The South American "common market," Mercosur, is a venue that provides significant economic opportunity for U.S.-based pharmaceutical companies. But until laws are strengthened, the risks are substantial, too.
Argentina, in particular, is one of the most important players in the region with a flourishing pharmaceutical industry. After Brazil, Argentina is Latin America's second-largest pharmaceutical market and the tenth largest worldwide. Argentina is one of the main participants in Mercosur, which is expected to become the third largest economic market in the world. Currently, the combined Mercosur pharmaceutical industry value is $12.5 billion. Argentina accounts for $4 billion.
While these statistics may entice U.S.based pharmaceutical firms to establish stakes in Argentina, the state of the country's intellectual property laws - and the lack of enforcement - are problematic. But legislative reform, initiated by the U.S. government, should be on the way.
On April 30, 1999, United States Trade Representative, Charlene Barshefsky announced the United States would initiate dispute settlement proceedings against Argentina in the WTO. Underlying these proceedings was Argentina's failure to comply with its GATT/TRIPS obligations with respect to intellectual property, and in particular, its failure to comply with exclusive marketing rights (EMR) obligations. These proceedings, however, should prompt Argentina to conform its patent legislation for compliance with international standards or risk WTO-implemented sanctions.
Pirates' Stomping Ground
Most industrialized countries have national patent laws that provide pharmaceutical companies with a period of market exclusivity during which they can recoup the significant time and monetary investment required to develop new drugs. Countries throughout the developing world likewise recognize that intellectual property protection encourages investment and economic growth.
Many developing countries, however, are reluctant to grant intellectual property protection for fear of price inflation and control over vital technology. Even where national intellectual property laws are in place, they are often not enforced. This lack of effective intellectual property protection oftentimes leads to the "pirating" of intellectual property in developing countries.
Patent pirates frequently copy innovative drugs and medicines that are under patent in the United States and other countries without compensating the patent holders. The protection offered by U.S. law is restricted territorially. Thus, no protection is provided by a U.S. patent against the sale of pirated goods in foreign countries.
U.S. companies lose to piracy an estimated $1 of every $3 shipped overseas. For example, Pharmaceutical Research and Manufactures of America (PhRMA) estimates that revenue lost in Latin America by U.S. drug firms is between $900 million and $2 billion annually because of the absence of restraints imposed on politically influential pirate drug manufacturers.
In Argentina alone, industry estimates place pharmaceutical piracy at $600 million per year. The top pharmaceutical companies in Argentina are Argentine. Less than half the industry is multinational. In contrast, in other Mercosur countries, such as Brazil, the fraction of mutinational companies exceeds 70 percent. Moreover, Argentine pharmaceutical companies have exerted their influence to counter enforcement of Argentina's recently overhauled patent laws, amended ostensibly to bring Argentina into compliance with international agreements.
On December 8, 1994, the agreement on the Uruguay Round of negotiations to revise the General Agreement on Tariffs and Trade (GATT) was approved by Congress and signed by President Clinton. GATT affects a broad range of trade and tariff-related issues, including intellectual property. The general provisions on GATT's Agreement on Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS), require all World Trade Organization (WTO) member countries to provide certain standards of protection for patents, copyrights, trademarks, trade secrets and other forms of intellectual property.
Many developing nations have responded to the GATT/TRIPS reforms with legislative initiatives designed to promote predictability and enforceability of IP rights. Countries in Southeast Asia, Africa, Latin America and the Middle East, for example, have witnessed significant patent reforms.
The GATT/TRIPS legislation particularly affected the pharmaceutical industry by its new definition of patentable subject matter. The only inventions that can be excluded from patentability are those whose exploitation would prejudice public order or morality, those involving diagnostic, therapeutic or surgical treatment of humans or animals, and inventions of plants or animals or essentially biological processes for their production. While these standards are fairly high, substantial leeway is provided for the implementation of these provisions. Developing countries have up to ten years before they must grant patents for this subject matter.
On March 20, 1996, the Argentine executive branch approved new legislation, essentially reforming Argentine patent law. As required by TRIPS, the new law extends patent protection to pharmaceutical products.
The efficacy of these laws, however, is questionable. Argentina took advantage of the developing country provisions, so it has a transition period of five years, until November 1, 2000, before these patents are granted. Given the additional time for agency review, effective protection will become available for products marketed from about 2004.
Argentine law fails to protect products in pipeline development (products patented elsewhere but not yet marketed). It also makes generous allowances for compulsory licensing. Under the new compulsory licensing provisions, a patent must be "worked" (e.g. licensed or otherwise used) within three years from the date of issuance or four years from the filing date.
Otherwise, an interested third party which has been unable to conclude a license agreement with the patentee under reasonable conditions, may request a license from the National Institute of Industrial Property (INPI), an agency created under the new laws. Upon receipt of a license request, proceedings are initiated by INPI. Both parties are accorded a hearing. At the conclusion of the hearing INPI decides whether a license should be granted and if so, the amount of the royalty to be paid to the patentee.
In accordance with TRIPS, Argentine law now provides that during the transition period a patent owner may apply to INPI for exclusive marketing rights (EMRs). Under these provisions, INPI will grant a petition for exclusive marketing rights for five years if the following conditions are met: The inventor must have already filed an Argentine patent application. A related application must have been filed and granted for the same product after January 1, 1995 in a GATT/TRIPS member country. And the product must been approved for marketing after January 1, 1995 in a GATT/TRIPS member country. This exclusivity will prematurely lapse if the Argentine patent application is granted or rejected during the five-year period, or if the marketing authorization from the health authorities is revoked.
Placed On The 'Watch List'
Shortly after the GATT/TRIPS reforms, the U.S. was concerned that Argentina was not taking significant steps towards implementation of their STRIPS obligations. In April 1996, Argentina was placed on the priority watch list pursuant to the Special 301 annual review conducted by the U.S. Trade Representative. Section 301 of the Trade Act of 1974 empowers the United States to take action against inadequate protection of intellectual property rights occurring in other countries as well as against trading partners engaging in "unfair trade practices."
The Omnibus Trade and Competitiveness Act of 1988 expanded section 301 by creating the so-called "Super 301," which gives the USTR the power to determine which countries should be investigated and retaliated against. Additional amendments to section 301 resulted in "Special 301," designed to ensure that intellectual property rights are adequately protected.
The Clinton Administration believed that Argentina's new patent law did not provide adequate protection and fell short of earlier Argentine government assurances of compliance with its TRIPS obligations. Many inconsistencies existed between GATT/TRIPS and the Argentine patent law. These inconsistencies were not actionable in the WTO because Argentina had availed itself of the developing country transition period. As a result, the TRIPS obligations did not go into force until January 1, 2000.
The Argentinean government implemented new laws, regulations and practices ostensibly to comply with GATT/TRIPS. Legislation implemented in January 1997 provides for the protection of confidential information. The new legislation provides protection against use of commercially valuable secret information in a manner contrary to "honest trade practices."
Importantly, special provisions of this legislation protect health registration data submitted to the Health Ministry in order to obtain marketing approval for pharmaceutical products. These provisions provide that the act of obtaining health authority approval of a "similar product" vis-a-vis a product already approved in Argentina or in one of 15 other countries is not a violation of the new law. However, last August the Argentinean government eliminated protection that had previously been accorded to data used in the registration of agrochemical products. This law has been criticized by the U.S. pharmaceutical industry as opening the door for generic drug manufacturers to use data generated by drug innovators for pharmaceutical product approval.
Even more problematic is Argentina's failure to comply with its exclusive marketing rights obligations for pharmaceutical products under TRIPS. The period of market exclusivity accorded pharmaceutical products under TRIPS assures some measure of fairness to pharmaceutical innovators.
At present, only one EMR has been granted to an anti-psychotic drug. The drug is currently being sold by the U.S. innovator company as well as by two Argentinean pirate laboratories. The Argentinean agency ANMAT, a functional equivalent of the U.S. Food and Drug Administration, refused to enforce the EMR by suspending regulatory approvals for the copied products. In support of its decision, ANMAT alleged that specific rules for the enforcement had not been enacted by the Argentinean government. This case is currently before the Argentine Supreme Court for review.
As a result of Argentina's failure to comply with its TRIPS obligations, local pirate labs are freely copying and selling innovative pharmaceuticals covered by U.S. patents. Thus, Argentina's neglect of its international obligations has unfairly benefited local industry.
In January 1997, the U.S. Government announced the suspension of benefits for 50 percent of Argentina's exports under the Generalized System of Preferences (GSP) program. This suspension was primarily due to Argentina's lack of patent protection for pharmaceuticals.
In the 1998 Special 301 review, Argentina remained in the priority watch due primarily to patent problems. While these statistics provide small comfort to U.S. pharmaceutical companies, recent measures should significantly increase intellectual property protection opportunities.
On April 30, 1999, United States Trade Representative, Charlene Barshefsky announced that, based on the 1999 Special 301 review, the United States would initiate dispute settlement proceedings against Argentina in the WTO. Underlying these proceedings was Argentina's failure to comply with its GATT/TRIPS obligations with respect to intellectual property, and in particular, its failure to comply with EMR obligations.
These proceedings should cause Argentina to conform its patent legislation for compliance with international standards or risk WTO-implemented sanctions. Favorable results have been achieved in other recent dispute settlement proceedings regarding the intellectual property laws of Sweden, Ireland, and Denmark.
Argentina's response to the U.S. complaint is expected to be similar. Prior to the U.S. complaint, several bills supported by the local pharmaceutical industry were pending before the Argentine Congress. These bills would have extended the transition term for withholding the effective grant of pharmaceutical product patents. Other bills then pending contemplated additional restrictions to the GATT/TRIPS implementing regulations.
The threat of commercial retaliation by the U.S. prompted top Argentinean national executives to stop these initiatives. Warnings that none of these bills should be passed have also been issued to Argentinean government officials by the U.S. Embassy in Argentina. A June 16, 1999, Argentinean press release predicted that these bills would be frozen.
Legislative reaction to these warnings will likely result in strengthened intellectual property protection under Argentinean patent laws, particularly in areas related to pharmaceutical products. In addition, the recently inaugurated Argentinean government is expected to significantly improve enforcement of IP rights. Such measures would provide protection against piracy of products, especially products related to pharmaceuticals.