1. The Issue

The global AIDS crisis has reached epidemic proportions in the Republic of South Africa, where nearly 1 in 10 citizens are HIV positive. While patients in the West enjoy widely accessible treatments that allow them to live longer, fuller lives, treatment in Africa is practically non-existent. The drugs, manufactured by U.S. and European pharmaceutical companies with exclusive patents, are priced far out of the range that even Africa's most developed nations - including South Africa - can afford. At the center of this debate is the ongoing dispute between the US and South Africa regarding intellectual property rights, compulsory licensing, and parallel importing of HIV medication. Lawmakers, public health officials, activists, and the drug companies continue to fight about which comes first - public health or corporate profits.

2. Description

Since the onset of the AIDS virus, 34m Sub-Saharan Africans have been afflicted with the disease. Of those, 11.5m have died - accounting for 83% of the world's total AIDS deaths. The situation in South Africa is particularly grim - 4.2m of the country's 43m citizens are infected with the virus. It has truly become a national emergency.

Painkillers, Patents, and Pricetags

In the West, AIDS is not the unstoppable killer it once was. New treatments called anti-retrovirals significantly decrease the virus' replication speed, allowing patients to live much longer, fuller lives and hampering the spread of the virus.

Treatment comes with a price tag - a very large one. An anti-HIV regimen of drugs for one patient at US prices costs US$15,000 annually. In South Africa, treating all 4.2m patients would cost $63b - more than 20% of the nation's gross domestic product. Because of these prices, only .001% of Africa's AIDS patients receive anti-retroviral treatment.

Nongovernmental organizations and AIDS activists are calling on Western pharmaceutical companies to drastically reduce the prices of AIDS medication in the developing world. They maintain that drug companies - who make only 1% of their profit on the African continent - can afford lower prices in the name of extinguishing this coming plague.

Drug companies, until a recent legal and public relations struggle, had been unwilling to make good faith efforts to reduce prices. They believe that 1% of revenue is necessary for researching possible vaccines and cures for the disease. They also assert their intellectual property rights and patents, which until recently were rarely respected in the developing world. Since the World Trade Organization (WTO) was created in 1995, member nations have had to respect 20 year patents on file with other members - including the pharmaceutical companies patents on AIDS medications. The WTO TRIPS agreement (Trade-Related Aspects of Intellectual Property Rights) codifies standards for adequate protection of patents.

The WTO and Patent Protection

The TRIPS agreement also allows two special practices that countries can use to lower the price of pharmaceuticals - compulsory licensing and parallel importing. Compulsory licensing gives the government the right to grant a license to a domestic manufacturer of a generic drug, provided that they pay royalties to the patent holder. The introduction of competition often drastically lowers prices, while both companies still turn a profit. Price reductions have been as high as 82%. Parallel importing allows countries to "comparison-shop" for the world's best market price of a drug and import quantities for sale in the domestic market.

Drug companies are particularly concerned that such practices, while legal under TRIPS and authorized by South Africa's 1997 Medicines Act, will alert consumers in the West of the actual low prices of pharmaceuticals, thereby cutting into profits in the developed world. They have lobbied persistently the U.S. government to apply bilateral pressure to prevent compulsory licensing and parallel importing and have thus far been successful in the U.S.

The South African government won a major legal victory when the suit filed against it by 39 Western pharmaceutical companies was withdrawn. The companies had sued the government to question the constitutionality of beginning parallel importing and compulsory licensing measures. Facing increased public outrage in the West (and the shaky legal ground of their claim), the companies withdrew their case in late April, paving the way for alternative ways of bringing in generic drugs. (Note: From a legal standpoint, the TRIPS agreement does indeed allow for parallel importing and compulsory licensing when public health or other national emergencies arrive. For more information, see my related work "The Killer Patent: Reframing the Debate Between Intellectual Property Rights and Public Health", April 2001, and the Legal Issues section below.)

Drugs but no Doctors

The often-unheard side of the story comes from the medical community. Scientists also question the prudence of allowing cheap AIDS drugs into the South African market. For anti-retrovirals to be effective, the regimen must be monitored strictly and requires a developed medical infrastructure that South Africa does not have. Official U.S. policy also supports development of the infrastructure over reducing prices.

Why is the infrastructure so important? When dosages are skipped, low levels of the HIV virus can continue to reproduce in the body. Through natural selection, the viruses that have survived and reproduced are those most resistant to the treatment. Slowly but surely, a mutation of HIV that does not respond to anti-retroviral treatment will develop. Scientists worry that this could worsen the epidemic and even spread back to the West. In the U.S., 10% of patients harbor drug-resistant strains of HIV - there's no telling how bad it could get when drugs are used in an unsupervised, underdeveloped market.

There is hope, however. Scientists feel that the possibility of a drug-resistant strain gives the private sector a vested interest in helping pay for developing an infrastructure in South Africa and other developing nations. If such a strain got back to the West, their drugs would be worthless and their profits in the developing world would disappear. Building an infrastructure may save their companies in the future.

This case study will explore the intellectual property and bilateral trade issues in this situation, as well as the social and economic impacts of the epidemic in South Africa.

3. Related Cases

THAIAIDS Case

MERCK Case

THAIWOMEN Case

NEPALSEX Case

MALARIA Case

BRIDE Case

RUSSSEX Case

Keywords: Environmental Problem=Health, Industry=Pharmaceuticals

4. Author and Date

Rick Hink (9 May 2001)

5. Discourse and Status

Disagreement and In-Progress (DIS)

The issues surrounding this case study of intellectual property and the AIDS epidemic in South Africa are largely legal ones, mostly based on the TRIPS agreement. Also important are agreements guaranteeing a right to public health, such as the International Covenant on Economic, Social, and Cultural Rights. The South African Medicines Act, passed in November 1997, was the measure that had been challenged by the pharmaceutical companies in court. The Act states that the government of the Republic of South Africa may pursue parallel importing and compulsory licensing, explained previously.

The central question to this debate is "Which is more important: public health or protection of patents and intellectual property?" If one defines the AIDS epidemic in South Africa as a national emergency or a "circumstance of extreme urgency," many of the pharmaceutical companies' arguments are moot. Even if such criteria are not met, the legal standing of the pharmaceutical companies is questionable at best.

PhRMA (Pharmaceutical Research and Manufacturers of America), in their "Watch List Countries" report, cites the provisions of TRIPS that they feel are violated by South Africa's Medicines Act:
- Article 28: limits parallel importing
- Article 31: limits compulsory licensing
- Article 39.3: pharmaceutical R&D should be protected against disclosure
- Article 41: member countries must enforce intellectual property rights

In all of these cases, there are provisions that seem to allow the South African government to pursue parallel importing and compulsory licensing.

Article 28 does prevent third parties from "making, using, offering for sale, selling, or importing" a product without the consent of the owner. However, other parts of the TRIPS agreement allow the national government to decide when such patents are exhausted. In fact, it is exclusively the right of the national government to make that determination (as to how many years a patent is good for).

Article 31 does prevent compulsory licensing - unless it is a situation of "extreme urgency" or a case of "public non-commercial use." Given the magnitude of the AIDS epidemic in South Africa, this requirement is fulfilled. Therefore, compulsory licensing is possible. Furthermore, it is up to the legal institutions of the national government to decide how the patent holder is to be compensated.

Article 39(3) allows for data exclusivity and disclosure by a government to third-party manufacturers. Unfortunately for the pharmaceutical patent holders, this too has a clause that allows disclosure "when necessary to protect the public."

Unfortunately, as in most international legal texts, these clauses dealing with "extreme urgency" and protecting the public are very vague. It is essentially up to the country in question or other world judicial bodies (or the dispute settlement body, when applicable) to clarify.

Finally, Article 41 provides for enforcement. It is the sole discretion of the government of South Africa to set up a dispute resolution procedure for patent violations. This type of case cannot be brought before the WTO Dispute Settlement Panels.

The other body of international law relevant to this case is that of public health. It should be noted that the International Covenant on Economic, Social, and Cultural Rights grants the "right of everyone to the enjoyment of the highest attainable standard of physical and mental health." (Article 12.1) Furthermore, parties to the treaty must take steps for the "prevention, treatment, and control of epidemic, endemic, occupational, and other diseases." (Article 12.2.c)

South Africa has signed and ratified the covenant without qualifications. The United States has signed (but not ratified) the treaty.

However, because the U.S. signed the covenant, it is prohibited from doing anything that would defeat the purpose of the treaty until it is ratified (or definitively not ratified). This is spelled out in the Vienna Convention on the Law of Treaties, which is commonly accepted customary international law.

Since the pharmaceutical companies have withdrawn their case, the legal issues have been largely decided. Their withdrawal essentially concedes that it within South Africa's right to pursue compulsory licensing and parallel importing.

6. Forum and Scope

World Trade Organization and Multilateral (MULTI)

7. Decision Breadth

Number of Parties Affected: 40 (All the pharmaceutical companies in the suit plus the governments of South Africa and the United States).

8. Legal Standing

Standing: Treaty (Agreement on Trade Related Aspects of Intellectual Property, or TRIPS)

9. Geographic Locations

a. Geographic Domain: Africa

b. Geographic Site: South Africa

c. Geographic Impact: Republic of South Africa

10. Sub-National Factors

None

11. Type of Habitat

Temperate

Besides for the intellectual property issues, which have already been discussed at length, the economic repercussions of having a diseased population are beginning to hit South Africa.

The United Nations Development Programme reports that the effects will include "declining productivity, rising rates of absenteeism, [and] loss of skilled and experienced labour. Over time, it may result in higher labour costs and weakened economic performance . . . It is precisely because South Africa has a relatively sophisticated economic system that its economic performance is so vulnerable to the effects of the epidemic."

The effects of the epidemic will undoubtedly affect South Africa's economic performance across the board, not just where related to health and intellectual property.

12. Type of Measure:

Intellectual Property (IPROP)

13. Direct v. Indirect Impacts

Direct (DIR)

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product (Pharmaceuticals): YES

b. Indirectly Related to Product: NO

c. Not Related to Product: NO

d. Related to Process: YES

15. Trade Product Identification: Drugs

HIV Anti-Retroviral Treatments; AIDS Medication generally; Labor

16. Economic Data:

Based on data from the Pharmaceutical Research and Manufacturers of America (PhRMA), the South African market for pharmaceuticals is approximately 12 billion rand per year. 80% of that industry is based in "research-based" pharmaceutical firms, employing 17,000 educated workers.

PhRMA members spend 500 million rand annually on social projects, clinical trials, and R&D in the Republic of South Africa.

30 factories have closed in the past two years due to what PhRMA calls a "hostile business environment and government ambivalence toward patents".

The projected revenues for the global pharmaceutical industry in 2002 is in the range of $406 billion.

17. Impact of Trade Restriction

HIGH

Even at reduced prices, it is unlikely that the introduction of parallel importing and compulsory licensing would affect their profits. Africa accounts for 1% of their market and the reduced prices still exceed or meet the cost of production.

18. Industry Sector:

Pharmaceuticals

19. Exporters and Importers:

United States and South Africa

While statistics definitely paint a grim picture for people living with AIDS in South Africa, they cannot illustrate the personal suffering that comes with the disease. The environmental impact is twofold. First, the human social environment:

Time Magazine recently ran a cover story on AIDS in Africa. Laetitia Hambahlane (not her real name) is a single mother diagnosed with AIDS in 1996:

"I wish I'd died right then," she says, as tears spill down her sunken cheeks. "I asked the doctor, 'Have you got medicine?' He said no. I said, 'Can't you keep me alive?'" The doctor could do nothing and sent her away. "I couldn't face the word," she says. "I couldn't sleep at night. I sat on my bed, thinking, praying. I did not see anyone day or night. I ask God, Why?" (Time)

Laetitia lost her job. Her children were "ashamed and frightened." Her mother walled off her room from the rest of the house and railed against Laetitia because of the lost income from her not working. She is regularly taunted and even attacked on the street because of her condition. Not even her own children will help take care of her.

People living with AIDS in South Africa are not only outcasts of their society, but in their own families. There is no telling what the long-term effects will be on such a huge population of people being treated as pariahs.

The social environment for patients in South Africa is just as bleak as the medical diagnosis.

The other "environment" in which this case unfolds is that of a somewhat underdeveloped healthcare system. By the government's own admission, there is much work that needs to be done in making sure that there are safe, clean medical facilities to dispense the antiretroviral treatments.

Drug companies point the finger at the governments of sub-saharan Africa, blaming them for mismanagement, misallocation of resources, and an unwillingness to dedicate their efforts to the disease. These accusations are made without any clear understanding of the other issues facing developing governments - which are often caused by the same international regimes the company wants to be upheld (WTO agreements, international commitments, etc.) The South African government, on the other hand, acknowledges the challenges they face in building their infrastructure. They hope that new offers of reduced drug prices (some as low as $400/per patient/per year) will help them use other monies for infrastructure development.

It should also be noted that the pharmaceutical companies' analysis is silent on the long-term effects of the pandemic and the long-term benefits of building the healthcare infrastructure. (Necessarily so, since corporations rarely look past current-quarter profitability by their very nature.) By fostering an environment in South Africa that has a commitment to long-term healthcare, the pharmaceutical companies would be investing in a future market that is much more prepared to deliver their products to the population - potentially increasing long term gains. If South Africa's 4.2m patients go untreated and die, there are also 4.2m less consumers for the treatments, which will most likely be needed for years and years until a cure is found.

20. Environmental Problem Type:

RIGHTS (Health)

21. Name, Type, and Diversity of Species:

Name: Homo sapiens

Type: South African

Diversity: Vulnerable

22. Resource Impact and Effect:

HIGH and PRODUCT

23. Urgency and Lifetime:

HIGH and 9 YEARS

It is estimated that by 2010 South Africa's life expentency, now one of the highest in Africa, will drop below the age of 40 due solely to the AIDS epidemic.

24. Substitutes

25. Culture

YES

26. Trans-Boundary Issues

NO

27. Rights

YES

28. Relevant Literature

UNAIDS. Epidemiological Fact Sheet on HIV/AIDS and Sexually Transmitted Infections - South Africa, 2000.

International Gay and Lesbian Human Rights Commission. "AIDS Drugs Now! Fact Sheet," http://iglhrc.org/campaigns/accesstotreatment/hivdrugsnow.html, 2000.

Mukherjee, Siddhartha. "Take Your Medicine," The New Republic, 24 July 2000.

Mathiason, Nick. "HIV Negatives," The Observer (London), 14 January 2001.

Redfern, Paul. "Critical Case in South Africa on Cost of AIDS Drug," Africa News (Nairobi), 22 January 2001.

Beresford, Belinda. "Drugs Let the Rich Buy a Few More Years of Life," The Daily Mail & Guardian (Durban, South Africa), 14 July 2000.

Federal Register. "Executive Order 13155 - Access to HIV/AIDS Pharmaceuticals and Medical Technologies," 12 May 2000.