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Intellectual Property Rights, Pharmaceuticals, and East Asia: Turning Gold into Lead?

By Jean-Marc F. Blanchard, Ph.D.

The Trade-Related Aspects of Intellectual Property Rights Agreement (“TRIPS”), one of the many agreements that established the World Trade Organization (WTO), sets forth international norms and legal standards with respect a variety of intellectual property rights (IPR) such as copyrights, trademarks, and trade secrets. In recent years, government budgetary woes and endemics and epidemics such as the HIV/AIDS crisis have put severe pressures on countries to violate or tepidly support the provisions of TRIPS relating to drug patents. Drug patents are important because they limit the sale, use, and manufacture of patented products, and, where appropriate, the use of patented drug manufacturing processes.

East Asia is no stranger to the aforementioned pressures. Furthermore, the national development objectives of East Asian governments provide them with incentives to interpret TRIPS in a self-serving manner.

Last April, the Office of the United States Trade Representative (USTR) issued its annual Special 301 Report on global IPR protection. The report shows that East Asian countries do not always protect drug patents. Taiwan suffers from some trademark counterfeiting while South Korea does not take adequate steps to prevent patent-infringing products from obtaining marketing approval. Furthermore, certain U.S. pharmaceuticals continue to experience difficulties in obtaining administrative protection for their products in China.

Although the situation with respect to drug patents in East Asia is not dire, there are a number of trends that threaten it. The first trend is the deteriorating public finance situation in East Asia. Relatively slow economic growth is producing pressure on many governments to tighten their budgets, which have been in deficit as a result of fiscal stimulus programs undertaken to stabilize or increase economic growth over the past few years. A second is the growing number of infectious diseases needing attention. These diseases raise not only budgetary issues, but also huge politico-economic issues because of their effect on family structures and the workforce. A third trend is the need for countries to find new sources of economic development. One noteworthy source that East Asian governments are currently emphasizing is the biotech sector.

Despite their acknowledgement that patent rights can provide an incentive for drug research and development, the preceding trends are leading East Asian countries to adopt a variety of ameliorative tactics vis-à-vis their pharmaceutical burdens. These tactics include price controls, cuts in drug reimbursement rates, and parallel importation. Moreover, East Asian and other countries are lobbying for the ability to use confidential drug test data, for the transfer of technology to support the development of domestic pharmaceuticals, and for more time to comply with TRIPS.

To the pharmaceutical industry’s dismay, these pressures are also leading East Asian countries (as well as other developing countries) to use compulsory licensing in a liberal fashion, to authorize compulsory licensing for production abroad, and to move slowly in establishing the enforcement systems that TRIPS requires. Although the specific justifications advanced by governments for such measures are often questionable, their general right to authorize compulsory licensing for domestic production is not. Article 31 of TRIPS specifically allows compulsory licensing for government use, or in a “national emergency” or “circumstance of extreme urgency.”

Looking ahead, the East Asian environment for IPR will worsen the greater the benefit that each country derives from exploiting drug patents and the lower the cost that it will incur from exploiting them. Benefit is a function of each country’s health care requirements, its drug manufacturing capabilities, its economic development needs, and its financial situation. Cost is a function of each country’s bargaining power versus patent holders. Factors increasing a country’s bargaining power include abundant financial and political resources, allies with financial and political clout, and a friendly normative environment. Factors increasing the patent holder’s position include financial and political might and powerful allies. Its power also is enhanced to the extent that an adversary country has its own medical products whose IPR it needs to protect.

Historically, the pharmaceutical industry has dealt with threats to its IPR by attempting to exercise power. This is changing, however, as shown by the industry’s creation of various drug subsidy programs such as the Together-Rx prescription savings program and its contributions to various global disease initiatives. Of course, pharmaceutical companies have not given up entirely on using their muscle. The industry, however, must be careful about emphasizing a realpolitik strategy because it can backfire in the court of public opinion. Moreover, pressure against developing countries has led them to undertake a counteroffensive in the WTO regarding the “proper” interpretation of TRIPS provisions.

In the short-run, pharmaceuticals should adopt a three-pronged strategy, which reduces the benefits that countries derive from infringing upon patents and increases the costs of such infringements. First, they should seek to partner not only with global health organizations, but also multilateral and bilateral development agencies. Such partnerships will leverage their charitable activities and deal directly with some of the root causes of the global health care crisis. Second, they should undertake public relations initiatives that reach wider audiences. Third, they should support developing country efforts to nurture industries using traditional medicines and indigenous biological endowments. In the long run, it is to the advantage of the pharmaceutical industry to assist global efforts to facilitate economic development. This is due to the fact that development can reduce the incentives for governments to break drug patents and can create a more hostile environment for patent violators.

Although the pharmaceutical industry always will be under a modicum of pressure given government budgetary pressures, rising health care burdens, and economic development objectives, more effective strategies can help to prevent the current situation from degenerating into an unending bad TRIP(s).