Order Code RL31066
CRS Report for Congress
Received through the CRS Web
HIV/AIDS Drugs, Patents and the TRIPS
Agreement: Issues and Options
July 27, 2001
/name redacted/
Visiting Scholar in Economic Growth and Entrepreneurship
Resources, Science and Industry Division
Congressional Research Service ˜ The Library of Congress

HIV/AIDS Drugs, Patents and the TRIPS Agreement:
Issues and Options
Summary
AIDS (“Acquired Immune Deficiency Syndrome”) is a serious medical condition
that predisposes patients towards opportunistic infections, tumors, dementia and
death. Human Immunodeficiency Virus (“HIV”) is the viral agent associated with
AIDS. HIV/AIDS remains a leading cause of death in the United States. Exposure
rates in some other parts of the world, such as sub-Saharan Africa, substantially
exceed those in the United States. The global HIV/AIDS pandemic has had a severe
impact upon many states within the developing world, and future social and economic
consequences could be devastating.
Recently introduced antiretroviral drugs have reduced the number of deaths
caused by HIV/AIDS. These medicines can keep HIV from replicating and causing
further damage to the immune system. Although the cost of an annual supply of
different HIV/AIDS drugs varies. The prices of these drugs are beyond the ability of
most residents of the developing world to pay. Because some HIV/AIDS drugs are
subject to patent protection, others may not manufacture these drugs without the
permission of the patent owner.
International disagreement has arisen regarding patents on HIV/AIDS drugs.
Until recently, many nations did not allow patents to issue on pharmaceuticals.
However, one component of the World Trade Organization agreements, the
Agreement on Trade-Related Aspects of Intellectual Property Rights (the “TRIPS
Agreement”), requires member states to grant pharmaceutical patents. Demand for
increased availability of HIV/AIDS drugs has led to perceived conflicts with this
TRIPS Agreement obligation. Although patent disputes concerning Brazil and South
Africa have recently been resolved, a fundamental conflict persists between the goals
of providing broad access to HIV/AIDS drugs, on one hand, and maintaining an
environment conducive to pharmaceutical research and development, on the other.
Legislation has been introduced in the 107th Congress relating to the availability
of drugs for treating HIV/AIDS. These and other options for dealing with this issue
are discussed. Other options include: providing the U.S. Trade Representative with
policy guidance that balances TRIPS Agreement compliance with the availability of
HIV/AIDS drugs; encouraging the differential pricing of HIV/AIDS drugs in the
developed and developing world; promoting market-based solutions, such as a global
settlement between entrepreneurial pharmaceutical companies and nations seeking
greater access to HIV/AIDS drugs; and offering humanitarian aid to the recently
announced United Nations global fund for fighting HIV/AIDS.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Patent Protection for Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Patent Law Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Patents on Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Pipeline Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Exclusive Marketing Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Limitations on Patent Protection for Pharmaceuticals . . . . . . . . . . . . . . . . . 7
International Disputes Regarding
HIV/AIDS Drug Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Issues for the Research-Based
Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Legislative Issues and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Codify Executive Order 13,155 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exemptions from International Obligations . . . . . . . . . . . . . . . . . . . . . . . . 21
Differential Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Market Segmentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Global Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Humanitarian Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Appropriate Incentives for Pharmaceutical Companies . . . . . . . . . . . . . . . 24
Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

HIV/AIDS Drugs, Patents and the TRIPS
Agreement: Issues and Options
Introduction
Pharmaceuticals remain an important industry both for the economy of the
United States and for the health of its citizens. With the United States serving as the
world’s largest market for pharmaceutical sales, the U.S. pharmaceutical industry is
among the nation’s most profitable.1 U.S. manufacturers have consistently maintained
a positive international trade balance and are responsible for nearly half of the major
pharmaceutical products marketed worldwide. Excluding public sanitation
improvements, the most significant advances in medicine were fueled by the discovery
of innovative drugs.2 Ongoing advances in biotechnology, genetics, information
technology and other fields suggest that the pharmaceutical industry will continue
progress towards the discovery and development of new pharmaceuticals.
Drug discovery and development is a costly and time-consuming undertaking.3
One widely quoted report found that, on average, this process consumes 12 to 15
years and costs $500 million per new drug brought to market.4 Most new drugs can
be copied quickly and cheaply, however. Given a technical environment where
products are difficult to develop but easy to copy, the pharmaceutical industry has
been described as particularly dependent upon the patent system.5 By providing
proprietary rights in innovative pharmaceutical compounds, patents protect research-
based drug companies from direct competition for a limited period of time. Patents
may allow pharmaceutical companies to appropriate the benefits of their research and
development efforts, thereby stimulating them to engage in such efforts in the first
place. One study concluded that 65% of new drugs would not have been
commercially introduced in the absence of patent protection.6
1Rai, Arti K, “The Information Revolution Reaches Pharmaceuticals,” 2001 University of
Illinois Law Review
173.
2Nash, Duane, “South Africa's Medicines and Related Substances Control Amendment Act
of 1997,” 15 Berkeley Technology Law Journal (2000), 485.
3See Congressional Research Service, Pharmaceutical Research and Development: A
Description and Analysis of the Process
, by (name redacted),
CRS Report for Congress
RL30913, 2 April 2001.
4Drews, Jurgen, In Quest of Tomorrow’s Medicine (New York: Springer 1998).
5Levin, Richard, et al., “Appropriating the Returns from Industrial Research and
Development,” Brookings Papers on Economic Activity, No. 3 (1987), 783.
6Mansfield, Edwin, “Patents and Innovation: An Empirical Study,” Management Science
(continued...)

CRS-2
Although patents have long been available on pharmaceuticals in the United
States, not all countries traditionally allowed pharmaceutical patents. Some
commentators believe that lack of effective patent protection abroad has cost U.S.
firms billions of dollars per year in lost revenue. The advent of the so-called “TRIPS
Agreement,” the Agreement on Trade-Related Aspects of Intellectual Property Rights
of the World Trade Organization (“WTO”),7 was expected to increase the availability
of patent protection for pharmaceuticals abroad.8 Under the TRIPS Agreement, all
WTO members agreed to amend their patent laws to allow patents to issue on
pharmaceuticals. WTO members also agreed to restrict their use of compulsory
licenses, a procedure through which a government obliges patentees to allow others
to practice the patented invention.
The efforts of some foreign countries to counter the spread of Acquired Immune
Deficiency Syndrome ("AIDS") have brought controversy to the intersection of the
patent system and the pharmaceutical industry. Certain drugs, developed and
patented by U.S. companies, have dramatically changed the length and quality of life
of patients infected with Human Immunodeficiency Virus ("HIV"). Some developing
countries have sought access to these drugs at low cost. Authorities have called for
the importation of generic versions of brand-name HIV/AIDS drugs, for example,
while others have encouraged local production of generic drugs whether the patent
owner agrees to such measures or not.
Many commentators regard the fulfillment of these requests as a moral
imperative.9 The unprecedented devastation worked by the HIV/AIDS pandemic
threatens to undermine the governments, economy, and social fabric of many states
within the developing world. Efforts to curb the AIDS pandemic could amount to a
security imperative as well, in view of the economic difficulties and political instability
that could otherwise result in Africa and potentially other parts of the developing
world.10
Some observers are of the view, however, that initiatives that weaken or
circumvent patent rights may limit the ability of research-based pharmaceutical
companies to obtain returns sufficient to refund their investments and allow further
investment in drug development, including HIV/AIDS research. As stated by
6(...continued)
(Feb. 1986), 175.
7Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994,
Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, Legal
Instruments--Results of the Uruguay Round vol. 31, 33 I.L.M. 81 (1994) [hereinafter TRIPS
Agreement].
8Weissman, Robert, “A Long Strange, TRIPS: The Pharmaceutical Industry Drive to
Harmonize Global Intellectual Property Rules, and the Remaining WTO Legal Alternatives
Available to Third World Countries,” 17 University of Pennsylvania Journal of International
Economic Law
(1996), 1069.
9See Congressional Research Service, AIDS in Africa: Issue Brief, by Copson, Raymond W.,
CRS Issue Brief IB10050, 14 May 2001.
10Ibid.

CRS-3
Economist Robert J. Barro of Harvard University, “it is probably a bad idea to take
the profitability out of this business because any cure or vaccine for AIDS is likely to
emerge from the efforts of profit-seeking corporations.”11 These controversies seem
to admit no easy answers, but they have significant potential impact upon public
health, international drug development and the future of the nascent international
patent regime.
This report considers the current dispute between the research-based
pharmaceutical industry, on one hand, and certain foreign governments, patient
advocacy groups and generic manufacturers, on the other, regarding patented
HIV/AIDS pharmaceuticals. After introducing fundamentals of patent protection for
pharmaceuticals domestically and abroad, this report discusses medications used in
treating HIV/AIDS. It then describes contemporary international controversies
regarding patents on HIV/AIDS drugs and the potential consequences of these
disputes for entrepreneurial drug companies. This report closes with a discussion of
legislative issues and options.
Patent Protection for Pharmaceuticals
Patent Law Fundamentals
The U.S. patent law allows individuals to obtain proprietary rights in their
inventions. Inventors must submit applications to the United States Patent and
Trademark Office (“USPTO”) if they wish to obtain patent rights.12 USPTO officials
known as examiners then assess whether the application merits the award of a
patent.13
In deciding whether to approve a patent application, a USPTO examiner will
consider whether the submitted application fully discloses and distinctly claims the
invention.14 The examiner will also determine whether the invention itself fulfills
certain substantive standards set by the patent statute. To be patentable, an invention
must be useful, novel and nonobvious. The requirement of usefulness, or utility, is
satisfied if the invention is operable and provides a tangible benefit.15 To be judged
novel, the invention must not be fully anticipated by a prior patent, publication or
other knowledge within the public domain.16 A nonobvious invention must not have
11Barro, Robert J., “Why Would A Rock Star Want to Talk to Me?,” Business Week (16 July
2001), 24.
1235 U.S.C. § 111.
1335 U.S.C. § 131.
1435 U.S.C. § 112.
1535 U.S.C. § 101.
1635 U.S.C. § 102.

CRS-4
been readily within the ordinary skills of a competent artisan at the time the invention
was made.17
If the USPTO allows the patent to issue, the patent proprietor obtains the right
to exclude others from making, using, selling, offering to sell or importing into the
United States the patented invention.18 Patent title therefore provides inventors with
limited periods of exclusivity in which they may practice their inventions, or license
others to do so. The grant of a patent permits the inventor to receive a return on the
expenditure of resources leading to the discovery, often by charging a higher price
than would prevail in a competitive market.
The term of patent protection is set at 20 years from the date the application is
filed.19 The issuance of a patent also places the technical information disclosed in the
patent instrument within the public domain. During the term of the patent,
competitors are stimulated to invent around the patented invention to provide for
parallel technical developments or meet similar market needs. Once the patent
expires, others are free to practice the invention without compensation to the
inventor.
Significantly, U.S. patents provide their owners with rights only within the
United States.20 If inventors desire intellectual property protection in another country,
they must specifically procure a patent in that jurisdiction. Usually this effort requires
submitting a patent application before a foreign patent office. As a practical matter,
multinational corporations often obtain a set of different national patents for each of
their significant inventions.
Patents on Pharmaceuticals
Inventors of pharmaceutical compounds have obtained U.S. patents for many
years. Such inventors faced difficulties when they sought patent protection abroad,
however. The patent laws of many other nations did not allow patents to issue on
pharmaceutical inventions.21 As a result, although research-based pharmaceutical
companies could obtain patents in the United States and some other countries, their
drugs could be freely copied elsewhere.
With the advent of the World Trade Organization in 1995, patents on
pharmaceuticals became more widely available. One component of the WTO
Agreement is the so-called TRIPS Agreement, or Agreement on Trade-Related
1735 U.S.C. § 103.
1835 U.S.C. § 271(a).
1935 U.S.C. § 154.
20Quality Tubing, Inc. v. Precision Tube Holdings Co., 75 F.Supp.2d 613, 619 (S.D. Tex.
1999).
21Scherer, F.M., “The Pharmaceutical Industry and World Intellectual Property Standards,”
53 Vanderbilt Law Review (2000), 2247-48.

CRS-5
Aspects of Intellectual Property Rights.22 Under Article 27 of the TRIPS Agreement,
WTO members agreed to allow patents to issue on inventions “in all fields of
technology.”23 One consequence of this requirement is that many WTO member
states will begin to allow patents to issue on pharmaceuticals.
The TRIPS Agreement allows some exceptions to its basic requirement that
patents issue “in all fields of technology.” One of these exceptions, provided in
Article 27(2), may be pertinent to the patenting of pharmaceuticals. That provision
states:
Members may exclude from patentability inventions, the prevention within their
territory of the commercial exploitation of which is necessary to protect
ordre public or morality, including to protect human, animal or plant life or health
or to avoid serious prejudice to the environment, provided that such exclusion is
not made merely because the exploitation is prohibited by their law.
WTO members did not have to comply with Article 27 of the TRIPS Agreement
immediately. For WTO members other than developing and least developed
countries, the compliance date for all requirements of the TRIPS Agreement was set
to January 1, 1996. For signatory states designated as developing countries, the
TRIPS Agreement set the general compliance date as January 1, 2000. However,
there is one exception to this general date. If on January 1, 2000, a developing
country did not extend patent protection to all areas of technology within the meaning
of Article 27, that developing country may delay implementation of these provisions
for an additional five years. The practical effect of this additional transition period
was that developing countries need not allow patents on pharmaceuticals until January
1, 2005.
The TRIPS Agreement also allows a signatory state designated as a least-
developed country to delay implementing the TRIPS Agreement until January 1,
2010. A showing of hardship may qualify least-developed countries for further delays
and other concessions.
The TRIPS Agreement does not oblige its signatories to protect subject matter
that fell into the public domain prior to the time its obligations became effective.24
For example, many HIV/AIDS drugs were developed and marketed prior to the
advent of the TRIPS Agreement. Such drugs may not be subject to patent protection
in those jurisdictions that did not grant patents on pharmaceuticals prior to the TRIPS
Agreement. In effect, the TRIPS Agreement apparently requires its signatories to
provide patent protections for any HIV/AIDS drugs developed after 1995 and into
the future.
As with other obligations imposed by the TRIPS Agreement, these commitments
are subject to enforcement through the WTO Dispute Settlement Body (DSB). If one
WTO member state believes that another member state is in violation of the TRIPS
22See TRIPS Agreement, supra note 6.
23TRIPS Agreement, supra note 6, at Art. 26.
24See TRIPS Agreement, supra note 6, at Art. 70.

CRS-6
Agreement, the member states may enter into consultation through the DSB. If the
member states cannot resolve their dispute, the DSB will convene a panel to hear and
resolve the dispute. Panel decisions are subject to review by the DSB Appellate
Body. The WTO Agreement calls for compensatory trade measures in circumstances
where the DSB finds a WTO member state to be in violation of the TRIPS
Agreement, yet that member state does not amend its laws.
Pipeline Protection
Although the TRIPS Agreement allows developing countries to delay
implementing their patent law obligations, it requires that they immediately establish
so-called pipeline protection for pharmaceuticals. Some sources refer to pipeline
protection as the “mailbox rule.”25 Under this requirement, countries that do not
allow pharmaceutical patents to issue must nonetheless accept patent applications.
These patent applications will essentially be held at the national patent office until it
comes time for the patent application to be considered.
Pipeline protection is valuable because it allows inventors to establish a date of
priority of invention. Although many years might pass between the application’s filing
date and the date on which it would be examined, the inventiveness of the claimed
invention must be judged as of its filing date. Pipeline protection allows inventors to
maintain their priority of invention in the face of subsequent technical advances.
Exclusive Marketing Rights
The TRIPS Agreement also mandates that WTO member states award an
Exclusive Marketing Right (“EMR”) to pharmaceutical innovators in specified
circumstances. The holder of an EMR concerning a particular product is designated
as the only entity authorized to distribute that product within the member state. The
award of EMRs provides innovators with transitional, patent-like market exclusivity
in member states that do not yet offer patent protection for pharmaceuticals.
In order for an enterprise to obtain an EMR in one WTO member state, that
enterprise must obtain both a patent and marketing approval on that pharmaceutical
in another WTO member state. That enterprise must also take two additional steps
within the jurisdiction in which an EMR is sought. First, the enterprise must obtain
marketing approval for the pharmaceutical. Second, that enterprise must file a patent
application claiming that pharmaceutical. Upon completing these two steps, the
enterprise may obtain an EMR with a maximum duration of five years. The EMR will
expire prior to the expiration of five years if either the marketed product is patented,
or the local patent office rejects the enterprise’s patent application.
25Giust, John E., “Noncompliance with TRIPS by Developed and Developing Countries: Is
TRIPS Working?,” 8 Indiana International and Comparative Law Review (1997), 69.

CRS-7
Limitations on Patent Protection for Pharmaceuticals
Some nations have restricted the scope of exclusive rights provided by their
patent laws. Two such restrictions, compulsory licenses and parallel importation, are
particularly pertinent to pharmaceutical patents. A compulsory license allows a
competitor of the patent owner to use the patented invention without the patent
owner’s permission.26 The term “parallel importation” refers to the practice of
acquiring drugs in one country and, without the authorization of the patent holder,
importing them into another country.27 These topics are reviewed in turn below.
Although compulsory licenses have played only a minor role in the United States
patent system,28 many foreign patent statutes include such provisions.29 These
statutes typically require an interested party formally to request the compulsory
license from the foreign government. Competent authorities then decide whether to
grant the license as well as the terms of any granted license. Grounds for granting a
compulsory license include the abusive exercise of patent rights, lack of domestic
manufacture of the patented product, commercialization of the patented good that
does not satisfy the needs of the local market and national emergencies.30 While some
accounts suggest that formal compulsory licensing proceedings are commenced only
infrequently, the mere existence of a compulsory licensing statute may do much to
encourage bargaining between a foreign patentee and domestic industry, on terms
favorable to local manufacturers.31
The TRIPS Agreement places some limits upon the ability of WTO member
states to award compulsory licenses for the use of another’s patented invention.
Among the most detailed provisions of the TRIPS Agreement, Article 31 imposes in
part the following restrictions upon the issuance of compulsory licenses:
• Each application for a compulsory license must be considered on its individual
merits.
26Sherwood, Robert, “Intellectual Property and Investment Stimulation: The Ratings of
Systems in Eighteen Developing Countries,” 37 IDEA (1997), 261.
27Andrade, Richard M., “The Parallel Importation of Unauthorized Genuine Goods: Analysis
and Observations of the Gray Market,” 14 University of Pennsylvania Journal of
International Business Law
(1993), 409.
28Dawson Chemical Co. v. Rohm and Haas Co., 448 U.S. 176 n.21 (1980).
29Julian-Arnold, Gianna, “International Compulsory Licensing: The Rationales and the
Reality,” 33 IDEA (1993), 349.
30Ibid. For studies of specific compulsory licensing provisions of individual nations, see, for
example, Baca, Rafael V., “Compulsory Patent Licensing in Mexico in the 1990's: The
Aftermath of NAFTA and the 1991 Industrial Property Law,” 8 Transnational
Lawyer
(1995), 33; Rosenthal, Robert E., “The Chinese Patent System,” 17 Law and Policy
in International Business
(1985), 907; Wechkin, John M., “Drug Price Regulation and
Compulsory Licensing for Pharmaceutical Patents: The New Zealand Connection,” 5 Pacific
Rim Law & Policy Journal
(1995), 237.
31Boseley, Sarah, “Opinion: Pharmaceuticals move their battleground to Brazil to stem the tide
of cheaper drugs,” Irish Times (20 April 2001), 14.

CRS-8
• The proposed user must have made efforts to obtain authorization from the patent
owner on reasonable commercial terms and conditions and that such efforts have not
been successful within a reasonable period of time. However, this requirement may
be waived in the case of a national emergency or other circumstances of extreme
urgency.
• Any such use shall be authorized predominantly for the supply of the domestic market
of the Member authorizing such use.
• The compulsory license must be revocable if and when its motivating circumstances
cease to exist and are unlikely to recur.
• The patent owner must be paid adequate remuneration in the circumstances of each
case, taking into account the economic value of the authorization.
• The legal validity of any decision relating to the authorization of such use shall be
subject to judicial or other independent review.
The conditions for compulsory licensing within the TRIPS Agreement involve
a number of ambiguities.32 Such terms as “national emergency” or “circumstance of
extreme urgency” are not further defined.33 It is not clear what exactly is meant by
the requirement that a compulsory license be granted primarily for the supply of the
domestic market. Nor is there any clear definition of what level of “adequate
remuneration” to the patent holder suffices. The precise application of these
limitations to medications for treating AIDS will not be fully understood until a
competent tribunal is called upon to interpret them, an event that has yet to occur.34
Despite these ambiguities, the possibility of a grant of a compulsory license may
place meaningful limits upon the exercise of pharmaceutical patents. Under many
foreign patent statutes, compulsory licenses may be invoked on such grounds as the
public order and the ready availability of the patented product in the domestic market.
If such compulsory licenses were issued in keeping with the procedural requirements
of the Article 31, then they would likely be deemed compatible with the TRIPS
Agreement.
Parallel importation presents another limitation upon the exercise of patent rights
on pharmaceuticals. As a result of varying economic conditions and government
32Ford, Sarah M., “Compulsory Licensing Provisions Under the TRIPS Agreement: Balancing
Pills and Patents,” 15 American University International Law Review (2000), 941.
33The initial determination of whether a particular event amounts to a “national emergency”
or “circumstance of extreme urgency” appears to be left to local authorities. Cf. “Kenya
leaders clear way for cheaper drugs,” Houston Chronicle (13 June 2001), 26.
34A ruling issued by the Appellate Body of the WTO DSB would likely provide the most
conclusive interpretation of the compulsory licensing provisions of the TRIPS Agreement.
The judgments of national courts and/or officials of WTO member states might also provide
persuasive authority as to the scope of these provisions. See Chua, Adrian T.L., “Precedent
and Principles of WTO Panel Jurisprudence,” 16 Berkeley International Law Journal (1998),
171.

CRS-9
regulations, pharmaceuticals may be sold at different prices in different countries.35
These price differences provide incentives for parallel importers to buy
pharmaceuticals in countries where they are sold more cheaply and resell them in
countries where they are sold at a higher price.36 Parallel imports are genuine
products in the sense that they originate from the brand name pharmaceutical
company. However, the parallel importer acts independently of the brand name
company, typically selling at a lower price than the patentee or its licensee in the
country of importation. As a result, the practice of parallel importation has been
referred to as the “gray market.”37
Parallel importation has yet to play a significant role in the U.S. pharmaceutical
market. Although the 106th Congress passed a law allowing the parallel importation
of drugs from overseas into the United States, the Clinton Administration refused to
implement the law. According to the Clinton Administration, not only could the
public be exposed to additional risks, but the cost of implementing the legislation
would outweigh its benefits.38 However, a considerable grey market exists in
consumer goods subject to trademark rights within the United States.39 In some other
countries, parallel importation has played a greater role in providing lower cost goods
imported from other nations across a number of market sectors.40
Commentators disagree over the effect of parallel importation upon the
availability of pharmaceuticals in poor and developing countries. If conducted for
humanitarian reasons, parallel importation could serve as an effective means for the
developing world to obtain medicines at the lowest available commercial price.41 The
non-government organization Médecins sans Frontiers, for example, hopes that
35For example, a 1997 study conducted by Dr. Larry D. Sasich for the nongovernmental
organization Public Citizen found that the costs to pharmacists of the antidepressant drug
clozapine varied widely among different countries. The Sasich study reported that 90
clozapine tablets dosed at 100 mg cost $51.94 in Spain, $73.72 in Sweden, $131.51 in Italy
and $317.03 in the United States. See Sasich, Larry D., International Comparison of Prices
for Antidepressant and Antipsychotic Drugs
(available at http://www.citizen.org/hrg/
PUBLICATIONS/1446.htm).
36See Andrade, supra note 27.
37Ibid.
38See Congressional Research Service, The Cost of Prescription Drugs for the Uninsured
Elderly and Legislative Approaches
, by Resources, Science, and Industry Division , CRS
Report for Congress RL30373, 16 Jan. 2001.
39See Hiebert, Timothy H., Parallel Importation in U.S. Trademark Law (Greenwood Press,
Westport, Connecticut, 1994).
40See Swanson, Tait R., Combating Gray Market Goods in a Global Market: Comparative
Analysis of Intellectual Property Laws and Recommended Strategies, 22 Houston Journal of
International Law
(2000), 327 (observing that parallel importation is permissible in Australia,
China, Indonesia, Japan, Korea, Mexico, New Zealand, Singapore, Thailand and other
nations).
41Dolmo, Bess-Carolina, “Examining Global Access to Essential Pharmaceuticals in the Face
of Patent Protection Rights: The South African Example,” 7 Buffalo Human Rights Law
Review
(2001), 137.

CRS-10
parallel importation will allow low-cost pharmaceuticals to be supplied to treatment
programs in the developing world. Other commentators argue that if drugs are
effectively available everywhere at the lowest price sold anywhere, then
pharmaceutical companies will sell drugs only in markets where they can command
a high price.42
Where a pharmaceutical is protected by a patent in the country of importation,
legal issues may arise with respect to parallel importation. Opponents of the grey
market contend that parallel importers violate local rights when they sell patented
drugs without the permission of the patent holder. Parallel importers assert that
patentees should not be allowed to use intellectual property rights to enforce private
product distribution arrangements. To do so, according to parallel importers, would
be to prevent the free movement of legitimate goods in the international marketplace.
Countries have differed in their judgments on whether parallel importation
violates domestic patent rights. For example, the Japanese Supreme Court decided
in 1997 that the importation of a patented product does not violate Japanese patent
rights.43 Although the legal situation in the United States is not entirely clear, most
observers believe that a court would decide that parallel importation constitutes
infringement of a U.S. patent.44 Because WTO member countries could not agree on
the appropriate legal standard for parallel importation, Article 6 of the TRIPS
Agreement expressly states that it does not govern this issue. As a result, WTO
signatories are free to develop their own intellectual property laws either approving
or disallowing parallel importation.
Pharmaceuticals for Curbing HIV/AIDS
Patents issues have arisen with respect to pharmaceuticals for treating Acquired
Immune Deficiency Syndrome (“AIDS”). AIDS has been described as "the most
dramatic, pervasive and tragic pandemic in recent history."45 HIV is associated with
AIDS, a serious condition in which the body's defenses against some illnesses are
broken down. Infected individuals are predisposed towards diseases that the body
would usually fight off quite easily, resulting in a wide range of opportunistic
infections, tumors, dementia and death.
42Perkins, David, et al., “Exhaustion of Intellectual Property Rights,” Practising Law
Institute: Patents , Copyrights, Trademarks, and Literary Property Course Handbook
Series
, 574 PLI/Pat 41 (7-8 Oct. 1999).
43See BBS Kraftfahrzeug Technik v. Kabushiki Kaisha Racimex Japan, Case No. Heisei 7
(wo) 1988 (1 July 1997).
44Wilder, Richard, “Market Segmentation: techniques, actors and incentives - The
use of intellectual property rights,” WHO/WTO Workshop on Differential Pricing and
Financing of Essential Drugs
(8-11 April 2001), 6.
45Stine, Gerald J., Acquired Immune Deficiency Syndrome: Biological, Medical, Social, and
Legal Issues
xxi (Englewood Cliff, N.J.: Prentice Hall, 1993).

CRS-11
In the United States, AIDS is the fifth leading cause of death in people 25-44
years of age.46 The Centers for Disease Control and Prevention report that, in total,
753,907 cases of AIDS have been reported in the United States.47 The total number
of reported deaths from AIDS in the United States is 438,795.48
HIV/AIDS exposure rates in some other parts of the world, such as sub-Saharan
Africa, are significantly higher than in the United States. An estimated 34 million
people living in sub-Saharan Africa have been infected with HIV/AIDS. Of those
infected, approximately 11.5 million have died.49
The HIV/AIDS crisis is one of extreme severity in many developing countries.
By 2010, it is projected that more than 44 million children in 34 developing countries
will have lost at least one parent to the disease.50 AIDS is devastating the education
sector in many countries, killing teachers and leading to school dropouts who must
care for ill parents. The gross domestic product of some sub-Saharan African
countries could drop by 20 % over more in the next decade. Life expectancy is also
dipping in many countries with high rates of HIV infection. In Botswana, for
example, life expectancy is just 39 years and is expected to drop to 29 years by 2010,
according to the U.S. Census Bureau. The high rate of HIV/AIDS infection observed
in many developing countries holds the potential to intensify poverty and destabilize
economies, governments and social infrastructures.51
In the United States, the number of deaths due to AIDS began to decrease in
1998. The principal reason for the decrease was the introduction of new drugs for
treating HIV. Antiretroviral drugs in particular have had an impact.52 These
medicines can keep HIV from replicating (making copies of itself) and causing further
damage to the immune system.
Individuals infected with HIV/AIDS currently use several sorts of antiretroviral
medications. The first available anti-HIV agents were nucleoside reverse transcriptase
inhibitors (NRTIs). This class of therapies includes lamivudine (3TC), stavudine
(d4T) and zidovudine (AZT). These agents work by preventing HIV viral replication
in infected cells. A second class consists of non-nucleoside reverse transcriptase
inhibitors (NNRTIs). These drugs also prevent HIV viral replication, but act at a
different binding site than NRTIs. NNRTIs include delavirdine, efavirenz and
nevirapine. A third class of anti-AIDS agents consists of protease inhibitors (PI). A
46Centers for Disease Control and Prevention, HIV/AIDS Surveillance Report: U.S. HIV and
AIDS cases reported through June 2000
, Midyear edition Vol. 12, No. 1 (available at
www.cdc.gov).
47Ibid.
48Ibid.
49See Copson, supra note 9.
50Stephens, Angela, “AIDS Becomes a National Security Issue,” National Journal (18 Nov.
2000).
51Ibid.
52“Impact of HAART on AIDS-Related Death Examined,” AIDS Weekly (24 July 2000).

CRS-12
PI inhibits viral replication by restricting cleavage of key HIV protein precursors. PIs
available on the market include amprenavir, crixivan and invirase.
Under current standards, the use of a single one of these medications is
disfavored. Such a therapy is believed to have low efficacy and high resistance rates.53
The favored approach employs three antiretroviral medications in combination. For
example, a doctor might prescribe the use of two NRTIs along with one PI, or one
NNRTI plus two NRTIs. This “drug cocktail” technique is often referred to as highly
active antiretroviral therapy, or HAART. It is believed to be highly effective,
maximizing HIV eradication while minimizing the development of resistance to AIDS
drugs. Dean Barry R. Bloom of the Harvard School of Public Health observed that
these drug combinations have reduced AIDS deaths by 73 %.54
Some experts believe that providing HAART to large numbers of people in the
developing world will require major health infrastructure improvements. Effective
HAART requires supply channels that can make the drugs constantly available and
regular monitoring of patients, both to deal with side effects and to adjust medications
if drug resistance emerges. Many fear that if the drugs are taken irregularly, resistant
strains will emerge that could cause untreatable infections worldwide. Infrastructure
improvements are likely to come slowly, however, and the numbers receiving the
drugs are expected to remain small, at least initially.55
The high costs of antiretroviral drugs have also concerned many observers. For
example, Paulo Teixeira, the director of Brazil’s national health program, stated that
the “prices of these drugs are beyond the realm of this world.”56 Patients in developed
countries reportedly pay $10,000 to $15,000 annually for these medicines.57 Still,
HIV drug therapy is cost effective in extending lives in comparison with treatments
for other serious diseases. One recent study showed, for example, that coronary
artery bypass surgery and dialysis cost $113,000 and $50,000 per life-year saved,
respectively.58
In response to complaints over high drug prices, as well as other statements of
concern, drug manufacturers have agreed to lower prices. For example, on March 7,
2001, Merck & Co. offered to sell both crixivan (a protease inhibitor) and stocrin (a
non-nucleoside reverse transcriptase inhibitor) to developing countries at reduced
prices. Crixivan would sell for $600 per patient per year, as compared with $6,016
53Saunders, Carol S., “A practical update on antiretroviral therapy,” Patient Care (15 Jan.
2001).
54Bloom, Barry, R., “AIDS: The Drugs Won’t Be Enough,” Washington Post (9 Mar. 2001),
A27.
55See Copson, supra note 9.
56Buckley, Stephen, “U.S., Brazil Clash Over AIDS Drugs,” Washington Post (6 Feb. 2001),
A1.
57Murphy, John F., “S. African president denies emergency,” Baltimore Sun (15 March
2001), 1A.
58Centers for Disease Control and Prevention Report, supra note 46.

CRS-13
per year in the United States. Stocrin would sell for $500 per patient per year, as
compared with $4,730 per year in the United States.59 Other pharmaceutical
companies, including Bristol-Myers and Abbott Laboratories, have also agreed to
lower the prices of certain medications in the developing world.60
These pricing arrangements were achieved at a time when international disputes
regarding patents on HIV/AIDS drugs were ongoing in Brazil and South Africa. At
the time of the publication of this report, both of these controversies appear to have
been resolved. In order to provide additional context to the present debate regarding
patents on HIV/AIDS drugs, as well as more specific experiences regarding the
interaction between the TRIPS Agreement and domestic patent laws, this report next
considers these disputes in turn.
International Disputes Regarding
HIV/AIDS Drug Patents
Brazil
The Brazilian government has sponsored an anti-HIV/AIDS campaign that,
among other components, includes a drug distribution program. Government facilities
manufacture seven anti-HIV/AIDS medications, including antiretroviral combination
therapies, and distribute them to HIV/AIDS patients free of charge.61 Many of these
medicines are the subject of patent protection in other countries. However, because
Brazil did not allow patents to issue on pharmaceuticals prior to its accession to the
TRIPS Agreement, these drugs are not subject to Brazilian patent rights. Many
observers believe the Brazilian program to be highly successful and should serve as
a model for other nations.62 Brazil has been identified as “the only developing nation
that has found a successful formula to combat the AIDS menace.”63
In supports of its anti-HIV/AIDS program, Brazil has purchased two patented
drugs called efavirenz and nelfinavir. U.S.-based Merck & Co. sells efavrinz in the
United States under the trademark Stocrin for an annual wholesale price of $4,730 per
patient. U.S.-based Pfizer, Inc. and Switzerland’s Hoffman-La Roche Inc. share
rights to nelfinavir. This drug is sold under the trademark Viracept for a wholesale
price of about $7,100 per year in the United States. However, in late 2000, the
Brazilian government announced that if the prices of efavirenz and nelfinavir were not
59Nessman, Ravi, “S. Africa: AIDS Drug Need Is Heeded,” AP Online (8 March 2001).
60Harris, Gardiner, “Adverse Reaction: AIDS Gaffes in Africa Come Back to Haunt Drug
Industry at Home,” Wall Street Journal (23 April 2001), A1.
61Buckley, Stephen, “Brazil Becomes Model in Fight Against AIDS,” Washington Post (17
Sept. 2000), A22.
62Ibid.
63Rubin, Trudy, “Brazil sets standard in fight against AIDS,” Times Union (Albany, New
York)
(3 July 2001), A7.

CRS-14
reduced, it would allow Brazilian companies to manufacture the medicines despite any
local patents.64
Some observers believe that this dispute formed one round in an ongoing
discussion between the United States and Brazil regarding a compulsory licensing
provision found within the Brazilian patent law.65 After seven months of unsuccessful
negotiations, the United States on January 8, 2001, asked the WTO to form a dispute
settlement panel regarding Brazilian patent law. The United States specifically
requested the WTO to consider the compatibility of Article 68 of Brazil’s 1996
industrial property code with the TRIPS Agreement. According to the United States,
Brazilian law imposes a so-called “local working” requirement. Article 68 stipulates
that a patent shall be subject to compulsory licensing if the patented invention is not
manufactured in Brazil within three years from the date the patent issues.66
The Brazilian government countered by charging the United States with its own
set of TRIPS Agreement violations before the WTO. On January 31, 2001, the
Brazilian government requested consultations with the United States on the
compatibility of P.L. 96-517 (commonly known as the “Bayh-Dole Act”) with the
TRIPS Agreement.67
On its face, the U.S. complaint against Brazil seemed to have little to do with
public health or access to drugs. The local working requirement of the Brazilian
patent law applies to all patented inventions, not just pharmaceuticals. Another
provision of the Brazilian patent law, Article 71, permits compulsory licenses for the
purpose of addressing national health emergencies. The United States did not
challenge Article 71.68
Nonetheless, some commentators considered the U.S. WTO complaint to act in
opposition to Brazil’s anti-AIDS campaign. Mr. Michael Bailey, senior policy advisor
at Oxfam, a humanitarian non-governmental organization, reportedly claimed that the
U.S. suit is “part of the systematic intimidation of Brazil and developing countries to
say if you step out of what we define as the line on intellectual property, we will
64“Merck Brings Down Price of 2 AIDS Drugs in Brazil,” Chicago Tribune (31 Mar. 2001).
65See Buckley, supra note 61.
66“WTO Dispute-Resolution Panel Will Review Brazil Patent Law,” Generic Line (9 Feb.
2001).
67Capdevila, Gustavo, “Health-Trade: Low-Cost Medicine Debate Grips WTO, WHO,” Inter
Press Service
(28 Mar. 2001). The Bayh-Dole Act primarily addresses the distribution of
patents resulting from federally-funded research and development performed by outside
organizations, and provides for the licensing of government-owned patents. See Congressional
Research Service, Patent Ownership and Federal Research and Development (R&D): A
Discussion on the Bayh-Dole Act and the Stevenson-Wydler Act,
by Schacht, Wendy H.,
CRS Report for Congress RL30320, 11 Dec. 2000.
68See Letter to Greg Gonsalves, Director of Treatment Advocacy, Gay Men’s Health Crisis,
from Joseph Papovich, Assistant United States Trade Representative for Services, Investment
and Intellectual Property Rights (9 Feb. 2001).

CRS-15
clobber you in the courts.”69 An article in the British medical journal The
Lancet
predicted that “if the USA does not withdraw its case, the wrath of the
international community will be as furious as in South Africa and make Brazil the
moral winner whatever happens.”70
This prediction proved prophetic. On June 25, 2001, the United States withdrew
its complaint against Brazil. In a joint statement, Brazil and the United States said
that they had reached a “mutually satisfactory solution” under which Brazil would
consult with the United States prior to invoking the compulsory licensing provisions
of Article 68. In addition, the two countries would discuss the matter during bilateral
trade discussions scheduled for July 20, 2001.71
To the extent that the U.S. action against Brazil concerned pharmaceuticals,
observers differ in their estimations of the value of domestic production. Some
believe that local production of pharmaceuticals encourages local technical
competence and promotes sustained development.72 Others have expressed concerns
that some developing countries may not be able to enforce manufacturing standards
in order to ensure the consistent production of reliable drugs. They are concerned
that generic drugs that are not manufactured at full strength hold the potential not
only to fail the patient, but to foster the growth of drug resistant viruses that are
difficult to treat and can be passed on to others.73
South Africa
Alongside events in Brazil, international controversy has centered upon the
South African Medicines and Medical Devices Regulatory Act (SAMMDRA).74
Former South African President Nelson Mandela signed SAMMDRA into law in
December 1997. SAMMDRA grants the South African Minister of Health the power
to authorize parallel imports and compulsory licenses. Although SAMMDRA is of
general application, most of the discussion concerning its provisions has been in the
context of antiretroviral drugs for treating AIDS.
The enactment of SAMMDRA initially provoked concerns from the United
States Trade Representative (USTR). The USTR voiced concerns that SAMMDRA
allowed the South Africa government to issue compulsory licenses on more liberal
terms than the TRIPS Agreement allows. Upon receiving assurances from South
69Boseley, Sarah, “Opinion: Pharmaceuticals move their battleground to Brazil to stem the tide
of cheaper drugs,” Irish Times (20 April 2001), 14.
70South Africa’s moral victory,” The Lancet (28 Apr. 2001), 1303.
71DeYoung, Karen, “U.N. Chief Urges Billions for AIDS,” Washington Post (26 June 2001),
A1.
72‘t Hoen, Ellen, “Affordable Medicines for Developing Countries,” WHO/WTO Workshop
on Differential Pricing and Financing of Essential Drugs
(8-11 April 2001).
73“Inside the Industry AIDS Rx: Experts Question Quality of Foreign Generics,” American
Political Network
(25 April 2001), 9.
74Medicines and Medical Devices Regulatory Act, No. 90 (1997) (S. Afr.).

CRS-16
African authorities that SAMMDRA would be applied in a fashion that comported
with the TRIPS Agreement, the USTR ceased its objections.
The South African government was also the subject of a lawsuit commenced by
the Pharmaceutical Manufacturers Association of South Africa along with 39
international pharmaceutical companies.75 Filing suit in the Pretoria High Court in
1998, the plaintiffs challenged SAMMDRA in light of the TRIPS Agreement and on
a number of other legal grounds. Three years later, in the face of mounting
international scrutiny, the plaintiffs opted not to pursue the matter further. On April
19, 2001, the court approved the plaintiffs’ request to dismiss the case, effectively
ending the litigation.
Reaction to the South African legislation has been mixed. This dispute has
attracted many detractors of research-based pharmaceutical companies, including
Ramon Castellblanch of Quinnipiac University. Writing in the Hartford Courant, Mr.
Castellblanch asserted that “no drug-maker's profit on one line of drugs is worth the
risk of a holocaust.”76 Publishing in the UK newspaper The Guardian, commentator
Madeline Bunting has stated: “Put baldly, patents are killing people.”77 A dispatch
from the Cuban government stated that “it is unacceptable that commercial interests,
technicalities or the desire for profit be pitted against the right of the people to find
solutions to disease that constitute a scourge of humanity.”78
HIV/AIDS patient Andrew Sullivan took a different view in a recent essay
published in the Newark, New Jersey Star-Ledger.79 Sullivan observes that the reason
a treatment for HIV/AIDS exists is because a free-market system offers financial
rewards for medical research. Sullivan’s view is that “knockoff companies in India
and Brazil . . . are at best copiers of American products and at worst thieves.” He
closes with the observation that the “American private sector, which has been
responsible for the lion’s share of HIV/AIDS research, is now offering to pay for 90
percent of the cost of drugs for the developing world at the expense of future profits
and research.”
Events in Brazil and South Africa underscore the policy trade-offs inherent in
meeting two fundamental public health goals: ensuring broad access to existing
pharmaceuticals, yet maintaining a research and development pipeline that encourages
the introduction of new drugs. In developed nations with established intellectual
property laws, the patent system strikes this balance by providing robust but short-
term proprietary rights to the research-based pharmaceutical industry. Many
commentators believe that this calculus may not be wholly appropriate in a developing
75“South Africa’s moral victory,” The Lancet (28 Apr. 2001), 1303.
76Castellblanch, Ramon, “U.S. Should Let Brazil Continue Anti-AIDS Fight,” The Hartford
Courant
(9 Mar. 2001), A15.
77Bunting, Madeline, “The profits that kill: Dying for drugs,” The Guardian (12 Feb. 2001).
78“Cuba backs Brazil in AIDS drug patent row,” The Marketletter (12 Mar. 2001).
79Sullivan, Andrew, “In defense of drug companies,” Star-Ledger (Newark N.J.) (25 March
2001), 1.

CRS-17
world that not only faces a public health crisis of unprecedented proportions, but is
unaccustomed to rigorous intellectual property laws. Present HIV/AIDS drug patent
controversies will also likely hold consequences for the research-based pharmaceutical
industry, considerations this report takes up next.
Issues for the Research-Based
Pharmaceutical Industry
Current disputes concerning patents on HIV/AIDS-related medications raise
issues concerning public image, public health, research funding and intellectual
property for the research-based pharmaceutical industry. Some observers believe that
current controversies over HIV/AIDS drugs have cast drug companies in negative
light.80 Other commentators have stated that patent rights place the profits of the
pharmaceutical industry over the health of individuals. Another reason for this
negative impression, according to the Wall Street Journal, is that the HIV/AIDS crisis
has caused pharmaceutical companies to lower prices significantly on drugs sold in
the developing world.81 Some critics believe that these price cuts have revealed what
they see as overly high profit levels on innovative pharmaceuticals, as well as
significant levels of executive compensation, advertising expenditures and marketing
outlays.82
Supporters of the pharmaceutical industry have responded to these concerns by
citing the need of entrepreneurial drug companies to obtain returns on investment and
satisfy investors. The pharmaceutical industry further maintains that its profit levels
are needed to support costly and time-consuming research and development efforts.
If drugs are less profitable to research, develop and market, industry representatives
explain, future research and development efforts could be diminished.
Some observers believe that patents have never served as a significant barrier
between pharmaceuticals and HIV/AIDS patients. Patents on many HIV/AIDS drugs
have not been sought in many developing countries. Research has not revealed a
single patent infringement case filed against a health care provider of HIV/AIDS
drugs anywhere in the developing world. Even public health activist James Love,
director of the Consumer Project on Technology, has observed that “the patent
situation in a lot of these African countries is really hard to nail down.”83
Events in South Africa may support this observation. Since the pharmaceutical
industry’s April 19, 2001 abandonment of its challenge to the South African
80Macken, Julie, “The Growing GM and Drug Disaster,” Australian Financial Review (22
Mar. 2001), 41.
81See supra text accompanying notes 59-60.
82Harris, Gardiner, “Adverse Reaction: AIDS Gaffes in Africa Come Back to Haunt Drug
Industry at Home,” The Wall Street Journal (23 April 2001), A1.
83DeYoung, Karen & Brubaker, Bill, “Another Firm Cuts HIV Drug Prices,” Washington
Post
(15 Mar. 2001), A1.

CRS-18
Medicines and Medical Devices Regulatory Act, officials quickly stated that the South
African government was unlikely to provide treatments to HIV/AIDS patients in the
short term. According to Health Minister Manto Tshabalala-Msimang, South Africa
continued to lack the finances and health care infrastructure to distribute antiretroviral
drugs.84 Some commentators have disputed her claims, however, stating that South
Africa possesses sufficient resources to commence an anti-HIV/AIDS campaign but
lacks the political will to act.85 Some South Africa authorities have questioned the
link between HIV and AIDS, for example, and no government drug program is in
place to assist most South African AIDS sufferers.86
The HIV/AIDS crisis has nonetheless placed critical accounts of the patent law
into the popular press. Some observers believe that adverse public opinion could
impact the shape of the TRIPS Agreement itself. The incoming WTO Director-
General, Panichadpki Supachai, reportedly has made reform of the TRIPS Agreement
a top priority.87 Some believe that this effort could result in changes to the ground
rules of the international patent system before that system has the opportunity to
become firmly rooted. It might also lead to broader acceptance of parallel
importation as well as easing the conditions under which a WTO member could issue
a compulsory license.
Pharmaceutical industry actions that decrease foreign drug prices could lead to
diminished sales or lower prices in the United States. Price disparities may encourage
individuals to import into the United States low-cost drugs purchased abroad. The
availability of lower-cost drugs abroad may also strengthen efforts to obtain drugs
more cheaply in the United States. For example, some states are considering
measures to control the costs of medicines, including the creation of large drug-
purchasing pools. The increased bargaining power of such pools may result in
discounts for pharmaceutical purchases.88
Such efforts could result in noticeable short-term gains for consumers. Some
observers anticipate, however, that these trends hold the potential to inflict significant
financial losses for research-based pharmaceutical companies.89 One mechanism for
absorbing these revenue losses would be to increase the price of other products, in
particular the price of patented drugs that are not subject to price controls or
compulsory licenses. Some commentators believe that this possibility would be
84“No antiretrovirals for S African public sec.,” The Marketletter (25 June 2001).
85See Beattie, Alan & Pilling, David, “A fund of high hopes and huge obstacles,” Financial
Times
(21 June 2001).
86Masland, Tom, “Botswana's Hope; This tiny African nation is leading the war against the
AIDS pandemic,” Newsweek International (11 June 2001), 71.
87Capdevila, Gustavo, “Health-Trade: Low-Cost Medicine Debate Grips WTO, WHO,” Inter
Press Service
(28 Mar. 2001).
88See Harris, supra note 82.
89Singham, Shanker A., “Competition Policy and the Stimulation of Innovation: TRIPS and
the Interface Between Competition and Patent Protection in the Pharmaceutical Industry,” 26
Brooklyn Journal of International Law (2000), 363.

CRS-19
politically unpalatable in markets where such conditions exist, including the United
States. HIV/AIDS patients in the United States may object to paying more for the
same medication than their counterparts in other countries.
A second technique that pharmaceutical companies could employ is to reduce
expenditures, including advertising, marketing and research and development budgets.
Companies might elect to engage in activities with lower associated risk, such as the
production of generic drugs. Smaller research and development budgets may lead to
the decreased development of new pharmaceuticals. There has also been a significant
increase in mergers of enterprises within the pharmaceutical industry. These mergers
have been inspired by a desire to reduce costs and to concentrate research and
development efforts upon so-called “blockbuster drugs.” This outcome too could
lead to an overall reduction in drug development, if competition in innovation is
reduced and the incentive to invest substantially in research and development declines.
The conflict between encouraging innovative efforts on one hand, and
disseminating the fruits of these labors on the other, has frequently pitted innovators
and the user community against one another. But while the debate between drug
developers and pharmaceutical users is a familiar one, experience has provided a
paucity of rigorous analytical methods for investigating their competing claims. The
relationship between innovation and patent rights remains poorly understood. Current
economic and policy tools do not allow us to calibrate the patent system precisely in
order to produce an optimal level of investment in innovation. As Congress monitors
these issues, the debate will likely focus on how best to achieve a balance between
contemporary public health needs and a traditional engine of innovation.
Legislative Issues and Options
Legislation addressing some of these issues has been introduced in the 107th
Congress. To some, the tremendous contributions of the U.S. research-based
pharmaceutical industry to the global pharmacopeia suggest that modifications to the
patent law should be approached with caution. For others, the unprecedented impact
of the HIV/AIDS pandemic, as well as the nascent status of the patent law throughout
much of the developing world, demand relaxation of TRIPS Agreement obligations.
Should Congress review these issues, legislative options that could contribute to the
availability of inexpensive drugs for treating HIV/AIDS in the developing world, yet
sustain an environment conducive to pharmaceutical research and development
domestically, are explored below.
Codify Executive Order 13,155
One option may be to confirm legislatively an executive order concerning the
international intellectual property issues with respect to HIV/AIDS drugs. Events in
South Africa prompted a May 10, 2000, executive order from President Bill Clinton.
Executive Order 13,155 declared that the United States would not pursue
enforcement of intellectual property rights concerning patented HIV/AIDS drugs
where infringements make the drugs more readily available in sub-Saharan Africa at
lower prices. The executive order stated in part:

CRS-20
In administering sections 301-310 of the Trade Act of 1974, the United States
shall not seek, through negotiation or otherwise, the revocation or revision of any
intellectual property law or policy of a beneficiary sub-Saharan African country,
as determined by the President, that regulates HIV/AIDS pharmaceuticals or
medical technologies if the law or policy of the country:

(1) promotes access to HIV/AIDS pharmaceuticals or medical technologies
for affected populations in that country; and
(2) provides adequate and effective intellectual property protection consistent
with the Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS Agreement) . . . .90
On February 22, 2001, an official of the U.S. Trade Representative's office said the
Bush Administration was not considering any change in current "flexible policy" on
this issue.
On March 6, 2001, Senators Diane Feinstein and Russell Feingold introduced a
bill that would in part legislatively codify Executive Order 13,155.91 Titled “Global
Access to AIDS Treatment Act of 2001,” S. 463 would in part authorize expenditures
for enhancing health care systems infrastructure in developing countries; establish a
system of educational loan repayments in order to encourage medical professionals
to provide HIV/AIDS treatment and care in developing countries; and call for the
creation of an international HIV/AIDS pharmaceuticals database.
S. 463 also includes a policy declaration stating that “the United States will not
seek, through negotiation or otherwise, the revocation or revision of intellectual
property or competition laws or policies that regulate pharmaceuticals or medical
technologies used to treat HIV/AIDS or the most common opportunistic infections
that accompany HIV/AIDS in any foreign country undergoing an HIV/AIDS-related
public health crisis if the laws or policies of that country–(1) promote access to the
pharmaceuticals or medical technologies for affected populations; and (2) provide
intellectual property protection consistent with the [TRIPS Agreement].”
As exemplified by the U.S. challenge of the Brazilian compulsory license clause,
the effect of Executive Order 13,155 has been rather modest. That executive order
limits the actions of the United States, and in particular the discretion of the U.S.
Trade Representative, to the extent that a foreign patent law complies with the TRIPS
Agreement. However, many developing nations and public health nongovernmental
organizations wish to launch HIV/AIDS initiatives that may not comply with the
TRIPS Agreement. If enacted, S. 463 might prevent the United States, and in
particular the U.S. Trade Representative, from seeking additional commitments from
other nations beyond those stated within the TRIPS Agreement. Otherwise S. 463
appears to confirm the balance of rights and responsibilities reached in the TRIPS
Agreement.
90Executive Order 13,155 (10 May 2000).
91Coile, Zachary, “Bill Would Boost Access to AIDS Drugs,” The San Francisco Chronicle
(7 March 2001), A5.

CRS-21
Exemptions from International Obligations
On March 7, 2001, Representative Maxine Waters introduced H.R 933, titled
the “Affordable HIV/AIDS Medicines for Poor Countries Act.” Among other
provisions, the bill would prohibit the U.S. Trade Representative from initiating a
proceeding before the World Trade Organization challenging laws that promote
access to HIV/AIDS pharmaceuticals or medical technologies for the population of
the country. H.R. 933 would also direct the U.S. representative at the WTO to urge
an exemption for “developing countries, including sub-Saharan African countries,
from the application of any provision of the [TRIPS Agreement], or the application
of any provision of any other international agreement relating to intellectual property
rights, that would prohibit or otherwise restrict those countries from establishing or
implementing any law or policy that promotes access to HIV/AIDS pharmaceuticals
or medical technologies to their populations.”
One difference between S. 463 and H.R. 933 is that the House bill would require
the United States to forgive certain violations of the TRIPS Agreement. In contrast,
S. 463 supports foreign patent laws and policies regarding HIV/AIDS treatments only
to the extent that they comply with the TRIPS Agreement. A consequence of this
distinction is that H.R. 933 would effectively limit the actions the United States could
commence before the WTO Dispute Settlement Body. Because intellectual property-
based WTO actions necessarily involve claims of TRIPS Agreement violations,
however, S. 463 would not limit the sorts of actions that the United States could bring
before the WTO.
Differential Pricing
During an April 2001 conference jointly sponsored by the WTO and World
Health Organization, some observers announced their views that differential pricing
would best balance the needs of AIDS patients and the research-based pharmaceutical
industry.92 Differential pricing potentially allows companies that make patented drugs
to recover most of the costs of research and development in richer markets and at the
same time sell or license production at lower prices in developing countries. 93
Ellen ‘t Hoen, legal advisor for the international organization Médecins Sans
Frontières, has raised objections to a differential pricing regime. According to Ms.
‘t Hoen, differential pricing does not guarantee that the drugs will be priced at the
lowest possible level and will be available on a predictable, long-term basis. Ms.‘t
Hoen has also articulated concerns that differential pricing does not encourage
sustainability, e.g., local production, in the developing world.94
92See Otten, Adrian, “Closing remarks,” WHO/WTO Workshop on Differential Pricing and
Financing of Essential Drugs
(8-11 April 2001).
93See Congressional Research Service, The Cost of Prescription Drugs for the Uninsured
Elderly and Legislative Approaches
, by Resources, Science, and Industry Division , CRS
Report for Congress RL30373, 16 Jan. 2001.
94‘t Hoen, supra note 72.

CRS-22
In addition to these fundamental objections, several practical difficulties attend
the proposed differential pricing system. Experience teaches that generic drugs sold
in one part of the world may readily find their way into another. In particular,
domestic laws that support parallel importation encourage the availability of grey
market goods. Such arbitrage could cut into those markets that are supposed to
provide the profits that support research and development. Some observers are
concerned that this proposal might also require poor patients in the developed world
to subsidize rich patients in the developing world.95
For some persons, another pragmatic concern with a differential pricing regime
is that low drug prices in one country may spread to other countries.96 Authorities in
Canada, Italy, the Netherlands and other nations regulate local prices in part based on
international comparisons. If these comparisons involved developing countries, then
there is a possibility of substantially diminished drug prices in the developed world as
well. Of course, some pharmaceutical consumers and other individuals would likely
view this effect as a positive development.
If Congress believes differential pricing to be an appropriate policy, it could take
steps to encourage this regime. These might include discouraging parallel importation
by clarifying U.S. patent law on this point and encouraging other nations to take
similar steps; more effective border controls could be established in order to control
the importation of drugs designated for the developing world; and discouraging
regulation based upon foreign pharmaceutical prices.
Market Segmentation
Congress could also consider the recent proposal of economist Jean Lanjouw of
Yale University. Ms. Lanjouw has suggested that drug companies ought to elect
whether to procure and enforce patents in either the developed or developing world.97
This scheme takes advantage of current patent laws that require drug companies that
perform research activities in the United States to seek a so-called “foreign filing
license” from the USPTO prior to seeking foreign patent rights.98 The foreign filing
licensing regime has traditionally allowed appropriate authorities to determine
whether the invention contains information that implicates national security or other
interests prior to its exportation.99
Ms. Lanjouw’s proposal would expand the function of a foreign filing license.
In exchange for the grant of a foreign filing license, the U.S. government would
95Phillips, Michael M., “AIDS-Drug Plan Envisions 2 Markets for Firms’ Patents,” The Wall
Street Journal
(13 June 2001), A2.
96Danzon, Patricia M., “Differential Pricing: Reconciling R&D, IP and Access,” WHO/WTO
Workshop on Differential Pricing and Financing of Essential Drugs
(8-11 April 2001).
97Phillips, supra note 95.
9835 U.S.C. §§ 181-188.
99Hausken, Gary L., “The Value of a Secret: Compensation for Imposition of Secrecy Orders
under the Invention Secrecy Act,” 119 Military Law Review (1988), 201.

CRS-23
require pharmaceutical companies to elect whether to obtain patent rights in either the
developed or developing world. Ms. Lanjouw hypothesizes that a company with a
new malaria drug might elect to enforce patent rights in the developing world,
because that is where most cases of malaria arise. But a company with a new
HIV/AIDS drug would likely prefer to elect the developed world, Ms. Lanjouw
explains, since that is where sales of such a drug would prove most profitable. If the
foreign filing licensee violated its agreement, the licensee’s U.S. patent would be
rendered unenforceable.100
Some practical implementation issues arise with respect to Ms. Lanjouw’s
proposal. The developing world also has yet to establish a track record of
pharmaceutical patent enforcement. As a result, there may be few takers of Ms.
Lanjouw’s option to relinquish patent rights in the developed world. Such a trend
would effectively encourage drug companies to produce medicines for diseases
suffered by residents of the developed world, offering few prospects for individuals
who suffer from diseases common only in the developing world.
If the United States were the only nation to pursue the Lanjouw proposal,
domestic entrepreneurs would also appear to suffer a disadvantage not shared by
foreign competitors. Absent this policy, others would be free to both acquire and
enforce patents everywhere. This initiative could, at an extreme, cause relocation of
research and development activities outside the United States. As a result, such a
strategy, if deemed useful, might be more appropriate for international agreement than
unilateral action.
Global Settlement
Another policy option would be encouragement of a global, negotiated
settlement among the relevant actors. Congress might encourage a global, negotiated
settlement between pertinent entrepreneurial pharmaceutical companies and those
countries seeking increased access to HIV/AIDS pharmaceuticals. Such a settlement
could allow these actors, including the United States, to avoid proceedings before the
WTO Dispute Settlement Body. It also holds the potential to reduce the transaction
costs associated with individual dispute settlement and diminish disparities of drug
pricing and availability among different developing countries.
Humanitarian Aid
African heads of state, meeting in Abuja, Nigeria, on April 26-27, 2001, declared
an AIDS state of emergency on the continent and called for the creation of a Global
AIDS fund backed by contributions of $5 billion to $10 billion annually. United
Nations Secretary General Kofi Annan, returning from Abuja, told an April 30, 2001
meeting of the Council of Foundations in Philadelphia that a global “war chest”
funded at $7 billion to $10 billion per year was needed to fight HIV/AIDS. On May
11, 2001, President Bush made what he termed a “founding contribution” of $200
million to this war chest, which would also be used to fight malaria and tuberculosis.
100Phillips, supra note 95.

CRS-24
At the time this report was published, significant congressional activity was directed
towards authorizing heightened levels of U.S. contributions to this global fund.101
Appropriate Incentives for Pharmaceutical Companies
In addition to subsidizing medical care in the developing world, Congress might
also consider offering additional incentives to pharmaceutical companies in order to
conduct HIV/AIDS research and distribute the results of this research to the
developing world. A number of existing measures already appear to contribute to this
goal, including laws that enable the transfer of patent rights resulting from
government-sponsored research to the private sector;102 offer a tax credit for research
and experimentation;103 and provide tax advantages when pharmaceutical companies
make the charitable donations of medications.104 In light of increasing recognition of
the HIV/AIDS pandemic, Congress may wish to consider augmenting existing
programs or supplementing them with additional incentives for private enterprise to
engage in research and development.
Concluding Observations
A central challenge raised by the impact of HIV/AIDS is the treatment of
HIV/AIDS victims with advanced medications. The HIV/AIDS crisis may also
challenge the ability of the patent law to provide an environment conducive to the
development of new drugs. Achieving a balance between the needs of the research-
based pharmaceutical industry, and those of HIV/AIDS patients, entails a careful
weighing of moral, legal, economic and public health considerations. Humanitarian
aid, encouragement of differential pricing and more precise specification or relaxation
of TRIPS Agreement standards are among the options that Congress could consider
in responding to the HIV/AIDS pandemic.
101DeYoung, Karen, “U.N. Delegates Agree on AIDS Declaration,” Washington Post (27 June
2001), A20.
102Congressional Research Service, Patent ownership and federal research and development
(R&D): A discussion on the Bayh-Dole Act and the Stevenson-Wydler Act
, by (name re
dacted), RL 30320, Dec. 11, 2000.
103Congressional Research Service, The Research and Experimentation Tax Credit: Current
Law and Selected Policy Issues for 106th Congress
, by (name redacted), RL 30479, Jan. 23,
2001.
104See Crimm, Nina J., “A Tax Proposal to Promote Pharmacologic Research, to Encourage
Conventional Prescription Drug Innovation and Improvement, and to Reduce Product Liability
Claims,” 29 Wake Forest Law Journal (1994), 1007.

EveryCRSReport.com
The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the
Library of Congress, charged with providing the United States Congress non-partisan advice on
issues that may come before Congress.
EveryCRSReport.com republishes CRS reports that are available to al Congressional staff. The
reports are not classified, and Members of Congress routinely make individual reports available to
the public.
Prior to our republication, we redacted names, phone numbers and email addresses of analysts
who produced the reports. We also added this page to the report. We have not intentional y made
any other changes to any report published on EveryCRSReport.com.
CRS reports, as a work of the United States government, are not subject to copyright protection in
the United States. Any CRS report may be reproduced and distributed in its entirety without
permission from CRS. However, as a CRS report may include copyrighted images or material from a
third party, you may need to obtain permission of the copyright holder if you wish to copy or
otherwise use copyrighted material.
Information in a CRS report should not be relied upon for purposes other than public
understanding of information that has been provided by CRS to members of Congress in
connection with CRS' institutional role.
EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim
copyright on any CRS report we have republished.