The Patent Pirates Are Finally Walking The Plank

Pfizer Inc. sells Feldene, its patented anti-inflammatory drug, to S ao Paulo's retail druggists for the wholesale price of 31c per capsule. But local generic manufacturers supply the drogarias with five different imitations of Feldene, under other names, at wholesale prices from 25c to 67c a capsule. Mexico City's farmacias, meanwhile, sell knock-off copies of Feldene bought from local producers for 29c to 33c per capsule.

What all of these druggists are really selling is intellectual property--the results of Pfizer research that developed Feldene's basic molecule, piroxicam, at a cost of tens of millions of dollars. Local competitors are able to pirate the drug legally because Brazil doesn't recognize drug patents, while Mexico's recently tightened patent safeguards don't apply to copies already on the local market. Some countries, such as Thailand, don't even try to enforce their own patent and copyright laws.

The result is a loss of global sales estimated at up to $17 billion a year (chart) for some of the most competitive U.S. industries. Besides drugmakers, these include producers of copyrighted software, movies, sound recordings, and books. Aside from recovering the sales lost to theft, these industries could increase their foreign revenues by an additional $10 billion or so over time if marketing development abroad weren't deterred by piracy. Theft is "the biggest obstacle to foreign market access," says Harvey E. Bale Jr., senior vice-president of the Pharmaceutical Manufacturers' Assn., which groups U.S. research-based drugmakers.

Not everyone agrees. Government officials and industrialists in many developing countries argue that they have every right to copy existing products. "Who is robbing who?" asks Jose Fernando Magalh aes, a director of Sintofarma, a Brazilian company that makes one of the local copies of Feldene. "Are we robbing from the patient? I don't think so." Like other Brazilian drugmakers, he calls for compulsory licensing of patented drugs to local producers. "Patients in any country must have the option of buying a drug at the best possible price," he says.

Like movies and software, drugs are fairly easy to steal using patent data or chemical analysis. And manufacturing a drug is cheap, compared with the sky-high cost of inventing it.

Nevertheless, afflicted U.S. industries, backed by increasingly tough Washington negotiators, are beginning to score victories after years of frustration. Mexico is offering 20-year patent protection and other safeguards. Even China, a notorious pirate, agreed on Jan. 16 to enact stricter patent and copyright safeguards--and to enforce these rules against violators, many of them state-run companies. Two days earlier, Canada announced that it is closing a big loophole in its patent law that forced patent holders to license their drugs to local generic producers before the patents ran out.

BIG STICK. What's spurring these U.S. victories is hardball negotiating with key trading partners. Mexico enacted its new law in hopes of winning a free-trade deal with the U.S. And China promised to leash copycats because U.S. Trade Representative Carla A. Hills threatened otherwise to slap heavy duties on Chinese exports to the U.S. worth up to $1.5 billion.

The actions to make the world safer for intellectual property will spur investments by U.S. companies to export more patented and copyrighted products and also step up production abroad. Of all the major American sectors plagued by piracy, the pharmaceutical industry is the largest and the most multinational. In Argentina, where legislators are expected to act by midyear on a bill to strengthen patent protection, Pfizer has doubled its sales force and is "spending money like mad to introduce new products," says Brower A. Merriam, executive vice-president at Pfizer International. In Canada, Johnson & Johnson has expanded its research 50% as a result of earlier steps by Ottawa to strengthen patent protection.

U.S. moviemakers and other copyright industries are also benefiting. "The great growth area is abroad," says Jack Valenti, president of the Motion Picture Association of America. "Wherever we can go in because we are protected, we go in immediately." In South Korea, a crackdown on pirates prodded by Washington hiked U.S. moviemakers' revenues to $100 million last year, up from $7 million in 1988.

The U.S.'s country-by-country negotiations are one side of a two-track campaign. The second is the trade bargaining that will soon reach a make-or-break stage in the 102-nation General Agreement on Tariffs & Trade (GATT). Although American negotiators have been pushing for a worldwide agreement to curb intellectual pirates, U.S. companies worry that a compromise draft accord, proposed by GATT Director General Arthur Dunkel, could give piracy free rein for another decade by allowing a 10-year transition before countries must clamp down on pirates.

Even if the GATT talks fail, the U.S. get-tough approach in dealing with individual countries is likely to continue yielding results, particularly in Latin America. U.S. bargaining power has increased because Latin economic reformers are eager to strengthen ties with the U.S.

MEXICAN MODEL. A watershed for intellectual-property protection was Mexican President Carlos Salinas de Gortari's 1990 decision to seek a North American Free Trade Agreement (NAFTA). This gave U.S. drugmakers and copyright industries unusual political leverage. They seized the opportunity to convince Salinas that strict Mexican safeguards for intellectual property were the essential quid pro quo. "We got congressmen to talk to the Mexican President," recalls Pfizer Chairman and Chief Executive Officer Edmund T. Pratt Jr. "We threatened not to support the effort for a free-trade agreement."

Now, Trade Representative Hills is holding up Mexico's law as the model for the rest of the hemisphere. A key provision in the Mexican law is protection for drugs already patented in the U.S. or other countries--not just new drugs patented after the law took effect last June. This is crucial, manufacturers say, to safeguard the new drugs coming down the pharmaceutical pipeline. There's big money at stake: an average $230 million each to develop and test new drugs.

Argentina seems likely to follow Mexico's example. A draft intellectual property bill being debated by legislators is "a very modern law," says Ernesto Buesa, managing director of Merck & Co.'s Argentine marketing subsidiary. In the 1980s, by contrast, Merck and other U.S. and European companies shut down many drug plants in Latin America because of piracy and other troubles from price controls to inflation. Merck turned over manufacturing to a licensee in Argentina and to a joint-venture partner in Brazil. Eli Lilly & Co. also pulled out of Argentina, where it now licenses products to another manufacturer, and Chile. A flock of other drugmakers, including Upjohn, Parke-Davis, Schering-Plough, and Syntex, exited from Brazil.

There are still plenty of question marks in Latin America, to be sure. The biggest imponderable is Brazil. A new draft patent law, which the Brazilian Congress could act on by June, is still highly nationalistic: It denies protection to drugs that are not made in Brazil, a provision intended to force patent holders to manufacture or license them locally.

`A BEATING.' Despite such problems, Brazil is a hard place for the multinationals to stay away from, simply because of its size as Latin America's biggest market. Despite pullbacks by a number of drugmakers, others have stayed on. Lilly is investing $10 million at its Campinas plant, near S ao Paulo, to expand capacity and incinerate wastes. Pfizer doubled its investment in the past two years to supply a veterinary drug for poultry to most of its worldwide markets. Now, Pfizer is considering an additional $20 million investment in veterinary products in Brazil to supply the big local market and for export. But Pfizer "is taking a beating" in pharmaceuticals and will shut down some facilities for those products, says Merriam.

While U.S. companies are the biggest victims of product theft as a group, European drug companies also have a lot at stake. The single most-pirated product may be Zantac, an ulcer medicine made by Britain's Glaxo Holdings PLC that is the world's biggest-selling drug. The "worst villains" are Brazil and India, according to Glaxo Director Jeremy A.W. Strachan. In Brazil, local companies started making Zantac under various names even before Glaxo launched the drug there.

That is why Glaxo and other European drugmakers are closely watching both the GATT negotiations and the U.S. drive to curb intellectual-property theft. If the GATT talks fail, Strachan figures the second-best alternative is for other industrial countries to follow the U.S. lead, thus enlisting the clout of major European governments in the U.S. arm-twisting strategy. By threatening retaliation, the Europeans could help "pick off the worst offenders one by one," Strachan says.So GATT or no GATT, the global campaign against patent pirates could just bestarting.

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