit or substandard

medicine.7 And these are reported cases: the true number is

likely to be far higher. And while the West has not experienced

such dramatic numbers, there is no question that the problems

of Asia and Africa are on our doorstep.

Other data suggest that:

➤ Counterfeit medicines constitute between 40 and 50% of

total supply in Nigeria and Pakistan.8

➤ In China, authorities have found that some products have a

counterfeit prevalence ranging between 50 and 85%.9

➤ In Thailand and Nigeria, 36.5% of antibiotics and anti-

malarials on the WHO essential drugs list are substandard.10

What is a counterfeit drug? According to the

World Health Organization (WHO), a counter-

feit drug is ‘a product that is deliberately and fraudulently

mislabelled with respect to identity and/or source. Coun-

terfeiting can apply to both branded and generic products

and counterfeit medicines may include products with the

correct ingredients but fake packaging, with the wrong ingre-

dients, without active ingredients or with insufficient active

ingredients’.1

The scale of the problemThe WHO estimates that 8–10% of the global medicine supply

chain is counterfeit – rising to 25% or higher in some countries.2

The largest counterfeit market with close proximity to the EU

free trade zone is Russia, where the generally accepted estimate

is that 12% of drugs are counterfeit.3 Now that the Baltic nations

of Latvia, Lithuania and Estonia have joined the EU, the WHO

11

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➤Corruption of courts and of regulatory authorities.

In some countries law enforcement can also be corrupt,

allowing criminals to pay corrupt law enforcement agents

to turn a blind eye to their activities. If a case does make

it to court, the gangs may be able to pay off the judge and

thereby induce a favorable judgement.

Corruption within the police force exacerbates this problem, so

that the enforcement of regulations is seen as an opportunity

to collect bribes.

Governments on both sides of the Atlantic have taken

significant preliminary steps to address this growing problem.

A problem which, in many respects, can be considered nothing

short of international healthcare terrorism.

Only recently Jeffrey Gren, Director of the US Commerce

Department’s Office of Health and Consumer Goods,

announced in a speech that the US government is working on

stopping the illicit flow of Active Pharmaceutical Ingredient

(API), which can be used in counterfeit medicines.13 Gren said

that the Commerce Department is focusing efforts on China

and India. China maintains that it cannot be responsible for

the API used outside the country. The production and trading of

an active pharmaceutical ingredient in bulk form needs to fall

under the same rules that govern the production and trading of

manufactured pharmaceuticals.

According to the Council of Europe (CoE) survey report

entitled Harmonised Provisions for Legislative and Administra-

tive Procedures Applicable to Counterfeit Medicines in the Council

of Europe Member States, dated January 2006, the predominant

themes behind counterfeit medicines and pharmaceutical crime

A recent survey by the WHO of seven African countries found

that between 20 and 90% of all anti-malarials failed quality

testing. These included chloroquine-based syrup and tablets,

whose failure rate ranged from 23 to 38%; and sulphadoxine/

pyrimethamine tablets, up to 90% of which were found to be

below standard.11

Underlying cultural and systemic failures leading to counterfeitingOne could outline three underlying causes of counterfeiting in

the Least Developed Countries (LDCs):12

➤Absent or defective IP protection. One way to prevent

the sale of unauthorised copies of medicines is to enable

companies to register and enforce trademarks. These enable

vendors to signal the quality of their product to potential

purchasers. Trademark owners have strong incentives to

ensure that the quality of their product is maintained

because their reputation and hence future profitability

depend upon it. In those countries where trademarks

cannot be enforced, cheaply produced poor quality copies

will typically crowd out good-quality drugs.

➤Lack of adequate civil liability. Civil law protects

the consumer against mis-sold or defective goods. By

enabling consumers (at home or abroad) to obtain redress

from the manufacturer or supplier of a harmful product,

such liability both compensates those who are harmed

and discourages manufacturers and suppliers from selling

counterfeits.

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Europe by an unsuspecting public is thus difficult to determine

based on known and currently available data. While it is

extremely unlikely that inadvertent consumption of counter-

feit medicines in Europe is related to major mortality (unlike

the situation that exists in some countries in Asia and Africa),

it is possible, if not probable, that counterfeit medicines make

a not insignificant contribution to morbidity (for example, via

ineffectiveness, inappropriate labelling and/or mis-labelling

and the absence of any possibility for batch recall).

According to Jonathan Harper,16 developed countries are at

risk from counterfeit medicines due to a number of inter-related

factors that can amount to a system failure:

➤ Lack of awareness and perception of the problem at many

authority/stakeholder levels;

➤ Regulatory gaps (particularly with regard to API, and to

packaging and distribution chain regulation);

➤ Weak export/transit regulations;

➤ Lack of coordination and inconsistency of approach

between relevant authorities both nationally, regionally

and internationally;

➤ Inefficient cooperation between stakeholders (within

the supply chain and between the supply chain and the

authorities).

Finally, one of the most serious impediments to an allied

transatlantic war against prescription drug counterfeiters is

parallel trade or parallel importation – the legal trade in products

which are priced differently in different countries, and where

sellers make a profit on this price differential. Currently, nearly

are those of ’invisibility’, ‘biohazard’ and ‘system failure’.14

These are discussed in more detail below.

When focusing on the scope of the problem in Europe, the

CoE report states that there is ‘undoubtedly a large “invis-

ibility” factor that masks the real extent of the presence of

counterfeit medicines in Europe’. This is due to a number of

factors, such as the very nature of medicinal products (coun-

terfeit medicines are invariably harder to detect compared to

other types of counterfeit products), the lack of a commonly

agreed and employed definition of counterfeit medicines by

European states and a lack of awareness (in the case of several

relevant authorities as well as the general public) of the threat

that counterfeit medicines poses, even if they exist at all.

Lack of sufficient information on the biohazards associated

with counterfeit medicines also poses a significant problem.

As reported in Coincidence or Crisis,15 the types of Adverse

Drug Reaction (ADR) associated with the inadvertent use of

counterfeit medicines can relate to one or more of a number

of problems depending on the type of counterfeiting practice

employed. Counterfeit medicine-associated ADRs may be due

to, but not limited to, inappropriate API dose (absent, insuffi-

cient or excess dose) and quality problems (product contamina-

tion, excipient problems).

Under-reporting of possible counterfeit medicine-related

ADRs is likely to be significant when one takes into account the

well-known problem of ADR under-reporting, even for author-

ised medicinal products. A weakness in the existing European

pharmacovigilance system is that it is not explicitly geared to

detection of ‘drug ineffectiveness’. The direct impact of the

inadvertent use of counterfeit medicines on public health in

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The problem of the InternetThe Internet has the very real potential of becoming the inter-

national drug cartel of the 21st century. When the ‘learned

intermediary’ – a doctor or pharmacist – is replaced by a greedy

intermediary (such as an unregulated Internet site), there is

significant danger to public health. Profiteers masquerading as

pharmacists are an ominous sign in terms of both safety and

effectiveness of medicines. ‘Buyer Beware’ is bad healthcare

practice and even worse healthcare policy. When patients go

outside of any given national regulatory system and enter into

the Internet’s grey zone, they assist those who put profits before

patient health, but may also come into contact with outright

criminals who have no scruples about actively feeding counter-

feit drugs into the marketplace.

The US Food & Drug Administration (FDA) has developed a

framework for a 21st-century pharmaceutical supply chain that

would be more secure against modern counterfeit threats.18

The FDA’s specific approach to protect US citizens from

counterfeit drugs includes the following eight elements:

1 Implementation of new technologies to better protect the

US drug supply;

2 Adoption of electronic track and trace technology;

3 Adoption and enforcement of strong, proven anti-

counterfeiting laws and regulations by individual US states;

4 Increased criminal penalties to deter counterfeiting and

more adequately punish those convicted;

5 Adoption of secure business practices by all participants in

the drug supply chain;

140 million individual drug packages are parallel-imported

throughout the EU – and a wholesaler repackages each and

every one of these. This means that, literally, parallel traders

open 140 million packets of drugs, remove their contents and

repackage them. But these parallel profiteers are in the money-

making business, not the safety business, and mistakes happen.

For example, new labels incorrectly state the dosage strength; a

new label says the box contains tablets, but inside are capsules;

the expiration date and batch numbers on the medicine boxes

do not match the actual batch and dates of expiration of the

medicines inside; and patient information materials are often

in the wrong language or are out of date.

As David Taylor, Professor of Pharmaceutical and Public

Health Policy at the School of Pharmacy, University of London,

writes:

An even more difficult message to communicate to

policymaking and other audiences would be that the

counterfeit drugs issue – although a genuinely serious

cause for concern – might in some instances be best

regarded as an indicator of the existence of more

important, long-term, threats to European public

interests … it would be incorrect to allege that licensed

parallel import medicine traders are directly responsible

for facilitating the introduction of counterfeit medicines

into the EU, or that generic medicines licensed in Europe

are bio-medically inferior to their branded counterparts.

But equally it would be wrong to deny that the growth of

complex patterns of trading in medicines in Europe has

extended medicine supply chains in ways that increase

opportunities for criminals to introduce fake products.17

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Healthy IPRs

6 Development of a system that helps ensure effective

reporting of counterfeit drugs to the FDA and that

strengthens the agency’s rapid response to such reports;

7 Education of consumers and health professionals about the

risks of counterfeit drugs and how to protect against them;

8 Collaboration with foreign stakeholders to develop

strategies to deter and detect counterfeit drugs globally.

Recommendation 8 is particularly important because, as the

Chinese proverb says: ‘An ant may well destroy a whole dam.’

Counterfeit drugs are a challenge to all nations, and criminal

counterfeiting operations are increasingly being carried out

across national borders. The FDA has stated that it intends to

work with the WHO, Interpol, and other international public

health and law enforcement organisations to develop and

implement worldwide strategies to combat counterfeit drugs.

ConclusionShould we worry about counterfeit prescription medicines? Is it

really that much of a problem? The answer is a resounding ‘yes’.

The problem is so severe and serious that the treatment should

start from the root. The focus should not be on the counter-

feit end product alone. Rather, the fight against counterfeiting

must address both cultural and systemic factors that underline

this problem. The scope of the problem is much more serious

than it appears and now is the time to aggressively address and

defeat this very real public health hazard.

part 3

Contemporary topical issues

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The Convention on Biodiversity (CBD) attempts to

link the conservation of biodiversity to the economic

goals of sustainable development. In line with this purpose,

Article 1 establishes the principle of fair and equitable sharing

of the benefits arising from the use of genetic resources. The

CBD delineates other objectives and principles, such as protec-

tion of the ‘traditional knowledge [TK] of indigenous and local

communities’ (Article 8(j)) and ‘sovereign rights of Contracting

Parties over their genetic resources’ (Art. 15(1)). The CBD was

negotiated under the auspices of the United Nations Environ-

ment Programme (UNEP), adopted at the UN Conference on

Environment and Development in 1992 (Rio Earth Summit),

and came into force on 29 December 1993. A large number of

countries – 187 countries and the European Community as of

April 2006 – are signatories to the Convention, with the notable

exception of the USA, which has not ratified it.1

The CBD provides a framework of goals, policies and obliga-

tions, and leaves Contracting Parties to determine the specific

12

The Convention on Biodiversity (CBD) and Intellectual Property RightsHiroko Yamane

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The Convention on Biodiversity (CBD) and Intellectual Property Rights

and Folklore in 2000 to discuss possible ways to protect TK and

folklore.

The CBD does not explicitly refer to Intellectual Property

Rights (IPRs), except in Article 16.5,3 which stipulates the

obligation for Contracting Parties to cooperate, so that ‘such

rights are supportive of and do not run counter to its objec-

tives’. The Bonn Guidelines adopted by the COP only suggest

that countries with users of genetic resources could consider

‘measures to encourage the disclosure of the country of origin

of the genetic resources and of the origin of TK, innovations

and practices of indigenous and local communities in applica-

tions for intellectual property rights’.4

Many resource-rich developing countries rely on the CBD5 to

bargain access against royalties, research data and technology

transfer, and to benefit from future economic returns arising

from biodiversity.6 These countries have advanced the idea of

indicating the origins of genetic resources in the patent specifi-

cation when patent filings are made.

Certain developing countries have taken the initiative in

examining the relationship between the CBD and the TRIPS

Agreement at different regional or international meetings.

For example, in 1999, in New Delhi, there was a proposal to

modify Article 27.3(b) of TRIPS,7 to strengthen Articles 22 and

23 concerning geographical indications, and to add to Article

29 the obligation to disclose the origin of genetic resources in

patent specifications, so that CBD objectives could be promoted

by national patent laws.

In 2001, the Doha Ministerial Conference of the World

Trade Organization (WTO) instructed the TRIPS Council, in

Paragraph 19, to examine the relationship between the TRIPS

measures to be applied within their borders. At the interna-

tional level, the CBD allows the Conference of the Parties (COP),

which consists of all governments and regional organisations

that have ratified the treaty, to adopt those approaches, as

appropriate, and as far as possible, in the vast fields of relevance

covered by the CBD. Among the topics addressed by the COP

are access to genetic resources, prior informed consent (PIC)

as a condition for access, and access and benefit-sharing (ABS)

in the case of genetic resources. For example, the Bonn Guide-

lines2 concerning ABS were adopted at COP 6 in 2002, and in

2006, at COP 8, a 2010 target to negotiate an international

regime was set.

There are, however, many provisions in the CBD whose

scope is not clearly delineated. For example, Article 2 stipulates

that ‘biological resources’ include genetic resources, organisms

or parts thereof, populations, or any other biotic component of

ecosystems with actual or potential use or value for humanity.

The Bonn Guidelines made it clear that human genes are not

included in its scope.

Various other international organisations have developed

projects which cover issues related to the CBD. For example,

the Food and Agricultural Organization (FAO) revised the

1983 International Undertaking on Plant Genetic Resources

in harmony with the CBD, and expanded the International

Treaty on Plant Genetic Resources for Food and Agriculture

(ITPGRFA), which went into effect in June 2004. The latter

addressed the ex situ collections and farmers’ rights issues that

are not addressed in the CBD. Similarly, the World Intellectual

Property Organization (WIPO) created the Intergovernmental

Committee on Intellectual Property and Genetic Resources, TK

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and equitable benefit-sharing based on the use of biological

resources. In fact, little economic study has been undertaken

concerning different proposals for benefit-sharing, as well as

disclosure requirements with concomitant penalties, with a

view to exploring what rules would be preferable.

First of all, the number of players and their relations on

the market, as well as the ways in which biological resources

contribute to innovation, vary radically in different fields of

technology, such as seeds, food, cosmetics, or medicines. The

different processes by which biological resources contribute

to the marketing of final products also give rise to different

bargaining positions of providers of those biological resources

vis-à-vis commercial players in the market for the final product.

Similarly, the value-added accruing to genetic resources differs

widely, depending on whether the product is in the industrial

or agricultural sector.

One of the important factors in discussing rules concerning

IPRs and benefit-sharing in the seed sector has been transac-

tion costs. For seeds, the costs of establishing contracts between

hundreds or thousands of farmers and breeders, as well as

among breeders, often outweigh the cost of limiting the scope

of breeders’ IPRs.10

For the food or cosmetic industries, and the pharmaceu-

tical industry, other considerations are relevant in the search

for rules related to benefit-sharing. Owners of biological

resources, for example, may be able to find commercial players

who would act as partners in food or cosmetic industry fields

with relative ease. The strong bargaining power of resource-

owners in these sectors comes from the fact that there are many

commercial players, and the technological value-added for

Agreement and the CBD, and the protection of TK and folklore,

while pursuing its work programme under the review of Article

27.3(b).

Recently, developing countries have made proposals at the

WTO to add Article 29 to the Agreement on Trade-Related

Aspects of Intellectual Property Rights (TRIPS Agreement)

with a view to obliging patent applicants to disclose the

country providing the resources and/or associated traditional

knowledge, if the subject matter of the patent is derived from

or developed with biological resources.8 The disclosure obliga-

tion is conceived of as a condition to granting a patent, with

an additional provision stating that patents will be revoked or

made unenforceable in the event of a failure to comply.

It is certainly necessary to prevent the plundering of biolog-

ical resources or of ideas couched in TK from developing

countries without appropriate reward. Patents are related to TK,

in as much as they are granted by virtue of novelty, inventive

step and industrial applicability. If biological resources and/or

related TK constitute prior art for the invention for which the

patent is sought, examiners should take this into account and

avoid granting erroneous patents. For this purpose, it is helpful

for TK to be documented.

One possible solution would be the creation of an interna-

tional database of TK.9 Applicants could also indicate in their

patent filing documents whether access conditions for biolog-

ical resources are fulfilled under the national laws concerned.

However, patent filings may not be the best means for

ensuring benefit-sharing. Patent laws regulate only patent

grant, validity and enforcement. Care should be exercised

to determine economically rational ways to ensure fair

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such technologies will never become profit-earning. The riskier

the pursuit of such success, the weaker the bargaining position

of the resource-owner.

The CBD sets out important principles for the use of biolog-

ical resources which favour developing countries. These princi-

ples should certainly guide companies and researchers to respect

the contribution of the biological resources of such countries

in their research and commercial activities. Rather than using

patent filings as a means to assure benefit-sharing, it would be

more rational to regulate ex ante the access conditions with the

principle of benefit-sharing. One could leave it up to the partners

of each research or commercial project to determine at what stage

this should happen in the process leading up to commercialisa-

tion, and how much should be paid in return to the providers

of biological resources. This mechanism should be elaborated

within the framework of the CBD, with a view to maximising

the opportunities for developing countries to contribute to local

R&D and to the economic development of their own countries.

National laws or regulations providing for the conditions of

access to genetic resources, TK of local communities or indig-

enous populations, or disclosure requirements in patent filing

already exist.11 Accordingly, the experiences gained from imple-

menting such legislation, as well as the studies elucidating the

mechanisms for introducing innovations based on the use of

genetic or biological resources, should be used to determine the

best methods for contributing to economic development and

innovation, both in the local communities and globally. This

would be a far better approach than trying to agree on a single

international rule on benefit-sharing among the complexities

of international economic activities.

commercialisation abroad may not be so high. The owners may

also have some idea of the true value of their resources because

their use in food/cosmetics/industrial production is relatively

similar to the traditional use.

In the pharmaceutical sector, by contrast, it may be more

difficult to design a satisfactory contract between resource-

owners and users. Owners of genetic resources may not be able

to assert strong bargaining power in relation to a small number

of market players who invest heavily in science and technology.

In addition, the low probability of pharmaceutical commercial

success by virtue of biological resources makes it difficult for

resource-owners to reap the benefit of their resources within a

short period of time. In these conditions, resource-owners have

no independent means to calculate the value of their resources.

In addition, information asymmetry often leads the owners to

believe their resources to have a higher value than claimed by

the users.

Furthermore, biological or genetic materials can increas-

ingly be substituted in drug research and development (R&D).

Although natural products have contributed to significant drug

discoveries in the past (such as aspirin from willow trees, peni-

cillin or statins from blue mould), this is no longer the case.

This further diminishes the value of biological resources.

For pharmaceutical companies, it may be more difficult

than for other industries to agree to heavy obligations through

disclosure of biological origins of unclear scope, with concom-

itant penalties based on patent law. During the long and

complex process leading from research to marketing, develop-

ment and approval of drug discoveries, numerous patents are

sought at a relatively early stage, with a high probability that

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A statutory research exemption for patents

and innovation and, as such, they are an important element for

innovation and economic growth.

However, studies also find that too much patenting may

deter research, development and innovation.2 In the fields of

biotechnology and pharmaceuticals, patents are often criti-

cised for being too broad with respect to potential follow-up

research on patented inventions. Concerns have been expressed

regarding cases where the necessary knowledge to conduct

further research on a problem is covered by a large number of

patents from different firms, and where too many dense and

overlapping rights might limit the access to patented inven-

tions. Such ‘patent thickets’ create situations where companies

must find their way through a dense web of overlapping IPRs

to actually commercialise a new technology.3 This can increase

transaction costs to a very high level. The huge number of

patents issued today and the tendency to apply for multiple

patents to cover one invention can induce hold-up problems

where a single product can potentially infringe many different

patent rights. The general problem is therefore to find the right

balance between incentives for research and access to patented

research at the same time.

A careful balance has to be struck between the incentives to

commercialise a first patent and the follow-up inventions that

could potentially create even further benefits to society. The

theory of patenting focuses on the inventor who is commer-

cialising the invention himself. The patent system provides an

incentive to the innovator to invest in research and develop-

ment (R&D). He has the exclusive right to commercialise the

invention with the help of patents. This view, however, does

not consider cases where the societal use of an invention is more

Finding the right balance between a reasonable level

of patent protection and innovation is a difficult

task for policymakers. In cases where protection is prohibiting

research on patented inventions, research exemptions could

provide the right policy mix for national innovation systems

and systems of Intellectual Property Rights (IPRs). The goal of a

research exemption is to enable fundamental and commercial

research. Its scope, however, is unclear, and there is no common

standard. The various forms of a research exemption and the

question of its definition in order to reach a socially optimal

level of innovation are discussed here both on the national and

international levels.1

More or less patent protection?A patent is a policy instrument, whose objective is to spur inno-

vation to a maximum beneficial level for society. Economic

theory postulates patents to facilitate diffusion of knowledge

1�

A statutory research exemption for patentsNikolaus Thumm

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greater the possibility that important research will not be carried

out. The general uncertainty of R&D demands for clear rules

on licensing of patent rights and for access to patented inven-

tions. These rules must also consider the danger of under-using

‘scientific commons’ relative to a social optimum. An effective

research exemption must be limited, it should not unreason-

ably conflict with the normal exploitation of the patent, and

it should not unreasonably prejudice the legitimate interest of

the patent user.

What it could look likeThe example of Switzerland illustrates the different interests

and issues to be taken into consideration when establishing

the right form of a statutory research exemption. It has been

common practice in Switzerland that acts of research do not

constitute infringements on patent-holders’ rights. Switzerland

has neither a statutory research exemption, nor are there any

court decisions on the issue. So in response to the concerns

over research hold-ups and as a precautionary measure in

order to serve the interests of researchers in Switzerland, a new

statutory research exemption has been included into the Swiss

draft version of the new patent law.

It had already become clear at the first public consultation

on the revised patent law in 2002 that the research exemption

was not commonly known in research circles. The necessity

for an explicit legal regulation also became evident. Further-

more, a survey of the Swiss biotechnology industry confirmed

concerns over access problems, especially in research related to

DNA patents and patents on methods for genetic testing.4

important than the benefit to the individual inventor. In such

cases, the individual use of patented research could prohibit

further research on the patented inventions because a license

is not provided, or because licensing fees themselves already

build a barrier for the potential further use of this invention.

Such cases are not only damaging to the follow-up inventor but

also to society as a whole.

The idea behind a research exemptionToo little protection of inventions can lead to free-riding and

causes underinvestment in R&D because of the loss of incen-

tives for these investments. A statutory research exemption is

therefore suitable to clarify problems of access to patent search.

But its establishment requires the careful consideration of

different interests.

Finding the right way to include a research exemption in

the patent system is difficult and its implementation can vary

from country to country. Other ways of facilitating access

to inventions for research purposes is through competition

policy or by using networks of open standards and ‘creative

commons’.

The ideal research exemption should provide access to

patented inventions for research while not limiting incentives

to invest in R&D. Its aim should be to provide greater clarity

for research and to avoid unnecessary rigidity. It should neither

unreasonably impede scientific development nor prohibit

investment in research. Nor does a research exemption mean a

substantial shift in the understanding and application of patent

law. The higher the transaction costs to set up research, the

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chain reaction is an essential procedure of gene technology that

allows small amounts of nucleotide sequences to increase. It

also allows for better approval and analysis of material and is

therefore an important tool for research in many laboratories.

In this case, the free use of the procedure could not be justified

under the new research exemption. The procedure is subject

to patent protection and its use requires the agreement of the

patent-holder.

Although there is no statutory exemption for research under-

taken with patented research tools, the Swiss proposal differs

from other statutory exemptions in that it guarantees access

to research tools through legal ‘non-reach-through’ licences.6

If the parties cannot reach an arrangement, the fees for such

licences should be fixed by a court. It is, however, expected that

the intervention of courts will not be necessary in practice and

will constitute a negotiation baseline that facilitates market

solutions.

Even if the invention is commercially oriented, the research

on the object of the invention can be exempted. What matters is

whether the research serves to reveal new knowledge about the

patented invention. This means, for example for genetic inven-

tions, that patented gene sequences can be used for research to

reveal further technical uses of the sequence, independent of

the purpose (commercial or non-commercial) of the research.

Hence, it could be revealed that the patented gene sequence

for insulin codifies for further proteins than the synthesis of

insulin in order to treat diabetics. These other proteins can

cover further potential uses that could be subject to addi-

tional patent protection. Science confirms that in many cases

a gene might codify for more than one protein. This makes the

As a consequence, in the ongoing patent law reform in Swit-

zerland and the current draft version of the patent law, policy-

makers are considering a statutory research exemption under

the general exemptions to patenting contained in Article 9.

The general purpose of the regulation is to serve research and

innovation and avoid negative influences of patenting on basic

research. Its provisions foresee several general exemptions, as

follows:

➤ Private use and non-commercial purposes;

➤ Use of the invention for teaching purposes;

➤ Use of biological material for the purpose of breeding or of

developing a plant variety;

➤ Biological material produced randomly or which is

technically unavoidable in the agriculture sector;

➤ Research and trials in which the invention is the object of

research.5

The latter is at the core of the statutory research exemption

and is regulated in Article 9.1(b) of the draft revision of the

law. The regulation concerns non-commercial research and

commercial research aimed at gaining new knowledge about

the subject matter of the invention. It also applies to the use

of patented inventions with the view of securing a marketing

authorisation for pharmaceutical products.

The exemption only covers research on patented inven-

tions where the patented invention itself is the object of the

research. The use of patented inventions as an instrument or

tool of research (research tools), on the other hand, such as

the polymerase chain reaction, is not covered. The polymerase

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the biotechnological and pharmaceutical industries. Too many

patents, or patents which are too strong, may sometimes lead

to hold-up situations, royalty stacking and other problems. In

such cases, the societal benefit of patents for innovation and

economic growth may be greatly reduced. Too much patenting,

or patenting which is too broad, in particular with genetic

information, is an additional risk. A properly designed research

exemption is therefore a useful tool to balance the IPR system.

The main difficulty in implementing legal exemptions for

research use of patented inventions lies in the definition of

the scope of the exemption. Allowing research ‘on’ a patented

invention versus research ‘with’ it is a general way of defining

a research exemption. Nevertheless, specific industries, such as

the biotechnology and pharmaceutical sectors, are expressing

concerns over accessing patented material for research purposes

that may not have been explicitly addressed by national patent

regimes.

Finding the right balance between incentives for research

and access to patented research at the same time is a difficult

policy task. Good intellectual property policy is not the same

as maximal IPRs. The patent system as it stands today does

not need overall re-organisation but rather continued fine-

tuning on the basis of existing regulations. Finding the correct

compromise between the interests of different stakeholders and

the overall benefit for society is a sensitive issue. To provide

a clearly defined statutory research exemption is one way to

guarantee the widest possible spread of publicly beneficial

scientific knowledge.

importance of a clearly defined research exemption for genetic

research evident.

In order to avoid monopolistic use of research tools and to

provide access to patented research tools, another regulation

in the new Swiss draft patent law (Article 9(a)) gives patented

inventions a non-exclusive licence. The right to a legal licence

provides a tool to avoid the abusive use of Material Transfer

Agreements wherever they limit the access to and the use of

biological material (reach-through licence). Article 9(a) provides

the right to claim such a licence before a court. This does not

consider, however, general contractual and competition regula-

tions.

The general understanding of the research exemption is that

it includes clinical trials proving the effectiveness and effects

of protected substances in drugs on humans. This includes

trials with the purpose of getting approval from the responsible

agencies of certain drugs (the so-called ‘Bolar’ exemption). The

commercial orientation of these activities does not prohibit

the research, and the production and storage of a patented

substance are allowed as long as they serve the purpose of

clinical trials and the drug approval process of Switzerland.

Whenever the production goes beyond a level that would

be justified for clinical trials or drug approval, it is no longer

covered by the research exemption. Production and storage

of substances before the expiry of the patent (stockpiling) is

understood to be prohibited under this research exemption.

ConclusionsPatents are important factors for innovation and especially in

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Patenting biotechnology

12�

When Europeans hear of patenting biotechnology,

their first thought is of the ethical concerns that

are expressed over patenting naturally occurring genes, or more

generally DNA1 or genetically modified higher life forms. Such

ethical concerns are largely restricted to Europe,2 and do not

feature much, for example, in the USA, where the concerns

associated with patenting biotechnology are rather different

and relate to the economic effects of such patenting.

Products and processes that relate to gene patents and genet-

ically modified animals are only a part of the biotechnology

landscape. Yet such patents have attracted more than their

fair share of attention, not only from academics and religious

organisations, but also from European legislators, who drafted

the Biotechnology Directive in the 1990s.3 Actually, much of

the investment in biotechnology and the majority of its sales

derive from therapeutic medicinal products. Typically, these

are large biological molecules, such as proteins (rather than the

genes which code for them), to which biotechnology patents

1�

Patenting biotechnologyTrevor Cook

are relevant. This is primarily because the therapeutic medicinal

product is in itself produced by biotechnological techniques,

or because biotechnology has identified the target on which a

small molecule therapeutic operates.

In the last few years artificial therapeutic proteins (such as

monoclonal antibodies) or modified proteins (such as long-

lasting or fast-acting versions of insulin) have come to represent

an increasing share of new drug introductions. These proteins

(and thus the genes which code for them) are artificial creations

that, in contrast to the first generation of therapeutic proteins,

have no existence in any form in nature. The first genera-

tion proteins were natural products, which the techniques

of biotechnology allowed to be produced in quantities that

permitted them, often for the first time given the tiny amounts

available in nature, to be used as therapeutics. The patent rights

over these first generation proteins, applied for in the 1980s,

are now starting to expire. In contrast to the first generation

proteins, the new ones raise no unique issues of patent law and

traditional patent law concepts, applicable to small therapeutic

molecules, can be valid.

Another economically significant aspect of biotechnology

patenting involves the therapeutic targets on which pharma-

ceuticals act and the research tools that are used in pharmaceu-

ticals research. The latter includes a wide variety of patented

products and techniques, such as naturally occurring genes

and genetically modified animals (such as that which was the

subject of the ‘Oncomouse’ case).4 Yet it is not the patents on

these that are the most economically significant to the pharma-

ceutical industry. Instead, biotechnology patents on the thera-

peutic targets on which pharmaceuticals act, typically receptors

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in the body (which are often proteins, but only rarely genes),

are the most commercially important research tool patents.

Thus, in May 2006, a Federal District Court Jury in Boston

ordered Eli Lilly to pay Ariad Pharmaceuticals US$65 million

for infringing Ariad’s US patent on methods of modulating the

nuclear factor kappa B group of proteins. The Lilly products in

question were two small molecule therapeutics useful in the

treatment of sepsis. In other cases, the patented target has been

used in the research which led to the discovery of a therapeutic

medicinal product. Such a patent can therefore allow its owner

to secure rights over, or at least an interest in, the drug itself as

the downstream product of such research. In these cases, the

relief granted against the infringer of a research tool patent may

‘reach through’ to sales of the final product. In other words, the

licensing of the patent involves an element of reach-through

royalty calculated as a percentage of sales of the therapeutic

product that is the ultimate product of such research.5

Ethical concerns in EuropeAgainst such ‘real-life’ concerns associated with biotech-

nology patenting, the ethical issues that bedevil biotechnology

patenting in Europe may seem to be little more than a regional

curiosity. The concerns are born out of certain public policies

in European patent law as well as by the availability to activists

of the relatively cheap European Patent Office (EPO) opposition

procedure. This has been used, for example, in the Oncomouse

case, as a proxy for ethical objections not so much to the patents

themselves but to the underlying activities of such patents.

As a result, Europe experienced controversies over the

morality of ‘patenting life’ in the first wave of public policy

challenges to biotechnology patents. These challenges were

also reflected in the controversy during the 1990s over the

Biotechnology Directive, which eventually became law in 1998.

The legal basis for the controversies is a particular provision of

the European Patent Convention (EPC), which excludes from

patentability ‘inventions the commercial exploitation of which

would be contrary to ordre public or morality’.6 This apparently

innocuous provision was not included in the international

convention in order to establish ethical standards, but rather

to ensure that no supranational body, such as the EPO, could

impose external ethical standards on national jurisdictions.

However, it was subverted by the Biotechnology Directive so as

to impose such standards in the field of biotechnology. Article

6 of the Directive sets out a non-exhaustive list of exclusions,

namely processes for cloning human beings or for modifying

the germ line genetic identity of human beings, uses of human

embryos for industrial or commercial purposes, and ‘processes

for modifying the genetic identity of animals which are likely

to cause them suffering without any substantial medical

benefit to man or animal, and also animals resulting from such

processes’.

Hopes that this provision might resolve matters have proven

ill-founded. Controversy has now erupted over stem cell patents

and in particular the extent to which patents over stem cells

that derive from human embryos fall within the scope of the

Article 6 exclusion for ‘uses of human embryos for industrial or

commercial purposes’.7 So yet again there is a dispute in Europe

over patentability as a proxy for a more fundamental dispute

over the ethics of stem cell research, which has also featured

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in controversy over the funding of such research from the EU

research budget. In contrast, one may criticise the approach

of the US government to the funding of such research, but at

least the controversy there is wholly separate from the patent

system.

Concerns about biotechnology patents and enhancing human health Continued focus in Europe on matters such as the ethics of

patenting stem cells is a distraction from the more fundamental

discussion about the effect of biotechnology patents on medical

research. It takes focus away from the potential impact on the

development of new therapeutic medicinal products (as in the

Ariad case discussed above) and on many other ‘real-life’ topics

of importance to public health, such as the development and

use of diagnostic tests. Although there are some worthy excep-

tions in Europe,8 most of these discussions are now taking place

in the USA and in international fora such as the Organisation

for Economic Co-operation and Development (OECD).

One example of a ‘real-life’ discussion on biotechnology

patents is the 2006 publication of the US National Research

Council’s Reaping the Benefits of Genomic and Proteomic Research:

Intellectual Property Rights, Innovation and Public Health.9 The

publication identifies differing types of biotechnology patents

and sets out a number of specific recommendations aimed

at striking a proper balance between, on the one hand, open

dissemination and access to scientific discoveries, and, on

the other, the protection of inventors’ rights with a view to

enhancing scientific progress and human health.

Some of these recommendations are indeed specific to the

situation in the USA. It is no secret that the USA has a less

rigorous approach to inventive step or obviousness than that

being applied in Europe, resulting in many more patents being

granted to gene sequences.10 The system also lacks the proper

experimental use defence employed in Europe, which allows

research into improving or validating diagnostic tests to be

undertaken without fear of infringing patents on such tests.

But as long as Europe continues to focus its attention on the

patent system as a proxy for disputes about the ethics of certain

types of biotechnological research, there will be few European

contributions to the real debate about biotechnology patents

and their role in public health.

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Patent wars and authorised generics in the USA: assessing the issues

In the USA, pharmaceutical manufacturers are often

characterised as innovators or imitators. Innovators

conduct research and development (R&D) activities; submit

New Drug Applications (NDAs) to the US Food & Drug Adminis-

tration (FDA); disseminate information about medical problems

and treatments to patients, physicians, pharmacists, and payers;

and sell brand pharmaceutical products. Imitators, on the other

hand, submit Abbreviated New Drug Applications (ANDAs) to

the FDA for generic versions of products when the exclusivity

for the brand products expire, and sell products, often through

telephone contact with wholesalers and pharmacies. Some

companies are both innovators and imitators. According to Rory

O’Riordan, President of the European Generics Association and

COO of Clonmel Healthcare, ‘big pharma is getting into generics

and generic houses are getting into drug discovery. Novartis, for

example, does everything – prescription originals, biopharma-

ceuticals and generics. Fixed definitions don’t work anymore.

They’re all pharma companies.’1 Innovator companies may

1�

Patent wars and authorised generics in the USA: assessing the issuesEmily Bishko Radel, Matthew Lowe and

Richard Rozek

offer generic products (i.e. generic versions of their own brands

and/or generic versions of brands sold by other companies).2

Likewise, imitator companies may engage in R&D and sell brand

products.3 Our focus is on the effects of an innovator company

offering a generic version of its brand product either through its

own affiliate or by licensing the rights to another company. We

refer to such a product as an authorised generic.4

Incentives for an imitator to enter still exist with authorised genericsProfit opportunities: Paragraph I, II, III, and IV certificationsIn 1984, Congress passed the Drug Price Competition and

Patent Term Restoration Act (Hatch-Waxman Act – see

Chapter 4) to both accelerate generic entry by imitators and

restore a period of exclusivity to innovative companies for

time lost while developing the brand product and waiting for

regulatory approval. Under this Act, the ANDA process was

established so that imitator companies could obtain approval

by establishing bioequivalence to a reference product, i.e.

the brand product. Imitators are able to obtain approvals

of generic versions of products in a shorter period of time

and at lower costs. They can therefore begin to prepare the

regulatory materials when the reference brand product is still

subject to exclusivity.

The profit incentive for generic entry continues to exist even

with the availability of authorised generics. There are two paths

an imitator company can take when filing an ANDA to enter

the marketplace with a generic version of an existing brand

product. It can:

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1 wait until the patent or other forms of exclusivity for the

brand product expire; or

2 challenge the validity of the patent covering the brand

product or claim that its generic version does not infringe

the patent. 5

In the former case, multiple generic sellers may enter the

marketplace at the same time. Even though multiple generic

versions of the brand product may become available simultane-

ously, each generic seller has an incentive to submit an ANDA.

Authorised generics do not deter imitator companies from

launching their products.

In the latter case, some policymakers are concerned that the

incentive for imitator companies to challenge patents covering

brand products are reduced due to competition from an author-

ised generic entering the marketplace during the 180-day period

associated with a successful patent challenge. Such an effect is

unlikely. Imitator companies continue to have profit incentives

to submit ANDAs with Paragraph IV certifications and sell the

associated products along with the authorised generics. It is

clearly beneficial for them to do so, as the following examples

show:

➤ One commentator recently estimated that ‘branded

products coming off patent are valued at over US$27 billion

in 2007 and US$29 billion in 2008.’6

➤ A study commissioned by the Generic Pharmaceutical

Association (GPhA) presents a hypothetical example

of the reduction in total profits to the ANDA filer from

an authorised generic.7 Even though the GPhA cost

assumptions may be overstated, the total profits to the

ANDA filer remain positive. The availability of profits

suggests that entry will not be discouraged.

➤ When Apotex Corporation (Apotex) launched

paroxetine (the generic version of Paxil®) in September

2003, it competed against an authorised generic that

GlaxoSmithKline had licensed to Par Pharmaceutical

Companies, Inc. (Par).8 Apotex was still able to earn

revenues of US$150 million for paroxetine.9 These revenues

represent 750% of the cost assumptions in a hypothetical

example presented in the GPhA Study (i.e. US$20 million

to enter, litigate, and begin production) and 1,500% of

the upper bound cost estimate presented by Johnson

& Johnson (i.e. litigation costs for the ANDA filer in a

Paragraph IV matter is in the range US$5–10 million).10

➤ The availability of authorised generics has not discouraged

companies from filing ANDAs. From 2 March 2004 through

14 September 2006, over 200 ANDAs have been submitted

to the FDA with a Paragraph IV certification.11

➤ Imitator companies pursue many products simultaneously,

filing multiple ANDAs with the FDA. For example, ‘as of

2 August 2006, Teva Pharmaceutical Industries Ltd [Teva]

had 148 ANDAs filed with the FDA, representing over

US$84 billion annually in brand value. Teva believes that

46 ANDAs, with a brand value of over US$35 billion, have

first-to-file status, which permits an initial 180 days of

marketing exclusivity.’12 The risk of entry by an authorised

generic has not kept Teva from filing over 30% of its ANDAs

through Paragraph IV certifications.

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Table 4 Comparison of the median and mean returns on net sales for 10 innovator and 10 imitator pharmaceutical companies in 2005

Innovatorcompanies Returnonnetsales(%)

GlaxoSmithKline PLC 22Merck & Co. Inc. 21Johnson & Johnson 21AstraZeneca PLC 20Novartis AG 19Bristol-Myers Squibb Co. 16Pfizer Inc 16Roche Holding AG 16Abbott Laboratories 15sanofi-aventis 8Median 1�Mean 1�

Imitatorcompanies Returnonnetsales(%)

Barr Pharmaceuticals Inc.1 26Biovail Corp 25Alpharma Inc. 24Forest Laboratories Inc. 2 24Teva Pharmaceuticals Industries Ltd. 20Mylan Laboratories Inc. 2 15IVAX Corp 3 11Merck KGaA 11Watson Pharmaceuticals Inc. 8Andrx Corp 6Median 1�Mean 1�

Note: innovator companies represent companies who largely sell brand products; imitator companies represent companies who largely sell generic products. 1 Represents fiscal year ending �0 June 200�. 2 Represents fiscal year ending �1 March 200�. � Represents 200� data. Data for 200� are not available due to IVAX being acquired by Teva Pharmaceutical Industries Ltd. Source: Bloomberg Professional

➤ Innovators and imitators are profitable. Using data from

Bloomberg Professional, we calculated the ratios of net

income to sales for ten leading innovator companies and

ten leading imitator companies for 2005. The medians of

the return on sales for both groups are equal.13 See Table 4.

New entrants are emergingThe availability of authorised generics has led to new entrants

emerging in the pharmaceutical industry. Companies are iden-

tifying profit opportunities in the generic market segment and

responding. For example, Prasco adopted a business model

focused on becoming the seller of authorised generics. Its

current product list indicates that it sells authorised generic

versions of seven brand products.14 This type of entrepreneurial

effort is pro-competitive.

Established companies are seeking licenses to sell authorised genericsEstablished generic manufacturers such as Mylan, Barr Phar-

maceuticals, Inc. (Barr), Par, Watson Pharmaceuticals, Inc.

(Watson), Teva,15 and Andrx Corporation have become sellers

of authorised generics under licenses from the innovators.16

These companies find it in their interests to file ANDAs for

some products and sell authorised generics of others.

The US Court of Appeals for the Second Circuit denied a

consumer group’s request for a rehearing in a case in which

the innovator (AstraZeneca Pharmaceuticals LP) licensed an

imitator company (Barr) to sell an authorised generic version

of its brand drug, Nolvadex® (tamoxifen citrate).17 Bruce L.

Downey, Chairman and CEO of Barr, said, ‘we are pleased that

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our patent challenge settlement related to tamoxifen itrate has

been upheld as being pro-consumer and pro-competitive’.18

Patients and payers benefit from authorised genericsLower pricesIn the absence of an authorised generic, the first entrant

typically sets a price for its generic product at about 90–95%

of the price of the brand product. As subsequent generic entry

occurs, the price for generic products is reduced further as

the imitator companies compete for market share.19 The FDA

reported that ‘the entry of the second generic competitor [is]

associated with the largest price reduction’ as it decreases the

average generic price from 94% to 52% of the brand price.20 The

availability of two generic entrants (i.e. the ANDA filer and the

authorised generic) lowers the price of generic products to cash

patients and other payers (private or public insurers).

Access to new and improved pharmaceutical productsInnovators use retained earnings from successful pharmaceu-

tical products to fund R&D for new products to meet unmet

medical needs. In general, development of pharmaceutical

products is a long and costly effort. Investing in pharmaceu-

tical R&D projects is risky, time-consuming, and expensive.

On average, only 5 of every 5,000 compounds evaluated in the

basic research phase enter into clinical trials, and only 1 of these

5 products ultimately receives FDA approval for marketing in

the USA.21 The development process for New Chemical Entities

(NCEs) takes 10 to 15 years,22 and costs an average of US$802

million.23 One study found that only 3 of every 10 approved

pharmaceutical products had sales that exceeded the average

after-tax development costs of a new product.24

To encourage innovators to continue bearing the risks and

making investments in pharmaceutical and biomedical R&D,

public policy in the USA must continue to preserve the intel-

lectual property system (i.e. laws regarding patents, copyrights,

trademarks, and trade secrets). It is this system that allows

an innovator to actively manage a pharmaceutical product’s

life cycle (even after patent expiration), which is integral to

preserving the incentives for the innovator to invest in R&D.

Likewise, imitator companies embrace authorised generics

as a means of protecting the intellectual property resulting

from their own innovative activities. Barr recently launched

an authorised generic version of its brand oral contraceptive

product, Seasonale®, after another company launched a generic

version of the product.25 Barr’s Bruce L. Downey said, ‘it is our

obligation to preserve our rightful interests in this product’.26

Multiple participants in the pharmaceutical industryPolicymakers have been concerned over the costs for health-

related expenditure including pharmaceutical products.27 In

assessing the expected economic impact of proposed changes

in policy, it is important to consider all of the participants in

the US healthcare system. The vertical structure of the market-

place for selling pharmaceutical products includes the following

participants:

➤ manufacturers (innovators/imitators);

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➤ wholesalers or distributors (local, regional, and national);

➤ retailers (e.g. chain and independent pharmacies),

hospitals, and federal facilities;

➤ third-party payers (private and public);

➤ physicians;

➤ patients.

When you consider this complex structure, it becomes clear

that addressing reform efforts at the activities of manufacturers

alone may not reduce costs to patients and the healthcare

system generally.

The Pharmaceutical Research and Manufacturers of America

(PhRMA) and GPhA commissioned studies to assess the impact

of authorised generics on pharmaceutical prices. The PhRMA

Study concluded that ‘at the outlet level [price to a pharmacy,

clinic, etc.] the generic discount to brand [during the 180-day

exclusivity period] is about 16 percentage points greater than

comparable examples without an authorised generic’.28 The

GPhA Study ‘used exactly the same set of drugs as in the PhRMA

study, in order to maintain consistency and for comparison

purposes’.29 Additionally, the GPhA Study relied on ‘retail level

prices from IMS National Prescription Audit, i.e. consumer prices

rather than wholesale prices used in the PhRMA study … ’30 The

GPhA Study found that ‘using the PhRMA approach, discounts

from retail prices averaged 15% in the no-AG sample, and 20%

in the AG sample, with a difference of about 5% – much lower

than the 15.8% figure arrived in the PhRMA study’.31 These

studies reveal an interesting fact about the price of pharma-

ceutical products. While the wholesale prices are lower with

authorised generics (relative to brand prices), this discount is

reduced at the retail level.

This result is consistent with other pricing analyses conducted

in the pharmaceutical industry. For example, in analysing

albuterol metered-dose inhalers (an asthma medicine), we found

that retailers’ mark-ups on acquisition cost for brand albuterol

inhalers to cash payers, Medicaid payers and insurance payers

were, on average, 28.8%, 28.8% and 14.4% respectively. In

contrast, retailers’ mark-ups on generic albuterol metered-dose

inhalers to cash payers, Medicaid payers, and insurance payers

were, on average, 363.3%, 234.5%, and 234.5% respectively.

While manufacturers charge lower prices for generic products

relative to brand products, the subsequent mark-ups on generic

products are much higher and reduce the benefit to patients

and the healthcare system generally.32

Payers and policymakers concerned about pharmaceutical

prices should focus on all participants in the vertical distribution

chain if they want to control costs. Regulating retailers’ mark-

ups is not necessarily the appropriate policy response. Relying

on competition among retailers will likely erode margins. For

example, Wal-Mart recently announced a pilot programme

to sell generic prescription pharmaceutical products for US$4

per prescription (up to a 30-day supply).33 Similarly, Kmart is

offering a 90-day supply of generic prescription pharmaceutical

products for US$15 per prescription.34 As companies compete for

revenues, patients should be informed of differential pricing at

the retail level (i.e. as with other purchases, they should ‘shop’ to

find the lowest prices for prescription pharmaceutical products).

Competitive initiatives such as the Wal-Mart and Kmart

programmes will contribute to controlling healthcare costs.

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Conclusion Currently, some policymakers in the USA are suggesting the

activities of the innovative companies to prohibit them from

entering into the generic market segment should be constrained,

claiming that this practice undermines competition and raises

prices for patients. Based on this analysis, we conclude that

the use of authorised generics is not anti-competitive: substan-

tial profit incentives for generic entry still exist. Authorised

generics create entry opportunities for new companies and

create licensing opportunities for existing imitator companies.

Moreover, authorised generics generate substantial benefits

for the healthcare system as they reduce costs to patients and

payers, and provide resources for innovative companies to

invest in R&D, resulting in the availability of new and improved

pharmaceutical products. Payers and policymakers concerned

about healthcare costs should expand their focus to the activi-

ties of all participants involved in creating, selling and distrib-

uting pharmaceutical products, i.e. wholesalers and pharmacies

as well as manufacturers, to identify potential cost savings.

It is a well-recognised fact that Intellectual Property

Rights (IPRs) are the main catalysts in furthering the

development of most – if not all – new pharmaceutical products.

The product market exclusivity deriving from the combined

effect of patents, Supplementary Protection Certificates (SPCs)

which extend the basic patent term, and the protection of

confidential test data (data exclusivity) are essential incen-

tives to develop new medicines. This is because of the unique

features of pharmaceutical products, which are the result of

processes that are long, risky and costly, but nonetheless easy

to copy. Incentives to drug development must therefore ensure

an effective exclusivity which is long enough both to enable

the remuneration of the innovator and to allow it to fund new

research and to compensate for the cost of failed research.

In most cases, a pharmaceutical product includes one

substance that is active in treating a disease. However, there

are an increasing number of pharmaceutical products already

available to patients or under development that combine

1�

IPRs and the support for biomedical innovation: the case of combination products in EuropeManuel Campolini

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IPRs and the support for biomedical innovation

two – or more – substances. Their combination into a single

product could result in an improved or even completely new

therapeutic effect. These ‘cocktail drugs’, which often require

extensive research and clinical trials, are routinely defined as

‘combination products’.

Even if the relevant patent or SPC protection and data exclu-

sivity have expired for the individual substances included in

a combination product, the SPC and the data exclusivity may

be available for the combination itself. This seems relatively

obvious for the combination of two active substances when

each of them has its own therapeutic effect. Yet, recent devel-

opments have questioned the scope of protection in borderline

situations and led to the conclusion that innovative devel-

opments, which are often crucial to patients, are not always

adequately protected. This chapter will briefly examine this

issue in relation to combination products.

The Supplementary Protection Certificate (SPC)The SPC is an IPR which allows for the extension of a patent

protection for a pharmaceutical product of a maximum period

of 5 years and was introduced in the EU by Regulation No.

1768/92. It aims to compensate for the time lost (8 to 12 years)

between the initial patent filing and the marketing approval of

the substance as a medicinal product. This situation deprives

innovators of the benefit of a 20-year period of effective exclu-

sivity. It is therefore an important legal tool that promotes

biomedical research in the European Union (EU).

The importance of the SPC can be illustrated by the following

example. The Massachusetts Institute of Technology (MIT) is

the holder of a European patent covering a substance called

polifeprosan, which was developed to provide a biodegrad-

able matrix for use in biomedical applications, in particular

for the controlled release of active substances in vivo. Gliadel

7.7mg Implant is a medicinal product that integrates this MIT

technology. It is a new formulation of the off-patent active

ingredient carmustine, combined with polifeprosan, which is

indicated for the treatment of recurrent brain cancers.

Carmustine was used in other pharmaceutical products previ-

ously approved in the EU. However, despite the fact that on its

own polifeprosan has no therapeutic effect, its combination

with carmustine allows the controlled release of the latter active

ingredient at higher but still constant doses. Gliadel therefore

substantially improves the therapeutic effect of carmustine,

and consequently the life expectancy of patients.

Gliadel has been registered in the UK, France and Germany.

It should be noted that due precisely to a long development

time, the MIT patent provided a short period of effective exclu-

sivity for Gliadel, i.e. around 8 years. An additional 5 years SPC

may therefore constitute a key feature of such product develop-

ment.

No SPC can be granted to carmustine as it is an off-patent

molecule. But could an SPC be granted to the patented new

formulation?

Put simply, a SPC may be granted to a product protected

by a basic patent that has been subject to a first marketing

authorisation as a medicinal product. Regulation No. 1768/92

defines a product as the ‘active ingredient or combination of

active ingredients‘, and a medicinal product as ‘any substance

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or combination of substances’ produced for the treatment or

prevention of disease in human beings or animals. The concept

of ‘active ingredient’ is not defined in the Regulation.

The MIT applied to the UK, French and German patent offices

for SPC. While the UK and French patent offices granted the

SPC, the German patent office decided that the SPC could not

be granted for Gliadel because the combination of carmustine

and polifeprosan could not be considered as a product within

the meaning of Regulation No. 1768/92 (since polifeprosan is

not an active substance having its own therapeutic effects).

The MIT lodged an appeal against this decision, arguing that

polifeprosan is neither an excipient (non-active substance) nor

a mere auxiliary component, but an essential component of

Gliadel.

Finally, the competent German Court asked the European

Court of Justice (ECJ) for a preliminary ruling on the issue.

The Advocate General then referred to the objectives of Regu-

lation No. 1768/92, which notably addresses the importance

of continuing improvement of public health, and requires

sufficient legal protection to be granted to innovations that

also provide an increased therapeutic efficacy or a reduction of

side effects, and more generally the significant enhancement

of existing active substances. He stated that ‘the combination

at stake represents a major innovation, resulting from long,

costly research, which the regulation is precisely seeking to

protect’. The absence of an SPC ‘would be likely to discourage

research centres located in the Member States from investing in

the development of medicinal combinations such as the one

at stake’.

Based on these policy considerations, the Advocate General

was favourable to granting an SPC for Gliadel. More specifically

he considered that ‘it is … the necessity of the excipient to

the therapeutic efficacy of the active ingredient that must be

the determining factor in ascertaining whether a combination

of these two substances is covered by ‘combination of active

ingredients of a medicinal product’. However, the ECJ rejected

this interpretation and considered that no SPC could be granted

as Regulation No. 1768/92 implicitly requires the combination

of two active substances.

This decision raises the issue of the validity of several SPCs

already granted by national patent offices in similar circum-

stances. More importantly, the decision may have unfortu-

nate negative implications – mainly for patients – in terms of

biomedical R&D. But does this mean that such products are left

without SPC and with only a limited period of patent protec-

tion? And what about data exclusivity?

Data exclusivityData exclusivity is the protection granted to the scientific dossier

submitted by an innovative company to obtain a marketing

approval for its new product. This dossier aims to demonstrate

the quality, safety and efficacy of the new product. It includes,

amongst other things, the results of costly clinical trials which

take several years to be completed. Data exclusivity means that

during a specific period of time (ten years in the EU) the generic

companies cannot market their copy products by relying on

the dossier of the innovative company. Because of the substan-

tial costs and delays involved in the process, generic companies

simply wait for the expiry of the relevant protection period

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and then refer to the originator’s full dossier. This means they

can enter the market after the expiry of the ten-year period.

Therefore, data exclusivity indirectly results in a protection

granted to the innovator’s product.

In practice, data exclusivity plays a crucial role in protecting

medicinal products for which patent/SPC protection is not

available, is weak or is too short due to lengthy development

periods. It should be remembered that data exclusivity was

introduced in the late 1980s when the protection of biotech

inventions (and research) was not completely secured in the EU.

It was therefore construed as a general safety net. The under-

lying rationale is the promotion of biomedical research and

the benefit to the patient through the granting of an effective

protection to valuable – and sometimes life-saving – medicines

that would otherwise not be developed. In the case of combina-

tion products, such as Gliadel, data exclusivity may at first sight

be an appropriate tool to ensure a more acceptable period of

market protection.

The new EU legislation does not include an explicit provision

dealing with the granting of data exclusivity to combination

products, but the European Commission position is that a new

‘combination’ medicinal product should have an independent

period of data exclusivity. There is, however, little doubt that

the Commission has in mind a fixed combination of two active

substances. Does this mean that combination products such

as Gliadel cannot benefit from data exclusivity? The answer is

not clear.

The revised EU pharmaceutical legislation has introduced

a new concept of Global Marketing Authorisation, which

generally prevents a pharmaceutical company from benefiting

from data exclusivity on improvements proposed on its own

original products. However, the granting of data exclusivity

does not seem to be excluded when such a development is

proposed by a company that is not the holder of the original

product. That being said, the rationale for such a disparate

and unsatisfactory treatment would require a further in-depth

analysis.

ConclusionThe standard explanation for the shortcomings of current SPC

legislation is that the EU law on the matter is general and cannot

take into account the details of every situation. However, this

type of issue also largely reflects the general restrictive approach

of the EU authorities when medicinal products are at stake.

There is very little doubt that, if accepted, the sound proposal

of the Advocate General would certainly not have been at odds

with the general case law of the ECJ. The proposal was based

on the objectives of the SPC Regulation No. 1768/92, i.e. the

promotion of research and development (R&D), and was ulti-

mately the interest of European patients. It would certainly not

have been the first time the Court had imposed the fulfilment

of the clear objectives surrounding legislation on a narrow

interpretation. Similar comments could apply to the implica-

tions for data exclusivity.

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Supplementary Protection Certificates (SPCs)

Supplementary Protection Certificates (SPCs) have

been part of the European pharmaceutical legisla-

tive regime for over thirteen years. It would therefore seem to

be an appropriate time to review how they are operating. This

chapter sets out the history and development of SPCs and looks

at current issues relating to their implementation.

HistoryThe subject of SPCs is closely linked to the idea of patent life

extension. The problem with pharmaceutical patents is that

delays in marketing authorisation, including the required

clinical trials, can lead to the product not being marketed until

a substantial portion of the patent term has elapsed. Marketing

(regulatory) approval, including clinical trials, usually takes

between 8–12 years to obtain, but there are cases where the

entire term of the patent has elapsed before marketing approval

has been granted. As pharmaceutical companies rely on patents

1�

Supplementary Protection Certificates (SPCs)Conal Clynch

to recoup their extensive research and development (R&D)

investments, the industry has long argued that the life of the

patent should be extended.

In the UK, ‘Prolongation for inadequate remuneration’ was

a feature provided by section 23 of the 1949 Patents Act. Exten-

sions were normally for up to 5 years (in addition to the then

16-year normal term), but could be as long as 10 years. The

European Patent Convention (EPC), on the other hand, which

introduced the European Patent, had no such provision and

hence patents governed by the EPC could only last for 20 years.

So when the UK Patents Act of 1977 implemented the provi-

sions of the EPC this special feature of prolongation for inad-

equate remuneration was no longer part of UK patent law.

The USA reacted to the concerns of the pharmaceutical

industry by introducing the Drug Price Competition and

Patent Term Restoration Act of 1984 (the ‘Restoration Act’),

which allowed for a maximum extension of five years. Japan

followed suit in 1988 and hence there was pressure on Europe

to introduce similar legislation. Indeed, because of the delays

in agreeing on a European system, France and Italy introduced

their own systems prior to the European one being estab-

lished.

The RegulationCouncil Regulation (EEC) No. 1768/92 of 18 June 1992

concerning the creation of a SPC for medicinal products (the

SPC Regulation) entered into force on 2 January 1993. The

rationale behind its creation was to harmonise EU law in the

area. Under the SPC Regulation an SPC may be granted to an

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eligible pharmaceutical product that is subject to patent protec-

tion. In other words, the subject matter of an SPC is the patent-

protected product. This differs from the US Restoration Act and

similar practice in Japan, where it is the patent itself which is

extended. Some of the problems related to SPCs are in fact due

to this difference, as well as to practical considerations where

the patent is owned by one company and the SPC by another

(this is dealt with in more detail in the section on implementa-

tion problems below). Although the European system has led to

some complications, it is nevertheless the fairer of the two. This

is because an SPC is related to the marketing approval process

of the product itself, which is the raison d’être for the extension.

Therefore, it is more equitable to increase the term of exclu-

sivity of the product than that of the whole patent (which may

cover a lot more than the product that has been approved).

SPCs have to be applied for separately in each Member State

of the European Economic Area (EEA) in which protection is

required and their effects are limited to the territories of the

Member States in which they are granted. This is necessary

because SPCs cannot exist independently of the patents on

which they are based, and all such patents have an intrinsically

territorial nature.

The Regulation stipulates the conditions which must be

fulfilled for an SPC to be granted, as well as the effects and term

of such certificates. SPCs can be granted if:

➤ the product is protected by a basic patent in force;

➤ a valid authorisation has been granted to place the product

on the market as a medicinal product;

➤ the product is not already the subject of a SPC;

➤ the marketing authorisation is the first in the Member

State.

The SPC system seeks to strike a balance between all parties

concerned. The Regulation in Recital 9, for example, makes it

clear that this includes not only the pharmaceutical industry

but also public health concerns:

Whereas all the interests at stake, including those of

public health, in a sector as complex and sensitive as the

pharmaceutical sector must nevertheless be taken into

account; whereas, for this purpose, the certificate cannot

be granted for a period exceeding five years; whereas

the protection granted should furthermore be strictly

confined to the product which obtained authorisation

to be placed on the market as a medicinal product.

Article 13 of the Regulation defines a formula to establish

the term of any certificate that an applicant may be entitled to.

Effectively, an SPC is available when the marketing approval

is granted five or more years after the filing date of the patent,

and its duration is for a period of time corresponding to how

long after that five-year point the approval was granted, up to a

maximum of five years.

The Regulation has been subject to a number of amend-

ments, especially as new Member States have joined the EC.

Regulation (EC) No. 1610/96 of 23 July 1996, which entered

into force on 8 February 1997, created a similar SPC right for

plant protection products (such as pesticides and herbicides)

which also are required to undergo similar approval.

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The paediatric medicines RegulationThe European Parliament recently agreed a Regulation on

paediatric medicines which will affect the duration of some

SPCs. The Regulation entered into force on 26 January 2007

and will extend SPCs available for paediatric medicines by

six months. The reason for introducing this legislation was

to make sure tests are carried out to guarantee the suit-

ability of medicines for children. Traditionally, pharmaceu-

tical companies have been reluctant to do this work as they

consider the size of the paediatric medicines market to be too

small to justify the expenses involved. The new Regulation,

however, obliges them to undertake the necessary testing and

grants them, as compensation, a six-month extension to the

relevant SPC(s).

This Regulation is similar to legislation introduced in the

USA in 1997 and 1998, and aims to ensure that Europe will

remain competitive and has comparable standards and research

on paediatric medicines.

Implementation problemsDespite some problems (some of which have resulted in refer-

ences to the ECJ), it seems the SPC legislation is generally

perceived to be working effectively across Europe.

Most issues have arisen from two distinct factors. First,

whilst Regulation No. 1768/92 seeks to provide a common legal

framework across the EC, it depends on national intellectual

property offices to administer it. Since the Regulation cannot

cover all eventualities, it has to rely upon the procedural provi-

sions of national law corresponding to the basic patent. This

will inevitably lead to differences in its interpretation between

different countries.

Secondly, when the Regulation was first enacted, the legisla-

tors had in mind a relatively simple linear model of the phar-

maceutical industry, with the patent-holder being both the

manufacturer and seller of the pharmaceutical product and

thus also the holder of the SPC. However, the real situation has

proved much more complex. For example, licensing agreements

can exist between different companies for the same product,

and these can differ in different countries. Moreover, multiple

patents belonging to a number of separate patent-holders may

relate to the same active ingredient. Patent pendency periods

and delays in issuing marketing approvals have in some cases

proved to be far longer than the original legislators anticipated.

Some of these issues were resolved through subsequent legisla-

tion when the Plant Protection Regulation was enacted, but for

others, the interpretation of the Regulation depends on case

law.

Given the transnational nature of the Regulation and its

economic importance, a further amendment of the Regulation

to reflect the decisions of the ECJ and the current state of the

pharmaceutical sector might be of benefit. However, this would

require a new proposal from the Commission.

One example of differences in interpretation of the Directive

concerns a recent ECJ judgement in Case C-431/04 (Massa-

chusetts Institute of Technology). This ruling clarified that

SPC Regulation No. 1768/92 does not apply to products which

combine an off-patent active substance with a substance that

has no therapeutic effect on its own (usually referred to as an

‘excipient’). This judgement relates to the interpretation of

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Article 1(b) of the Regulation, which defines a product as ’the

active ingredient or combination of active ingredients‘. The

article was interpreted differently by the Member States and

the judgement was notable in that the opinion of the Advocate

General (and the Commission) was not followed by the court.

The result is a situation where patents for these inventions will

be granted but no corresponding SPCs will be available. As SPCs

are intended to promote and reward pharmaceutical research,

there is concern that this important area of research will be

neglected. Revision of Article 1(b) of the Regulation could

therefore be considered, so as to allow for the combination of an

active ingredient and an inactive so-called carrier ingredient.

ConclusionSPCs serve to foster innovation in Europe’s pharmaceutical

sector by compensating companies for losses suffered due

to delays in receiving marketing approval. In doing so, they

ensure that Europe remains competitive vis-à-vis other innova-

tive economies such as the USA and Japan. Similarly, the intro-

duction of paediatric medicines legislation aims to ensure that

much-needed research takes place into the effects of medicines

on children. The extension of SPCs will serve to incentivise this

work.

Although there have been some problems relating to the

implementation of the Regulations, the system works well

in general. It is nevertheless in need of updating to maintain

the correct balance between the different stakeholders and to

further encourage innovations in the pharmaceutical and plant

protection areas.

Chapter 1 IPRs, pharmaceuticals and Foreign Direct Investment 1 The views expressed are those of the author and do not

necessarily reflect those of the Organisation for Economic

Cooperation and Development (OECD) or its Member

Countries. The author thanks OECD colleagues Valérie

Paris, Sébastien Miroudot and Christina Sampogna for

their suggestions and Mounira Nakaa for her assistance in

accessing certain FDI data.

2 For example, in the OECD area from 1994 to 2003 the

pharmaceutical sector had the highest growth rate of any

sector with respect to manufacturing trade (13.5% annual

growth versus an average of 5.8% for manufacturing as a

whole − OECD (2005), Science, Technology and Industry

Scoreboard, Paris). Manufacturing trade refers to exports plus

imports.

3 Park, W., and D. Lippoldt (2005), ‘International Licensing

and The Strengthening of Intellectual Property Rights in

Developing Countries During The 1990s’, OECD Economic

Studies, Vol. 40, Paris.

Notes

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Notes

4 These include copyright and related rights, trademarks,

geographical indications of origin, industrial designs, patents,

layout-designs of integrated circuits, and protection of

undisclosed information.

5 See WTO ‘TRIPS and Pharmaceutical Patents’, Fact Sheet,

Geneva, September 2006, available at: http://www.wto.org/

english/tratop_e/trips_e/factsheet_pharm00_e.htm for more

on TRIPS and pharmaceutical patents.

6 Balance is required in IPR policy since overly stringent

protection could in theory confer excess market power

(e.g. from patents that are too broad), thereby diminishing

competition and encouraging some IPR holders to continue

exploiting existing innovations while postponing new

innovation efforts.

7 For example, pharmaceutical expenditure on R&D is the

equivalent of about 22% of value added, whereas the figure

for manufacturing as a whole is 7% − OECD (2005).

8 A ‘lasting interest’ is defined as investment to obtain a share

of 10% or more of the voting power in the foreign enterprise

− OECD (2006), International Investment Perspectives, Paris,

p. 20.

9 One US study found that the average total cost for

development of a new drug in the late 1990s was US$897

million and that the average development costs had increased

5.8 times in constant dollars between the 1970s and the

1990s. The increase in costs was attributed in part to R&D

expenses and, in particular, clinical testing costs (which the

study estimated as rising 8.6 times during this period). Tufts

Center for the Study of Drug Development, ‘Total Cost to

Develop a New Prescription Drug’, press release, 13 May 2003;

and Psychiatric News, 1 August 2003, Vol. 38 No. 5.

10 OECD (2006) Innovation in Pharmaceutical Biotechnology:

Comparing National Innovation Systems at the Sectoral Level,

Paris.

11 A World Bank assessment found that government policies to

promote technology transfer via FDI have a greater likelihood

of success if they focus on boosting incentives to source

locally (e.g., by helping local suppliers to adapt) rather than

through regulation directly mandating technology transfer.

World Bank (2006) Global Integration & Technology Transfer,

B. Hoekman and B. Smarzynska Javorcik (eds.), Washington,

DC.

12 In Singapore during 2005, GlaxoSmithKline announced

a US$100 million facility expansion and Pfizer opened

a US$350 million plant – Pharmabiz, ‘New policies spur

pharma, biotech growth in Singapore’, 14 April 2005, posted

on-line at www.pharmabiz.com

13 As Carlos A. Primo Braga and C. Fink point out in ‘The

Relationship Between Intellectual Property Rights and

Foreign Direct Investment’, Duke Journal of Comparative

and International Law, Vol. 9, pp. 163ff, 1998 (http://www.

law.duke.edu/journals/djcil/articles/djcil9p163.htm),

the choice of whether and where to invest depends on

locational advantages (including IPR protection) of the home

and foreign markets and the profitability of internalising

production or selling or licensing the technology to another

firm that is active in the market.

14 In a 2003 survey on investment issues affecting the world’s

largest 1,000 firms, the consulting firm A. T. Kearney asked

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Notes

business leaders to characterise the most critical risks to their

corporations as they invest abroad. At the top of the list were

government regulations, country financial risk, currency

risk, and risk of political and social disturbances (each of

which were cited by 60% or more of respondents). Theft of

intellectual property was cited by 17% of the respondents and

ranked 12th on the list of concerns.

15 An article in FDI Magazine (‘Pharma pulls in $15bn’, 12 April

2005, on-line) lists the top ten locations for pharmaceutical

FDI projects during January 2002 to February 2005: USA

(52 projects), China (44), India (30), Ireland (29), Spain

(27), Canada (27), UK (23), Singapore (23), Brazil (22) and

Germany (18).

16 Smarzynska, B. (2002), Composition of Foreign Direct Investment

and Protection of Intellectual Property Rights: Evidence from

Transition Economies, The World Bank, Working Paper Series

No. 2786, http://econ.worldbank.org/files/12031_wps2786.

pdf

17 Mansfield, E. (1994), ‘Intellectual Property Protection, Foreign

Direct Investment, and Technology Transfer’, International

Finance Corporation Discussion Paper No. 19.

18 Lee, J.-Y. and E. Mansfield (1996), ‘Intellectual Property

Protection, Foreign Direct Investment and Technology

Transfer’, Review of Economics and Statistics, Vol. 78, pp. 181−6.

19 Park, W. and D. Lippoldt (2003). ‘The Impact of Trade-Related

Intellectual Property Rights on Trade and Foreign Direct

Investment in Developing Countries’, OECD Papers, Vol. 3,

No. 11, paper 294, a draft of which is available at: http://

www.oecd.org/dataoecd/59/46/2960051.pdf

20 Trade and FDI were measured as a % of GDP in each

destination market. The index of patent rights strength

considered membership in relevant international treaties,

restrictions on IPRs, available means of enforcement,

duration of protection and sectoral coverage of patent rights.

See also Lippoldt, D. (2006), ‘Can Stronger Intellectual

Property Rights Boost Trade, Foreign Direct Investment

And Licensing In Developing Countries?’ in The Intellectual

Property Debate: Perspectives from Law, Economics and Political

Economy , M. Pugatch (ed.), Edward Elgar Publishing, UK.

21 The estimates were not statistically significant for the LDCs

for the sectors shown.

22 Mansfield singles out the chemical industry as whole, noting

that ‘chemical firms are reluctant to transfer relatively

new or advanced technology to other than wholly owned

subsidiaries’. See note 17, p. 10.

Chapter 2 Parallel imports of patented medicines 1 Betts v. Willmott (1871) L.R. 6 Ch. App. 239, 245.

2 See the Commission’s Communication on parallel imports

of proprietary medicinal products for which marketing

authorisations have already been granted, COM (2003) 839,

30 December 2003.

Further reading for Chapter 2 Abbott, F. M. (1998), ‘First Report (Final) to the Committee on

International Trade Law of the International Law Association

on the Subject of Parallel Importation’, Journal of International

Economic Law, Vol. 1, No. 4, pp. 607−36.

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Notes

Danzon, P. M. and A. Towse (2003), ‘Differential pricing for

pharmaceuticals: reconciling access, R&D and patents’,

International Journal of Health Care Finance and Economics, Vol.

3, pp. 185−205.

Kanavos, P., Costa-I-Font, J., Merkur, S., and M. Gemill (2004),

‘The Economic Impact of Pharmaceutical Parallel Trade in

European Union Member States: A Stakeholder Analysis’,

Special Research Paper, LSE Health and Social Care.

Malueg, D. and M. Schwartz (1994), ‘Parallel Imports, Demand

Dispersion and International Price Discrimination’, Journal of

International Economics, Vol. 37, pp. 167−95.

OECD (2002) ‘Synthesis Report on Parallel Imports’, Paris.

Szymanski, S. and T. M. Valletti (2005), ‘Parallel trade, price

discrimination, investment and price caps’, Economic Policy,

Vol. 20, pp. 705−49.

Chapter � Strategic use of IPRs by pharmaceutical SMEs in developing countries 1 Mansfield, E., ‘Patents and Innovation: An Empirical Study’,

Management Science, February 1986.

2 Kettler, H., White, K. and S. Jordon (2003), ‘Valuing

Industry Contributions to Public-Private Partnerships for

Health Product Development’, Initiative on Public-Private

Partnerships for Health (IPPPH), Global Forum for Health

Research, Geneva.

3 The World Trade Organization’s (WHO) Agreement on

Trade-Related Aspects of Intellectual Property (TRIPS) came

into force in January 2005, for all but the least developed

countries.

4 Eiss et al., ‘Living with TRIPS’, at www.mihr.org

5 A provision which allows companies to begin to produce

copies of drugs which are still on patent, to enable the process

to be completed in time for when the patent expires – thus

reducing the delay in the production of generic medicines.

6 Details of these approaches can be found in the Handbook of

Best Practices for Management of Intellectual Property in Health

Research and Development, www.mihr.org

7 www.mihr.org

8 Numerous PPPs have been funded by governments and by

philanthropic foundations such as the Rockefeller and Gates

Foundations to tackle the so-called neglected diseases of the

developing world. The Commission for Intellectual Property

Rights, Innovation and Public Health (CIPIH), Geneva, April

2006, gives details of these PPPs.

9 MIHR (op. cit); www.wipo.org

10 Timmermans, K., (2006), Negotiating Health, Intellectual

Property and Access to Medicines, ICTSD.

Chapter � Antitrust and patent settlement investigations 1 FTC v. Schering-Plough Corp., 528 US ___, No. 05−273 (26 June

2006) (cert. denied).

2 ‘Overview of FTC Antitrust Actions in Pharmaceutical

Services and Product’, Health Care Services and Products

Division, Bureau of Competition, Federal Trade Commission,

April 2006, pp. 8−9.

3 Ibid., p. 8.

4 Ibid., p. 3.

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Notes

5 ‘FTC Charges Schering-Plough over Allegedly Anticompetitive

Agreements with Two Other Drug Manufacturers: Complaint

Alleges Illegal Payments to Delay Entry of Generic Products

into the US Market’, US Federal Trade Commission, Press

Release, 2 April 2001; and ‘In the Matter of Schering-Plough

Corp., Upsher-Smith Corp., and American Home Products

Corp.’, US Federal Trade Commission, Initial Decision, 27

June 2002, p. 2.

6 ‘In the Matter of Schering-Plough Corp., Upsher-Smith

Corp., and American Home Products Corp.’, US Federal Trade

Commission, Initial Decision, 27 June 2002, p. 4.

7 Ibid.

8 Ibid.

9 Two recent court decisions help illustrate the unsurprising

fact that a presumption that a branded manufacturer’s patent

is invalid will not always be consistent with the results of

court rulings. On 1 August 2006, a US District Court ruled

in favour of Daiichi Pharmaceutical, finding its patent for

Floxin Otic was not invalid; on 2 August 2006, the US Court

of Appeals for the Federal Circuit upheld an earlier decision

affirming the validity of one of the patents on Pfizer’s

drug Lipitor. Daiichi Pharmaceutical Co., LTC and Daiichi

Pharmaceutical Corporation v. Apotex, Inc. and Apotex Corp., Civ.

No. 03−937, United States District Court for the District of

New Jersey, Opinion, 1 August 2006; Pfizer, Inc., Pfizer Ireland

Pharmaceuticals, Warner-Lambert Company, Warner Lambert

Company LLC, and Warner Lambert Export, LTD v. Ranbaxy

Laboratories Limited and Ranbaxy Pharmaceuticals, Incorporated,

No. 06−1179 United States Court of Appeals for the Federal

Circuit, decided 2 August 2006.

10 ‘In the Matter of Schering-Plough Corp. et al.’, US Federal

Trade Commission, Opinion of the Commission, 8 December

2003, pp. 6−7.

11 Ibid., p. 8.

12 Schering-Plough Corp. v. FTC, http://www.ca11.uscourts.

gov/opinions/ops/200410688.pdf (402 F.3d 1056 [11th Cir.

2005]).

13 Ibid., p. 11.

14 Ibid.

15 Schering-Plough Corp. v. FTC, p. 34.

16 Ibid., p. 43.

17 Illinois Tool Works, Inc. et al. v. Independent Ink, Inc, 547 US ___

(2006).

Chapter � A new approach to trade-related pharmaceutical IPRs – IPRs as tradeable goods 1 Lamoreaux, N. R. and K. L. Sokoloff (2001), ‘Market Trade

in Patents and the Rise of a Class of Specialized Inventors

in the 19th-Century United States,’ The American Economic

Review, Vol. 91, No. 2 (Papers and Proceedings of the Hundred

Thirteenth Annual Meeting of the American Economic

Association), pp. 39−44.

2 Razgaitis, R. (2003, 2004), ‘US/Canadian Licensing In 2003:

Survey Results’, les Nouvelles. See also Gambardella, A.,

Giurib, P. et al. (2006), ‘The Market for Patents in Europe’,

LEM Working Paper Series, Laboratory of Economics and

Management, Sant’Anna School of Advanced Studies.

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Notes

3 Hayek (1937), ‘Economics and Knowledge’, Economica, Vol.

4, No. 13, pp. 33−54. Hayek (1945), ‘The Use of Knowledge

in Society’, The American Economic Review, Vol. 35, No. 4, pp.

519−30.

4 Ullberg, E. (2006), ‘World Trade in Intellectual Property −

Managing Risk and Uncertainty in the Knowledge Economy’,

Meredith Memorial Lectures Series, McGill.

5 Prof. Vernon Smith, Nobel Prize laureate in Economics

in 2002, pioneered this field. See his ‘An Experimental

Study of Competitive Market Behavior’, The Journal of

Political Economy, Vol. 70, No. 3, pp. 322−3, 1962; and

‘Microeconomic Systems as an Experimental Science’, The

American Economic Review, Vol. 72, No. 5, pp. 923−55.

6 Harris, C. and J. Vickers (1987), ‘Racing with Uncertainty’,

The Review of Economic Studies, Vol. 54, No.1, pp. 1−21.

Chapter � The WTO, IPRs and access to medicines 1 The chapter is based on material available in the Intellectual

Property Division of the World Trade Organization (WTO).

The views expressed do not reflect those of the WTO, its

Secretariat or its members.

2 See Chapter II of Watal, J. (2001), Intellectual Property Rights in

the WTO and Developing Countries, Kluwer Law International.

3 For instance, the brand name of the medicine (either

originator or generic) could be protected under trademarks;

the inserts that accompany the medicine could contain

copyrighted material, and the packaging could be the

subject of industrial design protection. Similarly, the issue of

enforcement of IPRs so as to eliminate counterfeit medicines

in the market should be at the heart of the debate on public

health.

4 Canada − Patent Protection for Pharmaceutical Products (WT/

DS114/R).

5 Some of these views are reflected in document IP/C/M/31,

which reproduces members’ statements in the TRIPS

Council made on 20 June 2001 in the special discussion on

intellectual property and access to medicines.

6 Document WT/MIN(01)/DEC/2.

7 Document IP/C/25 − June 2002; Document WT/L/478 – July

2002.

8 Document IP/C/40.

9 Documents WT/L/540 and Corr.1.

10 Contained in paragraph 29 of document WT/GC/M/82.

11 Notifications about the use of the system will be accessible

through a dedicated webpage on the WTO website: http://

www.wto.org/english/tratop_e/trips_e/public_health_e.htm

12 The latest list can be obtained from http://www.wto.org/

english/tratop_e/trips_e/amendment_e.htm

Chapter � Pharmaceutical IPRs and the TRIPS Agreement – past, present and future 1 See Gorlin, Jacques J. (1999), An Analysis of the Pharmaceutical-

Related Provisions of the WTO TRIPS (Intellectual Property)

Agreement, Intellectual Property Institute, London.

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Notes

2 See, for example, Choate, P. (2005), Hot Property: the Stealing

of Ideas in an Age of Globalization, Alfred A. Knopf, New York,

p. 232.

3 For example, the TRIPS Agreement did not ban parallel

imports nor did it provide for patent-term extension.

4 In fact, TRIPS Article 70.2 contains a mechanism for

amending TRIPS for the ‘purpose of adjusting to higher levels

of protection of intellectual property rights … ’

5 The best example is Article 39.3, which only requires

protection of undisclosed information ‘against unfair

commercial use’, which was understood at the time to

include data exclusivity. See Gorlin, J., The GATT Uruguay

Round: A Negotiating History (1986−1992) (1993), Vols 1 and 2,

pp. 43−50, Kluwer Law and Taxation Publishers,Boston.

6 TRIPS Article 1.

7 Least Developed Countries (LDCs) are countries which,

according to the UN, exhibit the lowest indicators of socio-

economic development of all countries in the world. There

are currently 50 LDCs.

8 Gaining TRIPS-level intellectual property protection in WTO

accession countries will provide significant benefits to the

industry.

Chapter � The WTO Decision of � December 200� on the amendment of the TRIPS Agreement 1 Paragraph 6 of the Doha Declaration.

2 A compulsory licence is an authorisation granted by

government to an economic operator to use a patent-

protected technology, without the consent of the right-

holder.

3 In the meaning of Article 9.3 of the WTO Agreement.

4 OJ No. L 157 of 9.6.2006, p. 1.

5 IP/C/W/416 of 21 November 2003.

6 IP/C/W/437 of 10 December 2004. A revised version

was circulated in March 2005 which took into account a

communication from Rwanda, on behalf of the African

Group, on legal arguments to support the African Group

proposal IP/C/W/440 of 1 March 2005. Subsequently, the

African Group circulated the statement made by Rwanda on

behalf of the Group during the TRIPS Council meeting held

on 31 March 2005, IP/C/W/445.

7 IP/C/W/444 of 18 March 2005.

8 This was clearly expressed by the Africans at the meeting

of the African Union’s Ministers for Trade, held in Arusha

(Tanzania) on 23−24 November 2005.

9 Paragraph 3 of Article X of the WTO Agreement.

10 These countries are the following: Hong Kong; Israel; Korea;

Kuwait; Macao China; Mexico; Qatar; Singapore; Chinese

Taipei; Turkey and the United Arab Emirates.

11 Paragraph 5 of Article 133 of the EC Treaty.

Chapter � The WHO Commission’s Report on IPRs, Innovation and Public Health: a missed opportunity 1 The opinions expressed herein are personal and should not

be attributed to White & Case or to any of its clients.

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2 The WHO Commission’s Report on IPRs, Innovation and

Public Health, p. 98.

3 Ibid., p. 124.

4 Ibid., Recommendation 4.17, p. 140.

5 Ibid., Recommendation 4.10, p. 134.

6 Ibid., pp. 146−47.

7 Ibid., pp. 147−48.

8 Defined in the Report (p. 149) as strategies used by patent-

holders to extend the length of their exclusivity beyond

twenty years, without any apparent therapeutic benefit.

9 Most of the 312 medicines on the WHO’s list of Essential

Drugs are now off patent. See http://www.who.int/medicines/

publications/essentialmedicines/en/

Chapter 10 The EU’s approach to the enforcement of pharmaceutical IPRs: multilateral, bilateral and domestic perspectives 1 The views expressed in this article are those of the author and

cannot be attributed to the European Commission.

2 The Lancet, ‘Infectious Diseases’, 21 August 2006.

3 Number of cases of counterfeit medicines occurring in the EU

between 2001 and 2005:

➤ 27 cases in legitimate supply chain

➤ 170 cases in illegitimate supply chain

4 Council Regulation (EC) No. 1383/2003, of 22 July 2003.

5 Directive 2004/48/EC, of 29 April 2004, harmonising the

enforcement of IPRs within the Community.

6 Proposal for a Directive on Criminal Measures aimed at

ensuring the Enforcement of IPRs, COM (2006) 186, of 26

April 2006.

7 Commission Communication 2005/129/03, of 26 May 2005.

8 See http://ec.europa.eu/trade/issues/sectoral/intell_property/

survey2006_en.htm

9 Commission Communication ‘Global Europe: competing in

the world’, of 4 October 2006.

10 Council Regulation (EC) 953/2003, of 3 June 2003.

Chapter 11 The threat of counterfeit medicines – a new approach to policy 1 See http://www.who.int/medicines/services/counterfeit/

impact/TheNewEstimatesCounterfeit.pdf

2 Ibid.

3 Ibid.

4 See http://www.who.int/mediacentre/news/releases/2006/

pr09/en/

5 See http://www.cmpi.org/viewstddoccontent.asp?detailid=17

8&contenttypeid=3

6 Schwartz, B. and V. Wong, ‘Counterfeit Cures’, Insight

Magazine, Shanghai Chamber of Commerce, March 2006.

7 See http://whqlibdoc.who.int/publications/2003/a86263_

part10.pdf

8 Gibson, L., ‘Drug regulators study global treaty to tackle

counterfeit drugs’, British Medical Journal, Vol. 328, No. 486,

28 February 2004.

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Notes

9 European Federation of Pharmaceutical Industries and

Associations, ‘Counterfeit medicines’, available at http://

www.efpia.org/2_indust/counterfeitdrugs.pdf

10 Shakoor et al. (1997), ‘Assessment of the incidence of

substandard drugs in developing countries’ in Tropical

Medicine and International Health, Vol. 2, pp. 839−45.

11 See http://www.whqlibdoc.who.int/hq/2003/WHO_EDM_

PAR_2003.4.pdf

12 Pitts, Peter J. (2006), Coincidence or Crisis? Prescription

Counterfeit Medicine, Stockholm Network, London, pp. 79−92.

13 Remarks in front of the Counterfeit Drugs and Supply Chain

Security Conference, Washington, DC, 2006.

14 See http://www.pacificresearch.org/pub/sab/health/2005/JH_

Washington_09-05.pdf

15 Pitts, op. cit., pp. 1−36.

16 Ibid.

17 Ibid., p. 40.

18 See http://www.fda.gov/oc/initiatives/counterfeit/report02_

04.html

Chapter 12 The Convention on Biodiversity (CBD) and Intellectual Property Rights 1 On the US declaration, see ‘Report of the Intergovernmental

Negotiating Committee for a Convention on Biological

Diversity’, UNEP/Bio.Div/N7ING5/4 (1992).

2 ‘Bonn Guidelines on Access to Genetic Resources and Fair

and Equitable Sharing of The Benefits Arising out of their

Utilization’, UN Doc. UNED/CBD/COP/6/2C (27 May 2002).

3 CBD 16(5): ‘The Contracting Parties, recognising that patents

and other IPRs may have an influence on the implementation

of this Convention, shall cooperate in this regard subject to

national legislation and international law in order to ensure

that such rights are supportive of and do not run counter to

its objectives.’

4 Bonn Guidelines, Annex 16(d)(ii).

5 Those CBD provisions relating to intellectual property are:

Article 8(j)[ In-situ Conservation] ‘Subject to its national

legislation, respect, preserve and maintain knowledge,

innovations and practices of indigenous and local

communities embodying traditional lifestyles relevant for

the conservation and sustainable use of biological diversity

and promote their wider application with the approval and

involvement of the holders of such knowledge, innovations

and practices and encourage the equitable sharing of the

benefits arising from the utilisation of such knowledge,

innovations and practices’;

Article 10(c) Article 10: [Sustainable Use of Components of

Biological Diversity]

Each Contracting Party shall, as far as possible and as

appropriate:

(c) ‘Protect and encourage customary use of biological

resources in accordance with traditional cultural practices

that are compatible with conservation or sustainable use

requirements;

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Notes

Article 16(2): ‘[…] In the case of technology subject to patents

and other IPRs, such access and transfer shall be provided on

terms which recognise and are consistent with the adequate

and effective protection of IPRs.’

Article 19(2) [Handling of Biotechnology and Distribution of

its Benefits]: ‘Each Contracting Party shall take all practicable

measures to promote and advance priority access on a

fair and equitable basis by Contracting Parties, especially

developing countries, to the results and benefits arising from

biotechnologies based upon genetic resources provided by

those Contracting Parties. Such access shall be on mutually

agreed terms.’

6 For example, ‘Non-Aligned and Developing Countries’ (New

Delhi, January 1999 http://www.grain.org/bio-ipr/?id=317).

The report affirms that the TRIPS Agreement fails to

adequately address the objectives of the CBD and proposes

the following: either remove the word ‘effective’ from

Article 27.3(b) in the context of sui generis systems of plant

variety protection, or define it such that national priority

is paramount in the interpretation of the term, including

(i) Conservation and sustainable use of biodiversity; (ii)

Promotion of traditional lifestyles; (iii) Promotion of food

security and health security; (iv) Ensuring equitable benefit-

sharing; (v) Invoking the precautionary principle; (vi) Respect

of the principles of equity and ethics; UNEP Conference on

the TRIPS and the CBD (Nairobi, February 1999 http://www.

grain.org/bio-ipr/?id=316); the South Asian Network on

Food, Ecology and Culture (February 1999 http://www.grain.

org/bio-ipr/?id=272).

7 Article 27 of the TRIPS Agreement defines what is patentable

subject matter and 27.3(b) provides members may exclude

from patentability ‘plants and animals other than micro-

organisms, and essentially biological processes for the

production of plants or animals other than non-biological

and microbiological processes’.

8 WT/GC/W/564/Rev.2, TN/C/W/41/Rev.2/IP/C/W/474, 5 July

2006.

9 WIPO/GRTKF/IC/9/13, 20 April 2006.

10 Article 12.3(d) of the ITPGRFA provides: ‘Recipients shall not

claim any intellectual property or other rights that limit the

facilitated access to the plant genetic resources for food and

agriculture, or their genetic parts or components, in the form

received from the multilateral system.’

11 Examples of access requirements protecting local

communities or indigenous populations are: Philippines

Presidential Executive Order No. 247 (1995); India

Biodiversity Act (2003); Brazilian Executive Power

(Provisional Measure No. 2.126−11, (2001); Decision 391 of

the Andean Group (1996) (Article 7).

Examples of legislations relating to disclosure of genetic

resources are: EC Biotech Directive 98/44/EC recital 27

(voluntary); Norway, Denmark, Sweden (with penalties

but no consequence on patent validity); Brazil Provisional

Measure 2186−16 (2001)Article 31: India Patent

(Amendment) Act (2005), Section 10(4)(d)(ii)[A−D] (with

consequences on patent grant and validity).

Further reading for Chapter 12 Drahos, P. and M. Blakeney, (eds.) (2001), IP in Biodiversity

and Agriculture: Regulating the Biosphere, Sweet & Maxwell,

London.

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Notes

Charest, M. G., Lerner, C. D., Brubaker, J. D., Siegel, A. D. and R.

Myers, Science, Vol. 308, No. 395, 2005.

Miyazaki, M., ‘Economic Value of microbial resources’ in

Microbiological Culture Collection, June 2006, pp. 15−19.

Chapter 1� A statutory research exemption for patents 1 The issue was the topic of a recent Organisation for Economic

Co-operation and Development (OECD) conference on

research use of patented inventions. See http://www.oecd.

org/document/46/0,2340,en_2649_34797_36060462_1_1_1_

1,00.html

2 See, for example, Thumm, N. (2005), ‘Patents for genetic

inventions: a tool to promote technological advance or

a limitation to upstream inventions’, Technovation, The

International Journal of Technological Innovation and

Entrepreneurship, Vol. 25, No. 12, pp. 1410−17.

3 Cf. Shapiro, C. (2001), ‘Navigating the Patent Thicket: Cross

Licenses, Patent Pools, and Standard-Setting’ in Innovation

Policy and the Economy, Vol. 1, MIT Press, www.faculty.haas.

berkeley.edu

4 See http://www.ige.ch/E/jurinfo/documents/j10005e.pdf

5 Swiss patent law revision, information under http://www.ige.

ch/E/jurinfo/j100.shtm#a03

6 Regulated in Article 9(a) of the revised patent law.

Chapter 1� Patenting biotechnology 1 A gene is a DNA sequence that codes for a protein. In multi-

celled organisms only a small proportion of DNA codes for

proteins, as between genes, and also within most genes, there

are DNA sequences some of which can be extremely long,

called introns, that are not genes, do not code for proteins,

and the function of which is at present unknown. For a

discussion of the issues associated with patents on genes

and DNA, see Cook, T. M. (2006), ‘Patenting Genes’, in The

Intellectual Property Debate – Perspectives from Law, Economics

and Political Economy, M. Pugatch (ed.), Edward Elgar

Publishing, UK.

2 Canada has also considered the ethical issues in some depth −

see ‘Patenting of Higher Life Forms and Related Issues’, Report

to the Government of Canada, Biotechnology Ministerial

Coordinating Committee, Canadian Biotechnology Advisory

Committee, June 2002.

3 Directive 98/44/EC of the European Parliament and of

the Council on the legal protection of biotechnological

inventions − OJEC L 213, 30.7.98, p. 13.

4 EPO Decision T 0315/03 Transgenic animals / HARVARD of 6

July 2004 – OJEPO 2006, p. 15.

5 In Europe, use of a research tool for its patented purpose

would not fall within the scope of the defence found in

the patent laws of most European countries, as to ‘use for

experimental purposes relating to the subject matter of the

invention’. No such defence exists in the USA. However,

the effect of the 2005 Supreme Court Judgment in Integra

Lifesciences 1, Ltd v. Merck KGaA − 545 US 193, 125 S. Ct.

2372 − despite ostensibly not addressing research tools, is to

deprive certain research tools of value even when used for

their patented purposes. See Cook, T. M. (2006), ‘A European

Perspective as to the Extent to which Experimental Use, and

Certain other Defences to Patent Infringement, apply to

174-175 20/3/07 15:35:15

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Notes

Differing Types of Research’, Intellectual Property Institute,

London.

6 Article 53(a) EPC as amended by Article 16, EPC Revision

Act of 2000 (not yet in force). Since most such controversy

originally concerned genetically modified animals, it also

involved consideration of another express exception from

patentability, namely that under Article 53(b) EPC, for ‘plant

and animal varieties or essentially biological processes for

the production of plants or animals … ’ the primary purpose

of which had been to avoid overlap with the plant variety

protection system. However, it has now been established that

although this restricts the nature of how genetically modified

plants and animals can be claimed in a patent, it does not

prevent patent claims being drafted which can encompass

plant or animal varieties. See EPO Decision G 1/98 Transgenic

plant / NOVARTIS of 20 December 1999, OJEPO 2000, p. 111,

and also the Biotechnology Directive Article 4.

7 See Plomer A. et al. (2006), ‘Stem Cell Patents: European

Patent Law and Ethics Report’ at http://www.nottingham.

ac.uk/law/StemCellProject/project.report.pdf for an extensive

discussion of this controversy.

8 Such as ‘Research and Patenting in Biotechnology: A Survey

in Switzerland’, Swiss Federal Institute of Intellectual Property

2003 at http://www.ige.ch/E/jurinfo/documents/j10005e.pdf;

and ‘Patents for Genetic Sequences: The Competitiveness of

Current UK Law and Practice’, Intellectual Property Institute

study for the UK Department of Trade and Industry, 2004.

9 Published by National Academies Press at http://www.nap.

edu/catalog/11487.html

10 See Stott, M. and J. Valentine (2004), ‘Gene Patenting and

Medical Research: a View from a Pharmaceutical Company’,

Nature Reviews Drug Discovery, Vol. 3, pp. 364−8 for data as to

the limited extent of gene patenting in Europe.

Chapter 1� Patent wars and authorised generics in the USA: assessing the issues 1 IIR’s Global Generic Strategies Conference, Barcelona,

Spain, Spring 2004. See http://www.imshealth.com/

web/content/0,3148,64576068_63872702_70261000_

71026728,00.html

2 Pfizer Inc. and Schering-Plough Corp. sell generic products

through their affiliates, Greenstone Ltd and Warrick

Pharmaceuticals respectively.

3 For example, Mylan Laboratories Inc. (Mylan) developed the

brand product Maxzide®.

4 ‘Senators Take Aim At Authorized Generics,’ IP Law 360, 21

July 2006. Innovators consider a variety of strategies when

managing a brand pharmaceutical product throughout its

life cycle. Some of these strategies have given rise to scrutiny

by policymakers, including innovators raising questions in

Citizen Petitions during the FDA approval process for ANDAs

submitted by imitator companies; introducing new and

improved products; settling patent infringement cases; or

launching, either directly or through licensing, authorised

generic versions of their brand products. We address the last

strategy in this chapter.

5 In the former case, the company files a Paragraph I, Paragraph

II, or Paragraph III certification as part of its ANDA. Paragraph

I certification applies when the FDA has not been informed

176-177 20/3/07 15:35:15

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1��

Notes

that a patent applies to the compound at issue. Paragraph II

certification applies when the patent covering the compound

has expired. Paragraph III certification applies effective on the

date the patent will expire. See ‘Title 21 − Food and Drugs,

Department of Health and Human Services − Continued, Part

314 − Applications for FDA Approval to Market a New Drug,

Subpart C − Abbreviated Applications’ at http://www.fda.gov/

CDER/ogd/paragraph4.htm. In the latter case, the company

files a Paragraph IV certification as part of its ANDA. Without

an authorised generic, imitator companies that are successful

with Paragraph IV certifications receive 180 days of marketing

exclusivity.

6 Tim Gilbert on behalf of Gilbert’s LLP ‘Hatch-Waxman:

Upsetting the Balance’, presented at The Intellectual Property,

Healthcare and Federal Civil Enforcement Committees of the

American Bar Association’s Antitrust Section’s ‘Whose Drug is

it Anyway?’ Lecture, Washington, DC, 14 September 2006.

7 Hollis, A. and Bryan A. Liang, ‘An Assessment of the Effect

of Authorised Generics on Consumer Prices’, 31 July 2006

(‘GPhA Study’), p. 20, footnote 39.

8 Par is ‘the fifth largest manufacturer and distributor of

generic pharmaceuticals in the USA’: see ‘About Generic

Pharmaceuticals’, at http://www.parpharm.com/about/

generics.jsp

9 See note 6.

10 Jerome A. Swindell on behalf of Johnson & Johnson,

‘Authorised Generics: Good for Everyone (Even Generics)’,

presented at The Intellectual Property, Healthcare and

Federal Civil Enforcement Committees of the American Bar

Association’s Antitrust Section’s ‘Whose Drug is it Anyway?’

Lecture, Washington, DC, 14 September 2006; and GPhA

Study, p. 20, footnote 39.

11 ‘Paragraph IV Patent Certifications as of 14 September 2006’,

at http://www.fda.gov/CDER/ogd/ppiv.htm

12 Seligman, P., ‘Teva’s Generic Advantage’, Business Week Online,

29 August 2006, at http://www.businessweek.com/print/

investor/content/aug2006/pi20060829_967054.htm

13 Similarly, the means of the return on sales for both groups are

equal. See Table 4.

14 ‘Authorized Generics, Prasco Product Profile’, Prasco, at

http://www.prasco.com/files/Branded_Site_Products/AG_

ProductProfile_Web_05.14.12_FINAL.pdf

15 Teva completed its acquisition of Ivax Corporation on 26

January 2006. See http://www.teva.co.il/pr/2006/pr_576.asp

16 IMS Consulting, ‘Assessment of Authorised Generics in

the US’, prepared for the Pharmaceutical Research and

Manufacturers of America (PhRMA), Spring 2006 (‘PhRMA

Study’), p. 4.

17 Daly, E. M., ‘In Win For Barr, Court Denies Tamoxifen

Rehearing’, IP Law 360, 18 September 2006; and http://www.

nolvadex.com.

18 Ibid.

19 Frank, Richard G. and David S. Salkever, ‘Generic Entry

and the Pricing of Pharmaceuticals’, Journal of Economics &

Management Strategy, Vol. 6, No. 1, Spring 1997, p. 84.

20 ‘Generic Competition and Drug Prices’, at http://www.fda.

gov/cder/ogd/generic_competition.htm#P5_1100

178-179 20/3/07 15:35:15

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1�1

Notes

21 ‘The Drug Development and Approval Process’, in Medicines

in Development for Heart Disease and Stroke, 2005, PhRMA, p.

19.

22 Ibid. The US$802 million represents the total capitalised cost

and is stated in 2000 dollars. Average out-of-pocket costs

were estimated to equal US$403 million. DiMasi, Joseph A.,

Hansen, Ronald W. and Henry G. Grabowski (2003), ‘The

Price of Innovation: New Estimates of Drug Development

Costs’ in Journal of Health Economics, Vol. 22, pp. 151−85.

24 Grabowski, H. and J. Vernon, ‘A New Look at the Returns and

Risks to Pharmaceutical R&D’ in Management Science, Vol. 16,

No. 7, July 1990, pp. 804−21.

25 Henson, S., ‘Barr Tries to Cut Generic Market by Entering It’,

IP Law 360, 8 September 2006.

26 Ibid.

27 For example, the Federal Trade Commission (FTC) is

conducting a study to analyse the short- and long-term

competitive effects of authorised generics. ‘FTC Proposes

Study of Competitive Impacts of Authorised Generic Drugs’,

FTC, 29 March 2006, at http://www.ftc.gov/opa/2006/03/

authgenerics.htm

28 PhRMA Study (see note 16), pp. 1−2.

29 GPhA Study (see note 7), p. 9.

30 Ibid., p. 11.

31 Ibid., p. 14.

32 Rozek, Richard P. and Bishko, Emily R., ‘Investment

Incentives Created by the Montreal Protocol and FDA Policy

on Albuterol’, The Journal of World Intellectual Property, Vol. 6,

No. 6, November 2003.

33 ‘Wal-Mart to Sell Generic Drugs for $4’, National Public

Radio, 21 September 2006, at http://www.npr.org/templates/

story/story.php?storyId=6119292&ft=1&f=1001; and ‘Wal-

Mart Cuts Generic Prescription Medicines to $4’, at http://

www.walmartfacts.com/articles/4464.aspx

34 ‘Kmart Says Its 90-Day Deal on Generic Drugs is Better than

Wal-Mart’s 30-Day’, 22 September 2006, at http://www.

seniorjournal.com/NEWS/MedicareDrugCards/6-09-22-

KmartSaysIts.htm

Chapter 1� Supplementary Protection Certificates (SPCs) 1 Public Law No. 98−417, 98 Stat. 1585 (1984).

Further reading for Chapter 17 UK Patent Office, Supplementary Protection Certificates for Medicinal

Products and Plant Protection Products − A Guide for Applicants

(revised January 1997). See http://www.patent.gov.uk/spctext.

pdf

UK Patent Office, UK Patent Office response to the Gower’s Review,

June 2006. See http://www.patent.gov.uk/policy-issues-

gowers-evidence.pdf

180-181 20/3/07 15:35:15

Joining the Stockholm NetworkWould you or your organisation like to join the Stockholm

Network? We have varying levels of membership, depending

on your needs and interests. For further information, please

contact our Managing Director, Shane Frith (shane@stockholm-

network.org).

Subscribe to the mailing listFancy getting a taste of what we do and what think tanks are

doing right across Europe? The Stockholm Network’s weekly

e-newsletter rounds up the latest activities of Europe’s leading

think tanks and thinkers and provides a valuable summary of

current policy trends across the EU. To sign up, contact Simon

Moore ([email protected]), or visit our website:

www.stockholm-network.org.

Other titles published by the Stockholm Network are listed on the following pages

182-183 20/3/07 15:35:15

Impatient for Change European attitudes to healthcare reform

Helen Disney, Karen Horn, Pavel Hrobon, Johan Hjertqvist, Alastair Kilmarnock, Andreas Mihm, Alberto Mingardi, Cécile Philippe, David Smith, Eline van den Broek, Gerrold Verhoeks

Do Europe’s politicians really understand what voters want

from their healthcare systems? How can they square the circle

of rising demand, rising costs and shrinking tax funding?

To find out, the Stockholm Network and Populus commis-

sioned a major study of the European public’s attitudes on the

state of their health systems now and what they expect from

them in future. Leading healthcare experts from across Europe

analyse the data, putting it into its national and pan-European

context.

The results are startling. Europeans are becoming ever more

concerned about what will happen to their health provision

in future if reform is not carried out urgently. They demon-

strate a large gap between what patients want and what their

political elite is delivering. And they suggest that information

and gaining the support of the medical profession are crucial to

securing the reform that Europe’s ailing health systems need.

Europe’s health consumers are already waiting and impatient

for change.

Published in association with PopulusISBN: 0-9547663-0-X£12.00

An Apology for Capitalism?Matthew Bishop, Vincent Cable, Clive Crook, Howard Davies, Bill Durodié, Stephen Godfrey-Isaacs, Julia Hailes, David Henderson, Steve Hilton, Benjamin Hunt, John Kay, Philippe Legrain, Johan Norberg, Neil Sherlock, Stephen Tindale

Edited by Helen Disney

Should companies be cheerleaders for capitalism or is the

growth of corporate and social responsibility evidence of a new

way of doing business and doing it better? Is it time for policy-

makers and business leaders to be more aggressive in dealing

with business failure?

A backlash is emerging too among those who think

companies are becoming too timid and apologetic. Too much

of this risk aversion could be damaging not just to profits

but to faith in capitalism itself. With books critical of global

corporations topping best-seller lists across the world, how can

corporations answer their critics – and should they even try?

An Apology for Capitalism? assembles leading thinkers and

policy experts to debate the limits of corporate and social

responsibility. It questions whether corporations deserve the

flak and asks if it is now time for them to embrace the business

of saying sorry.

ISBN: 0-9547663-1-8£10.00

184-185 20/3/07 15:35:16

A Sick BusinessCounterfeit medicines and organised crime

Graham Satchwell

Foreword by Lord Mackenzie of Framwellgate

Conducted by a former policeman, this investigation into

the trade in fake medicines and its links with organised crime

uncovers a horrifying story. Across Europe, counterfeiters

have discovered a range of easy routes for selling fake and sub-

standard products into the legitimate distribution chain.

A Sick Business shows how, to the uninitiated eye, this crime is

invisible. Most patients and consumers are unaware of just how

many public safety problems counterfeit medicines may cause.

It reveals that this illegal business is conducted by unscrupulous

people whose actions have already cost thousands of lives and

may even be linked to terrorist activity – yet almost nothing is

being done to stop it.

It should be read by anyone with an interest in keeping

Europe safe.

ISBN 0-9547663-2-6£10.00

Poles Apart?Eastern European attitudes to healthcare reform

Helen Disney, David Hill, Pavel Hrobon, Adam Kruszewski, Henrieta Madarová, Rick Nye, Martin Stefunko

How have eastern European countries fared since the fall of

the Berlin Wall, and what do their attitudes tell us about the

prospects for healthcare reform today?

Poles Apart? sets out to examine whether the perception of a

superior western European healthcare system is really true by

asking the opinions of 3,000 central and eastern Europeans and

comparing them with their counterparts in the rest of the EU.

Despite differences in access to care, due to significantly lower

levels of funding, and a sometimes unfounded admiration of

western Europe, the challenges facing healthcare systems and

the way people view them are remarkably similar across the

board. More striking still, the new Europe’s attitude suggests

that the east is on the cusp of providing valuable inspiration

and experience for reformers in western Europe in shaping the

modern health systems of tomorrow.

Published in association with PopulusISBN: 0-9547663-3-4£10.00

186-187 20/3/07 15:35:16

Does the West Know Best?Martin Bruncko, Gabriel Calzada, Christofer Fjellner, Andrei Grecu, Johan Hjertqvist, Pavel Hrobon, Philippe Manière, Miroslav Mikolasik, Dan Mitchell, Johnny Munkhammar, Stephen O’Connor, Matus Petrik, Ugnius Trumpa

Edited by Terence O’Dwyer

Accession of the central and eastern European states has

provided impetus for a fundamental re-evaluation of Europe’s

economic and social model. New member states have chal-

lenged the orthodoxy of western European systems. With the

west now facing the impending crises of an ageing population

and unsustainable healthcare systems, and the prospect of

sustained weak economic growth, the questions are: Should the

new member states be emulating western Europe? Or should

‘old Europe’ mimic the reforms of its newest partners? Indeed,

does ‘old Europe’ have any choice but to reform?

Does the West Know Best? assembles leading European thinkers

to examine social and economic reform, such as flat taxation,

the privatisation of social security and moves towards more

market-oriented health systems. It questions the sustainability

of the European economic and social model, while seeking

solutions to its endemic problems.

ISBN: 0-9547663-4-2

£8.00

Intellectual Property FrontiersExpanding the borders of discussion

Edited by Dr Meir Pugatch and Anne K. Jensen

The first book to be published by the Stockholm Network’s

Intellectual Property and Competition programme, Intellec-

tual Property Frontiers draws on the expertise of eighteen distin-

guished scholars, policymakers and practitioners. It aims to

familiarise readers with the diversity of themes and debates

currently taking place in the field of IP.

The publication is divided into four sections:

• The role of intellectual property in the business arena;

• Intellectual property dilemmas;

• Global issues;

• The European perspective.

£8.00

188-189 20/3/07 15:35:16

Europe Needs SavingDefusing the pensions timebomb

Matthew Bishop, Liam Halligan, Kamil Kajetanowicz, Edward Palmer, Giuseppe Pennisi, Wilfried Prewo, L. Jacobo Rodríguez, Ian Vásquez

Edited by Terence O’Dwyer

We are facing a demographic time bomb: by 2050, there will be

two workers to every retired person in most European countries.

In some countries, that ratio will be 1:1. Current pay-as-you-

go pension systems are quite simply financially, economically

and socially unsustainable – without reform, pensioners will

bankrupt the welfare state.

In Europe Needs Saving, several internationally renowned

experts on pensions attempt to answer some of the most

difficult questions facing us today: Should pay-as-you-go

systems be tweaked only slightly? Is there a role for the market

in providing pensions? If so, how extensive should that role

be? What are the benefits to the citizen – and to the govern-

ment? What can be learned from countries that have already

reformed? Is the Chilean model suitable for the ailing systems

in Europe? Or is the Swedish approach to reform more appro-

priate?

ISBN-10: 0-9547663-7-7ISBN-13: 978-0-9547663-7-5£10.00

Coincidence or Crisis?Prescription medicine counterfeiting

Jonathan Harper, Julian Morris, Graham Satchwell, Philip Stevens, David Taylor, Michael Tremblay

Edited by Peter J. Pitts

Introductions by Bill Newton Dunn and Mark E. Souder

The business of creating, distributing and selling counter-

feit pharmaceutical products is an unregulated, criminal and

growing part of the global economy. Evidence of this criminal

activity is mounting: according to a 1997 World Health Organi-

zation report, 10%–20% of drugs tested in developing countries

are either counterfeit or have not been handled according to

the manufacturers’ specifications.

In Europe, profiteers masquerading as pharmacists are selling

a nightmarish cornucopia of unsafe, unregulated, mislabelled,

repackaged and co-mingled drugs to unsuspecting consumers.

Coincidence or Crisis? brings together some of the world’s

leading experts to discuss the growth of counterfeit pharmaceu-

ticals. It provides a comprehensive analysis of the core issues,

while delimiting key strategies to tackle the problem.

ISBN-10: 0-9547663-8-5ISBN-13: 978-0-9547663-8-2£10.00

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Unlocking IdeasEssays from the Amigo Society

Arne Björnberg, Manuel Campolini, Pat Cox, Brian Crowley, Duncan Curley, Johan Hjertqvist, Pavel Hrobon, Mark Leonard, Johnny Munk-hammar, Peter Pitts, Jan Remans, Anders Sandberg

Edited by Francesca Ficai

Introduction by Jacob Arfwedson

Europe faces massive challenges in the years ahead. Healthcare

systems are struggling to keep up with new, innovative, but

expensive advances in medical technologies, while patients

are no longer passive recipients, but active consumers of their

treatments.

The Amigo Society conferences, held in Brussels, were set up

in 2004 to bring together public policy experts, media repre-

sentatives and members of civil society to debate these and

other issues of importance to an enlarged Europe. Held at the

Amigo Hotel, a former prison, their aim was to release new

ideas and fresh thinking into the Belgian – and wider European

– public debate.

Taking concrete examples from Europe and North America,

this collection examines the broad motivations behind, influ-

ences on, and opportunities for future health and welfare policy

reform. It also looks to the future, drawing in new fields of

policymaking expected to drastically alter Europe’s healthcare

landscape. The final set of essays examines consumer empow-

erment as the major factor which will push forward reform of

Europe’s health and welfare systems.

ISBN-10: 0-9547663-9-3ISBN-13: 978-0-9547663-9-9£8.00

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