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Drug Pricing, AIDS and the Developing Nations

August, 2000

As world attention shifts to the problem of AIDS in Africa and other developing nations, it is clear that we need something other than "business as usual" if HIV-infected people are ever going to have access to treatment. The North American and European model, which relies on annual expenditures of ten to twenty thousand dollars a year per person for drugs and support services, will never meet the needs of countries that spend only a few dollars per person annually on health care. It is against this backdrop that world attention has begun to search for ways to stop or at least slow the growing death rate from AIDS.

There are no simple solutions. Any effort that focuses solely on providing the needed drugs themselves is an oversimplification. Simply dumping drugs in the poorest countries would not only fail to solve the problem, but would most likely make things worse. Effective solutions must address not only the provision of drugs but, more important, the creation of a healthcare infrastructure to deliver them. They must also include patient education networks to help enable informed and safe use of the therapies. Without the needed clinics, clean water, basic nutrition, diagnostic testing, medical supplies and public education about the proper use of the medicines, a supply of drugs alone would quickly lead to multi-drug resistant strains of virus. Supplies of drugs without a medical infrastructure for their delivery would lead to drugs rotting in shipping docks or uncontrolled black marketing, inviting both political and public corruption. Additionally, without a proper medical infrastructure, people may develop irreversible side effects. And perhaps above all else, drugs delivered without clean water and nutritional support simply couldn't work.

Yet, assuming goodwill and a major international effort, these problems can be addressed over time, eventually making it reasonable to focus efforts on drugs and the unrealistic prices currently charged for them. Some laudable private efforts, such as the work of the group Doctors Without Borders and other less well known programs, are already distributing medical treatment for AIDS in areas once thought impossible to reach. The question next becomes how to widen such efforts and address the entire population in need, not just selected portions of it.

Some discussion has focused on ways for impoverished countries to either make the drugs themselves, negotiate lower prices from the pharmaceutical companies, or to import them from other countries where they are sold at the lowest available prices. "Compulsory licensing" is a provision of international law that allows countries with a desperate healthcare crisis to forcibly obtain a license to manufacture and distribute a needed drug on its own while paying only a minimal royalty to the patent holder. "Parallel importing" allows countries to shop for drugs in other countries at the lowest available prices. Normally, industry sets drug prices separately in each country and one country cannot buy drugs from another to get around high local prices. Both these approaches have been encouraged by a wide spectrum of activist and public policy groups. A key question, however, is whether they can make enough of a difference to solve the problem.

Recently, in response to these concerns, a small consortium of the major pharmaceutical companies announced their intentions to work with the United Nations to improve access to treatment. Few details have yet been announced. What's known so far is only that the program will place a high emphasis on working with countries where there is adequate attention paid to issues of healthcare infrastructure, not just drug discounting. It will not participate in dumping drugs but focus, quite correctly, on comprehensive solutions. While some of the motivation for this is humanitarian, it is also hard not to suspect that it is at least partly driven by increased public pressure and industry's great dislike for other proposed solutions, such as compulsory licensing and parallel imports, which they see as a major threat to their patent rights.

While this industry effort has been received with cautious support, a few key requirements must be met if it is to provide meaningful solutions and not just improved public relations. There are at least three basic principles that this program must adhere to if it is serious about helping developing nations. We urge international agreement on these principles:

1. Industry's offer of drug discounts must come without strings. It must not require participating countries to abandon their rights to other possible solutions, such as compulsory licensing and parallel imports. Since industry is so deeply concerned about the patent issues and protecting its intellectual property, there is fear that discounts might be offered only to countries that agree to swear off these alternatives. Such a provision would be unethical and immoral.

If industry really feels threatened by compulsory licensing and parallel imports, the way to discourage their use is by offering lower prices than could be achieved by such methods. Despite the apparent appeal of local manufacturing, no one can produce the needed drugs more cheaply or with greater quality assurance than the manufacturers themselves. Industry already has the factories, production lines, quality control facilities and packaging structures in place and paid for by earlier sale of the drugs elsewhere. It is able to buy raw materials cheaper than any other possible source. No fledgling startup effort, either by country or a generic manufacturer, could even come close to the economies of production already available to the drugs' manufacturers. The only real question is whether industry will cut profits to the bone, as needed, and sell the drugs at the cheapest possible price. If it does, this will simultaneously meet the needs of impoverished countries and industry's own perceived need to protect patent rights.

If industry insists upon the tightest possible control of patents, the price it must pay is to be the supplier of lowest cost for developing nations. The real power of compulsory licensing and parallel imports is the negotiating leverage they provide to force price cuts. For that reason, no country should ever give up the right to these mechanisms and activists should aggressively support them.

Deep discounting will not threaten the economics of the pharmaceutical companies. The basic costs of drug development and licensing for AIDS drugs are routinely paid for by sales and profits in the western nations. Industry can afford to think in terms only of raw materials and manufacturing costs, which are quite small. If even a relatively tiny amount of profit is built into the selling price of a drug, industry still stands to make money -- perhaps a great deal of it -- despite hugely discounted prices. The number of people in need in developing nations is so much higher than in western nations that even a very small profit per unit sale, applied across therapy for tens of millions of people, can add up to substantial profitability. Industry will not go bankrupt from becoming a good world citizen.

2. Offers of deep discounts on drugs must include all the newest and most recently developed therapies, not just older drugs. As a group, the new therapies are both more effective and easier to use, two factors that are even more critical in developing nations than in North America and Europe. To date, offers of discounts have only specifically mentioned older drugs such as AZT and 3TC. While these drugs may still be useful, and are used in combination with the newer drugs, they are not "state of the art" when used alone. Discount programs must not be used to unload older and less desirable drugs on poorer nations. The temptation to do so is very high within the pharmaceutical industry, which would like to find new markets for drugs whose sales have waned in the wealthier nations. The UN and other supporters of the discount initiative must prevent this from happening. Additionally, the countries that need the deep discounts must act quickly to license the newer therapies. If not, their own laws will limit the programs to older, less effective therapies.

3. Any discount program must provide sliding prices appropriate to the needs of individual nations, not a fixed discount rate for all. Developing nations differ widely in their economic ability to assist with the cost of treatment. Some, like South Africa, can afford to pay higher prices than other less economically fit nations. Western nations tend to view all of Africa as one large impoverished jungle, but in fact many African nations are quite sophisticated and have substantial economies and industrial growth. Others, however, are afflicted by wide scale, extreme poverty. They cannot all pay the same rates.

A fundamental principle of fair pricing must recognize that for the poorest nations, the only effective discount level is 100% -- in other words, drug must be provided free of cost. Such provisions already exist in most western nations, where the pharmaceutical industry routinely offers free drug to impoverished people with no other means to access therapy. Admittedly, the numbers in need are far greater in developing nations, but the principle of "free drug for those in the greatest need" is well established. Nations with the worst economic conditions have all they can do to make even small contributions to their healthcare infrastructure and cannot be burdened, at any price, with the cost of pharmaceutical drugs needed to fight an epidemic. No discount level other than 100% will make treatment feasible.

Moving up from the poorest nations, some reasonable formulas must be established for setting prices. One possibility might be to link drug prices with the amount of money a country is able to spend per person annually on healthcare, or the percentage of its population living at levels of extreme poverty. These are only suggestions -- no one yet knows the best or the right way to do this. But the sliding scale of pricing, however it is scaled or linked to economic conditions, must begin at zero -- free drug for poorest nations. No other framework is morally acceptable.

Even with such principles, providing treatment for AIDS in developing nations will be no easy task. The cost of drug is only a small part of the problem. Building the necessary medical infrastructure will also be costly, as will be meeting the most fundamental needs for food and clean water. Concerned nations must also -- or perhaps first -- mount effective prevention campaigns to stop the spread of HIV, almost certainly beginning with efforts to block mother-to-child transmission. Treatment without prevention will simply create an endless cycle of pain, suffering and expense.

Newly proposed programs for addressing the problem of AIDS in the developing nations are only the beginning. It will take decades to bring 21st century healthcare across the globe. AIDS is hardly the only medical problem developing nations face and it must compete with other national priorities. A truly effective, global approach to AIDS must begin with a meeting of heads of State. President Clinton has declared the spread of AIDS in developing nations an urgent matter of U.S. national security. If we believe this, then he and other western heads of state must begin to treat it as such. Just as they met to discuss intervention in Bosnia or to launch warfare against Iraq, they must now meet to plot out national and international strategy against this threat. They must begin negotiations and planning efforts with the heads of the affected nations, as well as grass roots representatives of the people in those nations. And they must begin to adjust their thinking in terms of dollars. Current efforts amount to a few hundred million extra dollars here and there, this from a country that spends roughly one-and-a-half billion each time the space shuttle makes a supply run to orbit.


The pharmaceutical industry can and must be made to do its part in confronting AIDS, but it would be extremely naive of us to believe that lower drug prices alone will solve the problem. Blaming industry for the entire problem is a convenient but false solution. There is a huge need for additional funding from the developed nations and the major international private foundations, as well as a sustained and corruption-free effort on the part of nations in need. There is plenty of blame to pass around for having let things get as bad as they are. AIDS is the world's problem, and until we learn to address it as such, no real progress will be made.

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