Policy Issues Concerning Parallel Trade of Pharmaceutical Drugs in the United States

1. Policy Issues Concerning Parallel Trade of Pharmaceutical Drugs in the United States James Love CPTech FDA Prescription Drug Importation Meeting 14 April 2004

2. New York Times, April 14, 2004, pages A1, c14, Gardiner Harris, “Price of AIDS Drugs Intensifies the Debate on Imports.”

3. Side Point • Parallel trade in medicines would not be necessary if the US government declared it would issue compulsory licenses on patents when prices were unfair to US consumers

4. Parallel trade in medicines should be limited to countries that should have good regulatory systems and which are classified as high income by the World Bank • As long as we finance R&D from profits on the sale of medicines, we need a policy framework that explicitly supports market segmentation between high and lower income countries. • A single world price for medicines would not serve the interests of consumers in high or low income countries.

5. The US government needs to clarify that the United States recognizes international exhaustion of patent rights. Prior to Jazz Camera Photo v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001), and in some cases in other circuits following that decision, the general rule in the U.S. was perceived by many to be an international exhaustion rule. See Curtiss Aeroplane v. United Aircraft, 266 F. 71 (2d. Cir. 1920) (holding that U.S. patent holder, in consenting to the use of its patent for manufacture of airplanes in Canada, had exhausted its right to control the importation of the resulting aircraft into the United States). In Jazz Camera, the Federal Circuit held that the sale of products by a patent holder in another country did not exhaust U.S. patent rights, stating: • United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent. See Boesch v. Graff, 133 U.S. 697, 701-703 (1890) (a lawful foreign purchase does not obviate the need for license from the United States patentee before importation into and sale in the United States).

6. The TRIPS framework for exhaustion of rights should be changed to permit exhaustion only among countries of similar or higher income Article 6 - Exhaustion For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights. Article 4 - Most-Favoured-Nation Treatment With regard to the protection of intellectual property, any advantage, favour, privilege or immunity granted by a Member to the nationals of any other country shall be accorded immediately and unconditionally to the nationals of all other Members. . .

7. Article 17(9)(4) of the US-Australia FTA Each Party shall provide that the exclusive right of the patent owner to prevent importation of a patented product, or a product that results from a patented process, without the consent of the patent owner shall not be limited by the sale or distribution of that product outside its territory at least where the patentee has placed restrictions on import by contract or other means.

8. Article 16(7)(2) of the US-Singapore Free Trade Agreement Each Party shall provide that patent owners shall also have the right to assign, or transfer by succession, a patent and to conclude licensing contracts. Each Party shall provide a cause of action to prevent or redress the procurement of a patented pharmaceutical product, without the authorization of the patent owner, by a party who knows or has reason to know that such product is or has been distributed in breach of a contract between the right holder and a licensee, regardless of whether such breach occurs in or outside its territory. [Footnote 16-10] Each Party shall provide that in such a cause of action, notice shall constitute constructive knowledge.

9. U.S.-Morocco Free Trade AgreementArticle 15.9: PATENTS 4. Each Party shall provide that the exclusive right of the patent owner to prevent importation of a patented product, or a product that results from patented process, without the consent of the patent owner shall not be limited by the sale or distribution of that product outside its territory/9/ . fn9/ A Party may limit application of this paragraph to cases where the patent owner has placed restrictions on import by contract or other means.

10. The Hague Convention on Jurisdiction and Enforcement of Foreign Judgments may inhibit parallel trade Another possible problem concerns a current negotiation on a treaty on cross-border jurisdiction, and in particular, the provisions that would make contractual choice of court provisions automatically enforced globally. Sellers of medicines would routinely choose courts that uphold restrictions on parallel trade. CPTech has asked the US Department of State to exclude from the proposed Hague Convention on Jurisdiction and Enforcement of Foreign Judgments cases involving parallel trade or the exhaustion of intellectual property rights. For information on this issue, see: http://www.cptech.org/ecom/jurisdiction/paralleltrade.pdf

11. October 30, 2002 IMS report on parallel trade in Europe The belief that parallel traded goods are of poorer quality is actively encouraged by the pharmaceutical industry. . . But for the most part, parallel traded products are as good as the local product because they are identical - the only difference is that they were packaged in a box of a different design to appeal to the needs of a different European market, a market which has exactly the same high quality requirements. Parallel traded products are high quality, well-packaged and well-distributed and cannot be criticized for their inferior quality compared with branded products. The market is growing. http://open.imshealth.com/IMSinclude/i_article_20021030.asp

12. US Government Funded Inventions should not more be expensive in the USA than in other High Income Countries • Abbott charges 5 to 10 times the Canadian or European price for Norvir, a very important drug for AIDS. • Pfizer charges 2 to 5 times more for Xalatan in the US than it does in Canada or Europe. • These and many other drugs were invented in the US on government grants. • DHHS can declare that it will grant federal March-In licenses on government funded drugs when prices are unfair to American consumers.

13. Short term mechanism to deal with R&D

14. The US Government should require parallel traders to contribute to an R&D fund • If innovator profits decline, the pharmaceutical industry may reduce R&D outlays. • Policy makers can address this problem as follows: • Require that parallel traders to pay a fee of 15 percent of the difference between the manufacturer’s US price and the foreign price, into a transparent R&D fund. • Funding research and development in this way could focus R&D on public health priorities and increase transparency in R&D flows.

15. Long term mechanism to address R&D

16. We need a new framework for R&D • Trade agreements should focus on how we share the burden of health care R&D • Related to capacity to pay (GDP per capita) • Countries should have flexibility on how they pay for R&D • We need to separate the markets for R&D and the markets for products • Every product should become a generic • Innovators should have different rewards than 20 year marketing monopolies

18. Further reading January 29, 2004. Essential Inventions, Inc., Petition to use authority under Bayh-Dole Act to promote access to ritonavir, supported by National Institute of Allergy and Infectious Diseases contract No. Al27220. James Love, “Evidence Regarding Research and Development Investments in Innovative and Non-Innovative Medicines,” September 22, 2003. Burton A Weisbrod, “Solving the drug dilemma,” Washington Post. Aug 22, 2003: Tim Hubbard and James Love, 2004. A New Trade Framework for Global Healthcare R&D. PLoS Biology 2 (2):147-150