March 7, 2001

Staff Reporters of THE WALL STREET JOURNAL

An extraordinary price war is breaking out in the market for AIDS drugs in poor countries, as pharmaceuticals giants seek to blunt a growing threat from generic-drug companies and recoup some moral high ground amid the crippling epidemic.

Merck & Co. Tuesday confirmed it is slashing the prices for two of its important AIDS-fighting drugs in Africa by 40% to 55%, on top of sharp reductions the company already pledged last year. In a significant development, it also plans to offer the reduced prices to other poor countries beyond Africa.

Bristol-Myers Squibb Co. and GlaxoSmithKline PLC also plan to implement a new round of sharp cuts, people familiar with the matter said. They come at a time when two generic companies based in India are now fighting with each other to claim the low-cost mantle.

"This is extraordinary news," says David Nabarro, a high-ranking World Health Organization official who was alerted to the move Tuesday. "This is part of a trend we hope will increase availability."

Despite the fast-dropping prices, it is still unclear how many people can benefit in Africa, where an estimated 25 million people are infected with HIV, the virus that causes AIDS. Highly publicized price cuts by the major pharmaceuticals makers last May haven't had much impact on the epidemic, because the cost was still too high and the negotiating process to implement them has been cumbersome. And even at the new lower prices, few will be able to pay for the drugs without a major infusion of funds from abroad.

The latest pricing moves reflect increasing concern by pharmaceuticals executives that generic competitors are winning a public-relations battle that could eventually undermine international patents -- their most precious asset.

AIDS Fighters Win Skirmish in South African Legal Fight

Just this week, 39 pharmaceuticals makers went to court in a lawsuit designed to block South Africa from importing or manufacturing generic copies of the big companies' drugs. But the court case is provoking a public pummeling by AIDS activists, who argue the patents are keeping life-sustaining drugs from the grasp of millions of people.

Pharmaceuticals executives worry that the vilification of the industry will become so widespread that governments will become emboldened to take away drug-company patents, not just in poor nations, but even in wealthier ones, as well. In the U.S., for instance, politicians and health advocates have complained strenuously about the high cost of medicines.

"If we don't solve the drug access problem, then our intellectual property is at risk," says Raymond Gilmartin, Merck's chairman and chief executive. He adds that the companies "need to demonstrate that intellectual property is not an obstacle" to access in developing countries.

The current pricing free-for-all was triggered last month when Cipla Ltd., a leading generic drug maker in India, promised to sell a combination of three AIDS drugs to Africa at $600 per patient per year, about 40% below the discounted price of a similar regimen offered by the giant drug makers.

A New Entrant

Now a second Indian manufacturer, Hetero Drugs Ltd. has just announced it will sell the same cocktail of drugs for $347 a year. Hetero's entry into the AIDS pricing fray is being hailed by AIDS activists, partly because they say it will bring more pressure on all drug companies, generic or patent-based. The Indian company has already entered an agreement with a large South African generics firm, Aspen Pharmacare Ltd., to distribute Hetero's drugs -- if the South African government wins its lawsuit with the pharmaceuticals companies and allows for the importation of generic drugs.

Price War The most recent prices for AIDS drugs per patient per year in the U.S. and Africa offered by large drug makers and two Indian generic drug companies.

"These connections between Indian and South African firms are the future of AIDS treatment in South Africa," says Toby Kasper, a member of Doctors without Borders. "I hope that the government will ensure that these offers can be taken up as soon as possible."

The Indian generic companies face many hurdles. They can produce and sell patent-protected drugs in India because that country doesn't recognize international patent laws. In order to sell the drugs to Africa, the Indian companies must somehow get around patent laws -- even those with weak protections -- in Africa. Moreover, the Indian companies must get each of their medicines approved by local regulatory agencies, something that already has been accomplished by the big drug companies.

Merck, on the other hand, says its new offer is available immediately to any government, charitable organization, or employer in poor nations.

Executives say this round of price cuts will be different from last May's, in which Merck drew criticism by declining to make its prices widely known. Back then, it also restricted the offer to Africa, and insisted that the U.N. help oversee the process. Now, it plans to roll out the offer to poor nations beyond Africa, although it hasn't yet specified which ones. Merck's only demand is that it receive guarantees that their drugs won't be re-exported to any other nation.

Merck says it will abandon country-by-country negotiations that have dragged on slowly since last summer and led to such a small number of pricing agreements. To date, only three African countries -- Senegal, Rwanda and Uganda -- have agreed to take the companies up on last year's price reductions.

"We were not making the type of progress we wanted," says Per Wold-Olsen, who runs Merck's Middle East and Africa operations. So, he says, the company decided to simplify the process by coming up with one price that it considers to be the lowest it can go.

Specifically, Merck is now offering to sell its powerful protease inhibitor drug, Crixivan, for $600 per patient per year, 43% lower than its previous discounted price of $1,044. In addition, it also will charge $500 a year for another AIDS drug, Stocrin, which is 55% below the price it offered in May. Both drugs are critical components to the AIDS cocktail therapy, which has lowered the HIV death rate throughout the industrialized world.

Each of these drugs is often included in a daily regimen with Glaxo's Combivir, a combination of two drugs, AZT and 3TC, to produce the powerful AIDS cocktail. As a result of the new price offering, either of these two regimens would cost less than $1,330 a year, far below $10,800 and $11,800 a year in the U.S.

In fact, Merck's new price for Crixivan undercuts generic copies of the drug made by India's Hetero, which is offering to sell the drug for $2,300 a year. Merck says in order to meet expected demand it is rearranging manufacturing facilities to triple production capacity for Crixivan. Merck says its new prices for Crixivan and Stocrin give it no profit, though it isn't possible to verify that from independent sources because the company's production costs aren't known. Peter Piot, executive director of the Joint United Nations Program on AIDS, or Unaids, says he is especially pleased that Merck has ended its previous policy of allowing its price to be known only to countries that participate in Unaids-sponsored negotiations. Making the price public "is crucial to helping governments in the hardest-hit regions plan sustainable HIV care programs," Dr. Piot says. "As prices fall as close to costs as we can get them, it means that we can concentrate on the other issues: building and strengthening health systems, raising finance, and ensuring that a wider care agenda is delivered."

Pilot Program

A little less than three years ago, at the 1998 world AIDS conference in Geneva, the United Nations first announced a pilot program to provide HIV drugs at cut-rate prices to several developing nations. Merck was one of the largest AIDS drug manufacturers to refuse to participate.

Executives insisted the price of AIDS drugs wasn't the prime barrier to improving the lot of HIV-infected people in Africa. Instead, the company argued that what was most needed was so-called infrastructure, health services and patient and doctor education. To buttress its case, Merck pointed to its successful giveaway of a drug sold in the U.S. for treating animals but which can prevent river blindness in people. Merck said the key to its river-blindness program was the years it spent building health-service networks to provide the drug.

Instead of joining the U.N. pilot program, Merck pledged $5 million to a Harvard AIDS Institute program to develop new ways of providing care in Africa. Activists at the AIDS conference weren't appeased. Blowing whistles and shouting through bullhorns, they trashed Merck's booth, kicking down display stands and spray-painting slogans over its colorful Crixivan ads.

Two years later, however, Merck changed its tune. While maintaining that price discounts alone won't solve the AIDS crisis for most of Africa, the company decided that by lowering prices the number of people treated, while still low, would greatly expand. In addition, the company says it was heartened by statements by WHO Director General Gro Harlem Brundtland saying that any effort to increase access to drug-company medicines must also include agreements honoring the drug makers' patents.

"She deserves tremendous credit," says Merck's Mr. Wold-Olsen. "She's been severely criticized by her own people and governments in the developing world for her willingness to partner with industry." As a result of Dr. Brundtland's assurances, and because of intensifying public pressure, last May Merck joined with Bristol-Myers, Glaxo, Boehringer-Ingelheim GmbH and Roche Holding Ltd., in announcing the then-unprecedented 80% to 90% price reductions. Merck also pledged $50 million plus free drugs for a program to develop comprehensive AIDS care in Botswana. The program is cosponsored by the Harvard AIDS Institute and the Bill and Melinda Gates Foundation.

Now the company says it realizes it must go further.

In January, Merck's chairman, Mr. Gilmartin, met in Davos, Switzerland, at the World Economic Forum with WHO's Dr. Brundtland and with Unaids's Dr. Piot. Both explained to Mr. Gilmartin that the companies' price discount in May wasn't producing much of an increase in access to the AIDS drugs. In particular, the health leaders and others told Mr. Gilmartin that even at last year's reduced price, the cost of the AIDS drugs was still too high.

'Gaining Experience'

In a series of internal discussions in recent weeks, company officials say they decided that one way to stimulate large-scale involvement by the U.S., the European community and other major funding groups was to provide the new pricing scheme in which the company would be selling its products at about what it costs to manufacture the drugs. Mr. Gilmartin says the companies' evolving stances, in which it initially refused to discount prices, then made its first price reductions last year, to its new position now are simply a result of Merck "gaining experience."

Still, Merck officials continue to fret that lowering prices for poor nations will be used by health advocates to demand lower prices for AIDS drugs in the U.S. "We're making a big assumption here," says Mr. Gilmartin, "that the American people and Congress will look at our discussions in Africa and recognize that they should not be a part of the debate about prices in other parts of the world."

Meanwhile, several other major drug makers, also discouraged by the small numbers of Africans who have benefited from the first round of price cuts, say they are seriously considering new reductions similar to Merck's. Glaxo had previously reduced its Combivir drug by 90% to $2 a day, a price that was available only to governments. But Jean-Pierre Garnier, Glaxo's chief executive, says the company is now offering the same price to "clinics, employers -- essentially centers in contact with thousands of AIDS patients in Africa."

For example, the company is negotiating with the South African mining company Anglo American Corp. in Johannesburg to provide AIDS drugs at the discounted price. Moreover, Mr. Garnier says he hopes that as private charitable agencies and African governments "endorse our offer, our volume will increase and we will be in a position to realize economies of scale and therefore pass further cost savings on to the patients -- the ultimate beneficiaries of this approach."

Moreover, three other major AIDS drug providers, Roche, Bristol-Myers and Boehringer-Ingelheim, are all considering their own new set of reduced prices. Kellie McLaughlin, a spokesperson for Roche, says within the past 10 days the Swiss drug-maker told Unaids the company plans to lower the price of Viracept and Fortovase, two protease inhibitors it sells. Although the company won't say how much it expects to reduce the prices, it acknowledges the price cuts are the first for these products since late 1998.

And while Bristol-Myers won't say if it will reduce prices below what it offered in May, people familiar with the company's plans say the drug maker expects to offer its own round of sharp discounts sometime soon.

All the companies maintain the new drug charges are about as low as they can go without huge volume buying. Still, AIDS activists, who have become skeptical of drug-company statements over the past few years, are likely to say the companies can discount further. Expecting that, Mr. Gilmartin says the price "will never be low enough" to satisfy activists. "I don't expect to get any credit," he says. "But we will make a difference."

Drug (Company) U.S. Price Cipla Hetero Latest Company Offer in Africa

Zerit (Bristol-Myers) $3,589 $70 $47 $252 3TC (Glaxo) 3,271 190 98 232 Crixivan (Merck) 6,016 N.A. 2,300 600 Combivir* (Glaxo) 7,093 635 293 730 Stocrin (Merck) 4,730 N.A. 1,179 500 Viramune (Boehringer) 3,508 340 202 483 *AZT and 3TC N.A.=not available Sources: The companies,WSJ research

-- Daniel Pearl and Rachel Zimmerman contributed to this article.

Write to Mark Schoofs at mark.schoofs@wsj.com and Michael Waldholz at michael.waldholz@wsj.com