The World Trade Organization has dealt a blow to big drug companies' livelihood: patents.

A WTO declaration signed Wednesday would give developing countries the explicit right to override foreign companies' patents for drugs treating HIV/AIDS, cancer, tuberculosis and malaria, as well as drugs for any other illness deemed a serious national health risk.

Big brand-name drug companies were hoping the declaration would cover only HIV/AIDS in developing nations. But the recent Cipro deal cut in the U.S. made it harder for U.S. delegates to argue that intellectual property rights take precedence over health emergencies. Just a few weeks ago, U.S. Health Secretary Tommy Thompson demanded that drug company

Bayer

give the government a discount on Cipro, an antianthrax drug, or see its patent broken.

"The Cipro hysteria couldn't have come at worse or more opportune time for what was going on at WTO, depending on how you look at it," said Bob Goldberg, senior fellow with Manhattan Institute for Policy Research. "The question became, how can the U.S. pull rank on patents in the case of Cipro but not when it comes to needs of Third World?" U.S. interest in maintaining the political loyalty of developing nations like India in a time of war may have helped too.

Future Markets

While sales of drugs to developing countries don't play a major role in drug companies' profits today, they might 10 years from now. Meanwhile, weaker patent laws and cheaper drugs abroad, coupled with new awareness of the threat of bioterrorism, could make patent protection a more controversial issue at home.

Patents, which last 20 years for most drugs, are the lifeblood of the pharmaceutical industry. Free of competition until the patent has expired, companies charge high prices for their drugs to compensate for the money poured into research and development.

Last year, U.S. pharmaceutical companies spent $25 billion on research and development, while global industry sales totaled $355 billion. U.S. sales in 2001 are expected to total $185 billion, with operating earnings of $50 billion. But fat profits make the high risk involved in drug development worth it. Many drugs never make it to market.

Developing countries like South Africa and Brazil had already won legal victories against big U.S. drug companies in the past year. But the WTO deal would give developing countries more negotiating power, making it likely that more cases would be decided in their favor.

At a time when awareness of public health issues in America runs high, the Pharmaceutical Research and Manufacturers of America issued a statement supporting the WTO declaration. But analysts worry that generic industries will flourish in developing countries that might have generated profits down the road.

"In those economies you're spending more than you're making in the hope that one day when those economies mature they will be a source of profits," said Richard Evans, pharmaceutical analyst at Sanford Bernstein. "Now, you'll never commercialize those economies, because in the interim, they're going to build their own factories, hire their own workers, and create legitimized industries that become part of the political-economic fabric. never to be removed."

Few fear that Third World generics will leak back into Western countries and undermine the big drug companies' markets. But U.S. legislators might increase efforts to get generics to market more quickly.

Books Open

If drugs suddenly get a lot cheaper overseas, it will be harder for brand-name companies to disguise the handsome markups they enjoy at home. Copycat generics often sell for up to 70% less than their brand-name counterparts. "You may see more waves of that 'give me all the Cipro I want at any price,'" says Tom Miller, healthcare expert at the Cato Institute, a conservative think tank.

The pharmaceutical industry shells out big bucks to protect its patents in Washington. The lobbying and campaign contribution budget for the industry in 1999 and 2000 totaled $197 million, larger than that of any other industry. But the recent Cipro episode and the WTO negotiations suggest that public opinion can override powerful lobbies in times of crisis. Bayer ultimately agreed to halve its price on Cipro for sales to the government.

Prescription drug benefits for seniors have been put on the shelf for at least a year, analysts said. But Congress might push legislation favoring generics, or curb extensions on patents that some companies are seeking. The House is about to consider a Senate-passed bill to extend the industry's patents by six months on many existing drugs.

Another bill, introduced by Senators Charles Schumer and John McCain earlier this year, would make it easier for generic companies to challenge companies' patents and discourage brand-name companies from paying off generic companies to delay product launches.

"The question is whether it builds momentum in that direction," says Miller. "Less patent protection means less long-term stability in terms of incentives to engage in this." It's not a crisis, he said, but it is the beginning of a trend.