March 2, 2001

Staff Reporters of THE WALL STREET JOURNAL

Can the pharmaceuticals industry inflict any more damage upon its ailing public image? Well, how about suing Nelson Mandela?

That's how scores of international AIDS activists are portraying a lawsuit by 40 drug makers that will be heard beginning Monday in a Pretoria courthouse. The suit seeks to overturn a law that Mr. Mandela signed when he was president of South Africa. Under the law, South Africa can import cheap, generic versions of patented medicines -- including powerful new drugs for treating AIDS -- without permission from the patent owner.

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As the case heads for court, many drug-company executives privately say they wish the lawsuit -- and the Scrooge-like picture it paints of their industry -- would disappear. But publicly the companies say they're going forward because the South African law strikes at the heart of their most precious commodity: patents.

"It's never good to be embroiled in a suit with your customers," says Harvey Bale, director general of the International Federation of Pharmaceutical Manufacturers Association, a Geneva-based trade group. But despite the bad press, he says, the industry must protect its patents, which he calls "the foundation of research and development."

The pharmaceuticals industry is locked in a tightening international public-policy vise. On one hand, drug companies want desperately to be seen as helping fight the global AIDS crisis. Witness the unprecedented offer last year by several companies to cut prices of many AIDS drugs in Africa. But the companies also remain unwavering in their defense of patents, even if it means suing poor nations that want to make buy bootleg generics because they can't afford brand-name drugs.

The stakes for the industry are far higher than the market for AIDS drugs in Africa. Their fear: If the South African law is allowed to stand, other countries will be emboldened to pursue similar legislation. "It is quite likely to be a slippery slope," says Mark Groombridge, a research fellow at the Cato Institute, a conservative think tank. "If the question is AIDS today, why not heart disease and cancer drugs tomorrow?"

*These are the discounted prices being offered to some African nations by brand-name drug makers and by Cipla AIDS Drug Prices Offered in Africa
Per patient per year
Drug/Maker Patented Generic*
Combivir/Glaxo $730 $635
3TC/Glaxo 232 190
Zerit/Bristol-Myers 252 70
Stocrin/Merck 1,110 N/A
Viramune/Boehringer 483 340

Sources: The companies; UNAIDS

Moreover, the U.S. companies fear that if poor countries are allowed to buy low-priced drugs, American consumers will demand the same. Indeed, many of the activists and lawmakers who support cheap generic drugs overseas are also lobbying to drive down prices in the U.S. -- just as insurers and employers are mounting their own crusade to cut skyrocketing drug prices. Drug makers currently derive the lion's share of their annual profits from the $126 billion U.S. market, where they have the greatest freedom to price drugs at a premium.

Growing Alarm

The pressure is especially intense in Washington, where the drug industry spent an unprecedented amount of money last year -- $80 million -- to help elect President Bush and a Republican Congress. But the U.S. government is no longer standing firmly behind the industry. Before the AIDS crisis, there was never any doubt that the U.S. considered drug patents sacrosant. Now a growing alarm about the spread of the disease, and a widening belief by consumers that pharmaceuticals companies price their drugs too high, has forced Washington to reconsider its unyielding support for the industry's positions overseas.

For years, the drug industry had a staunch ally in the U.S. Trade Representative's office. There, the industry's go-to guy for the past five years has been Joseph Papovich, a 53-year-old assistant trade representative. Mr. Papovich, a career bureaucrat, is responsible for protecting the patent rights of American companies abroad. For example, according to people present at a 1996 meeting between Mr. Papovich and AIDS activists, when the activists complained that strict patent laws prevent poor Africans from getting drugs, Mr. Papovich replied -- truthfully if somewhat undiplomatically -- "I don't represent African consumers." As Peter Scher, chief of staff at the trade office under President Clinton, puts it: "Joe Papovich viewed his responsibility simply: Carry out the agenda of U.S. companies."

Now that has changed. When the Pretoria High Court hears opening arguments in the drug industry's case, the U.S. government, after years of complaining about the South African statute, won't be at the industry's side. The Clinton administration's decision to stop pressing South Africa to change the law, reaffirmed by the Bush administration last week, says much about the rapidly changing environment for American drug companies overseas. The global AIDS crisis has prompted a widening circle of activists, including nonprofit organizations such as Doctors Without Borders and Oxfam, to attack the patents of American drug companies as a direct threat to the health of the world's poor. These groups are encouraging Third World countries to make or import generics, even if it means violating drug company patents.

For the U.S. trade office, such debates are a far cry from their usual agenda, which tends to revolve around the arcane details of treaties with acronyms like TRIPS (Trade Related Aspects of Intellectual Property Rights). Until a few years ago, the big worries at the trade office were about protecting American compact discs from piracy in China, and protecting Microsoft So in early 1998, when a group of drug-industry representatives went to see Mr. Papovich to complain about the new South African law, the trade office approached it much like a routine patent complaint. The South Africa law, which was passed in December 1997, authorizes two controversial practices. One, called parallel importing -- a form of "gray market" retailing -- allows importers to buy drugs from the cheapest sources available, regardless of whether the patent holders give their approval. The other practice, called compulsory licensing, permits the South African government to license local companies to produce cheaper versions of drugs whose patents are held by foreign companies.

Direct Assault

For the industry, these provisions were tantamount to a direct assault on their livelihood. In February 1998, the consortium of 40 drug companies, led by a South African pharmaceuticals trade group, filed suit. Its key legal claim was that the statute, the Medicines and Related Substances Act of 1997, is unconstitutional because it gives sweeping power to South Africa's health minister to ignore the country's patent laws. The South African trade group, the Pharmaceutical Manufacturers' Association of South Africa, also argued that the law could have negative economic consequences for the country. "If we were to drop the case, the multinational pharmaceutical industry would exit South Africa, and South Africa would be the poorer for it," says Mirryena Deeb, the group's chief executive.

In general, industry officials say that treating AIDS -- as well as malaria, tuberculosis, malnutrition and other medical woes prevalent among the world's poor -- is a global problem that can't be solved just by attacking pharmaceuticals prices and profits. Drug-company executives claim that their enormous business simply presents an easy target for activists, for whom marshaling a world-wide crusade against poverty and disease would be a much tougher task.

'Infrastructure' Issue

"There are issues associated with infrastructure, with providing proper care and treatment, distribution systems have to be in place -- all these things are needed to ensure access to medicines," says Greg Reaves, a spokesman for Merck For its part, the South African government says it will vigorously defend the Medicines Act -- which hasn't been implemented because of the lawsuit. Joanne Collinge, a spokeswoman for South Africa's Ministry of Health, says the statute reflects the government's position that equal access to health care is a constitutionally protected right. "We have a constitution that says there will be accessible health care, and that means affordable medicines," she says. "The problems in getting universal access are so deep we need major structural intervention."

Several weeks after the South African law was passed, in early 1998, members of a U.S. drug-industry lobbying group trooped across town to ask the trade office to take action against South Africa. According to an official in the trade office, the industry group framed the matter simply as a fight over intellectual-property rights, and didn't even mention how it might affect the treatment of AIDS.

For the next two years, Mr. Papovich and other U.S. officials took up the industry's arguments in a series of letters, phone calls and meetings with South African officials. According to U.S. trade officials, their South African counterparts also didn't broach the subject of AIDS -- perhaps because of the societal stigma. Rather, the U.S. officials say, the two sides simply argued about whether the Medicines Act ran afoul of common international trade practices.

'We Missed It'

"We all missed it," says Charlene Barshefsky, the U.S. Trade Representative at the time. "I didn't appreciate at all the extent to which our interpretation of South Africa's international property obligations were draconian."

To pressure South Africa to amend its law, the U.S. in 1998 denied Pretoria's request for additional benefits under the Generalized System of Preferences, a trade scheme that allows poor countries to export products to the U.S. at reduced duties. Then, a year later, Rep. Rodney Frelinghuysen, a New Jersey Republican, speaking on behalf of drug companies with operations in his state, attached an amendment to South African aid legislation, holding up payments for a few months until the U.S. demonstrated it was pressuring South Africa on the Medicines Act.

In April 1999, the U.S. trade office also cranked up the heat. In its annual Watch List, published that month, it cited South Africa for the Medicines Act, which the U.S. said could potentially "abrogate patent rights." The list doesn't necessarily lead to U.S. trade sanctions, but it does send a warning signal to international investors. Avoiding the Issue

A month later, Mr. Papovich accompanied then-Vice President Al Gore to Cape Town for meetings with their South African counterparts. The South Africans complained to Mr. Papovich about the watch list but tiptoed around the AIDS issue. When the group returned to the U.S., however, things changed. On June 16, a group of activists disrupted Mr. Gore's carefully planned speech in Carthage, Tenn., announcing his run for the presidency. Chanting "Gore greed kills" and "medication for every nation," the activists waved banners and hooted during Mr. Gore's talk. They repeated their actions at successive campaign stops.

Meanwhile, back in Washington, activists met with Mr. Papovich and other U.S. trade officials at an office building near the White House. Says Eric Sawyer, a founder of the AIDS activist groups Act Up New York and the Health Gap Coalition: "We were slamming on the table, accusing them of genocide." The trade officials' response, Mr. Sawyer says, "was to look as though they had been slapped across the face." The activists warned Mr. Papovich that more disruption was to come.

They made good on their threats, pestering Mr. Gore at campaign stops across the country. Finally, in July, Mr. Gore announced that the White House was reversing its policy. Essentially, the trade office adopted a sort of "Don't ask, don't tell" stance, under which the U.S. agreed to look the other way if South Africa began to make or import generic AIDS drugs.

Not Enough

But that wasn't enough for the activists, who wanted the U.S. to expand the new policy beyond South Africa. They continued to organize demonstrations. In October, 500 Act Up activists marched down 17th Street in Washington to the trade office, holding giant puppets depicting an evil-looking Ms. Barshefsky. Mr. Papovich was in Bangkok when he received a panicked phone call from trade staffers back in Washington that the building was under siege. Traffic was tied up for about an hour, and trade officials stayed locked inside the building until the activists eventually dispersed. Two months later, Mr. Papovich was on hand to witness another demonstration. A dozen activists managed to enter the trade office after one of them tricked security guards by pretending to sprain an ankle. Mr. Papovich, on his way to deliver a speech on Capitol Hill, passed the activists on the stairs. From his taxi, he watched, horrified, as the activists unfurled a huge banner from a second-floor window, reading: "Essential Drugs for All Nations."

By then, a cosmic change was under way inside the trade office. Public health and the AIDS crisis were starting to dominate discussions on how to protect intellectual property. The arguments presented by the drug industry started receiving an increasingly skeptical audience among trade officials. For example, that fall several pharmaceuticals executives met with Ms. Barshefsky and argued that the problem with AIDS in Africa wasn't high-priced drugs, but a lack of computers and other components of health-care infrastructure. According to people in the room, Ms. Barshefsky was taken aback. "I don't think you're suggesting a lack of computers is what's causing this pandemic?" she asked, these people said. A few months later, during the disastrous December 1999 meeting of the WTO in Seattle, the U.S. trade office issued a statement. The new South Africa policy, it said, would be extended to all poor countries. Drug companies were dismayed, but not surprised. By then it was clear that the activists' power was surging, while their own influence appeared to be waning. They bided their time. When President Bush took office, some drug companies hoped their campaign efforts on behalf of the new president would lead to a reversal of Mr. Papovich's new stance. They didn't overtly lobby, however, knowing the potential for public-relations damage. Last week, the trade office issued a statement saying it is "not considering a change in the present flexible policy." Administration officials privately say this was an easy decision to make, and it isn't likely to be reversed. "The HIV/AIDS crisis is a terrible tragedy for countries, families and individuals," said the statement, which was written by Mr. Papovich and approved by the Bush administration. "Consistent with our overall effort to protect America's investment in intellectual property, [the Bush administration will] work with countries that develop serious programs to prevent and treat this horrible disease."

-- Scott Hensley in New York contributed to this article. Write to Helene Cooper at helene.cooper@wsj.com