In response to these licensing deals and a further deal with GlaxoSmithKline whereby Aspen would be the exclusive distributor of another forty Glaxo medicines, Aspen is just finishing a new $23 million production facility set to open next year.

However, despite these limited concession by the drug companies and Aspen's planned expansion, the Treatment Action Campaign had complained all along that merely transferring the monopoly from a patent holder to a single licensee would not satisfy its demand for increased competition. Accordingly it had demanded that licenses be offered to other qualified licensees.

In this regard, several India producers had been quietly negotiating on their own in order to become competitive in the South African market. For example, Cipla had previously filed a complaint to the Competition Commission because its request for voluntary ARV licenses from the major pharmaceutical companies had been effectively denied because of patently ridiculous demands for proprietary information. Cipla had also established a subsidy enterprise in Cape Town, Cipla-Medpro, that intends to enter the generic market. Another producer, Ranbaxy Laboratories of Delhi, had started an antiretroviral joint venture with Adcock Ingram called Tembalani or Tiger Brands.

These three companies, Aspen, Cipla, and Ranbaxy, were three of the four companies involved in the original Clinton Foundation initiative (a fifth, Hetero, has since been added). Although the formal agreement between the generic producers and the Clinton Foundation is limited to just South Africa, Rwanda, Mozambique, Tanzania, Haiti, the Bahamas, the Dominican Republic, and the Eastern Caribbean States, the expectation is that the new lower prices will be made available to other countries and other programs besides those administered by the Foundation.

The new agreement with GSK announced today includes Aspen and Thembalami up to two additional manufacturers who meet "reasonable criteria which includes registration with the Medicines Control Council and the meeting of safety and efficacy obligations." BI's license is marginally narrower and includes Aspen and other two other producers. The licenses give the generic licensees express permission to market ARVs more widely in both public and private sectors throughout Sub-Saharan Africa. No longer will these two drug companies be permitted to seek high profits from rich elites thereby restricting access for affordable ARVs to many workers and middle-income earners who cannot afford high price medicines even where they have some medical aid coverage. Likewise, GSK and BI will no longer be permitted to try to limit generic ARV sales within narrow geographical and national boundaries, thereby reducing the ability of generic producers to reach meaningful economies of scale thereby permitting efficiencies in sourcing active pharmaceutical ingredients and in manufacturing processes so that prices can fall even further. Finally, the new agreement dramatically lowers GSK's previous royalty rate of 30% to 5% and BI's from 15% to 5%, much closer to the industry norm. The end result of this historic agreement will be a handful of generic companies capable of producing assured quality antiretrovirals that will compete against each other to reach even lower prices.

An additional advantage of the expanded number of licensees is that it will permit entry by companies that have already had their ARVs registered by the Medicines Control Council in South Africa. Aspen has one such approval already, but its other ARV products are awaiting final approval at the Council. Cipla and Ranbaxy, on the other hand, have already gained approval on several of their ARV products and are awaiting further approval of their fixed-dose combination ARVs. These combinations have recently been pre-qualified by the World Health Organization which should help speed approval in South Africa as well.

Once these fixed-dose medicines are approved, the true cost savings from the Competition Commission case will be quite clear. At the end of the day, South Africa will be able to buy superior FDC medicines for 1 million people for the same total dollars being spent by 10,000 rich South African in 2000. With ARVs priced at a penny on the dollar, the South African government finally relented on its stubborn refusal to commit to a national treatment plan.

Cost Comparisons of Annual Treatment |-------------------+---------------+---------------+---------------+---------------|
| ARV | Private Sector| Branded Public| Previous | New Clinton|
| | Price S.A. | Sector Price | cheapest | Foundation |
| | 07/03 | 07-10/03 | generic price | Price |
| | | | 05/03 | |
|-------------------+---------------+---------------+---------------+---------------|
| AZT (zidovudine) | $1073.10 | $212* | $140 | |
|-------------------+---------------+---------------+---------------+---------------|
| 3TC (lamivudine) | $1178.95 | $70* | $65 | |
|-------------------+---------------+---------------+---------------+---------------|
| AZT+3TC(combivir) | $1474.60 | $237* | $204 | |
|-------------------+---------------+---------------+---------------+---------------|
| DdI (didanosine) | $423.51 | $310 | $185 | |
|-------------------+---------------+---------------+---------------+---------------|
| d4T (stavudine) | $74.71 | $49 | $31 | |
|-------------------+---------------+---------------+---------------+---------------|
| nevirapine | $664.30 | $438 | $105 | |
|-------------------+---------------+---------------+---------------+---------------|
| efavirenz | $590.39 | $500 | $438 | |
|-------------------+---------------+---------------+---------------+---------------|
| nelfinavir | $1256.95 | $880 | $880 | |
|-------------------+---------------+---------------+---------------+---------------|
| d4T+3TC+nevirapine| $1917.96 | $557* | $201 (FDC) | $132 (FDC) |
|-------------------+---------------+---------------+---------------+---------------|
| Combivir+nevirapin| $2138.90 | $675* | $383 (FDC) | $138 (FDC) |
| e | | | | |
|-------------------+---------------+---------------+---------------+---------------|
| Combivir | $2064.99 | $737* | $642 | |
| +efavirenz | | | | |
|-------------------+---------------+---------------+---------------+---------------|
| Combivir | $2731.55 | $1117* | $1084 | |
| +nelfinavir | | | | |
|-------------------+---------------+---------------+---------------+---------------|

* Based on 32% price concessions announced October 16, 2003.

Just as there will be significant price advantages arising from the new licenses, there will be tremendous public health advantages from procuring medicines that patients can take on a simplified schedule thereby increasing adherence to life-long ARV therapy. The WHO has made procurement and utilization of fixed-dose combination medicines a cornerstone of its 3-by-5 treatment plan. As it said recently, "The availability of 'user-friendly' fixed-dose combinations (FDCs) that preclude omitting one or more drugs from the treatment regimen is another important consideration as this improve adherence and limits the emergence of drug resistance." (WHO, Scaling up antiretroviral therapy in resource-limited settings: Treatment guidelines for a public health approach -- 2003 Revision.) In particular, the WHO has recommended AZT or d4T combined with 3TC and with either nevirapine or efavirenz. At present only d4T/3TC/nevirapine and AZT/3TC/nevirapine are available as three-in-one fixed dose combinations, but the agreements specifically state that the three ARVs covered by the agreement can be made in combination with any other ARV for which the licensees have a license.

The licensing agreements forced on the drug companies as a result of the Competition Commission case suggests that drug companies do not have carte blanche to set profit-maximizing prices and that even their so-called discount prices are unnecessarily high, particularly those charged in private sector markets. Big Pharma's excessive pricing and refusal to license have contributed to the premature, predicable and avoidable deaths of thousands people living with HIV/AIDS. However, treatment activists, led by the Treatment Action Campaign helped create a perfect storm for universal AIDS treatment in South Africa. They pressured the drug companies to open themselves to assured quality generic competition permitting prices to plummet. And they engaged in a protracted public campaign against the South African government, first forcing it to adopt a universal mother-to-child-transmission prevention program and then a year later to commit to a national treatment plan that will provide universal coverage within five years. Although a great deal remains to be done to equalize and extend the health system in South Africa, to recruit and train health care practitioners, to improve drug procurement and distribution systems, and to prepare communities for rapid uptake of voluntary counseling and testing and for a spectrum of HIV/AIDS therapies, two major barriers to treatment have been removed.

Reservations about the license agreements

Although there is much to celebrate in the December 10 licensing agreements, there are also some downsides as well. Most importantly, it would have been wonderful to have a precedent of a compulsory license issued in Africa on the grounds of excessive pricing and failure to issue voluntary licenses. This precedent would have set a strong standard within South Africa for ARVs and other drugs. It might also have encouraged other developing countries to issue compulsory licenses and to adopt stronger competition legislation that would better regulate anti-competitive practices by Big Pharma and other transnational corporations. Hearings before the Competition Tribunal would also have opened the door on Pharma's pricing practices, both for Northern and Southern consumers. Major drug companies get apoplectic at the thought that outsiders would learn their true investments in research and development on particular drugs, their expenditures on marketing, their true marginal costs of production, and their extraordinary rates of profit.

Similarly, although the licensing agreements open up competition, they do so only to a limited and hand-selected group of companies. Aspen and Ranbaxy, for example, have already forged corporate ties with GSK and there is some concern that it would have been better for there to be truly open licenses -- licenses available to any generic producer who succeeded in getting its products registered in South Africa. Three and four licenses are good, but more might have been even better.

A final reservation about the licensing agreements arises not so much from the agreements themselves as from the U.S.'s persistent pursuit of heightened intellectual property protections. Although the U.S. lost some of its pharmaceutical hegemony in the Doha Declaration on the TRIPS Agreement and Public Health, it regained some ground in the August 30 Paragraph 6 Implementation Agreement as modified by the Chairperson's Statement. This recent WTO agreement binds developing countries in a mass of red tape as they figure how to import a broad array of medicines from abroad to address their multi-faceted public health needs. But, the U.S. is not content with its recent August 30 semi-victory. Instead, it is seeking enhanced intellectual property protections in its current negotiations with the South African Customs Union. In this negotiation, based on recent precedent with Morocco and Chile, the U.S. may be seeking to limit the grounds upon which a country might issue a compulsory license (emergencies, non-commercial government use, or anti-competitive practices only) and it specifically may be trying to eliminate the right to export medicines produced under a compulsory license. In addition, the U.S. may be seeking to eliminate the right of parallel importation (comparison shopping in other countries where identical patented drugs have been sold more cheaply by or with the permission of the patent holder) and to extend the length of patents. Even worse, the U.S. is know to be seeking a five-year period of absolute data exclusivity with respect to confidential data it has submitted to a medicines registration agency, like the Medicines Control Council in South Africa. Accordingly, generic companies would have to wait five years to register their drugs even after a compulsory license was issued because none of them could afford to duplicate clinical trials. Thus, an additional downside of the voluntary license agreement may be that it will take pressure of South Africa in the SACU negotiations. Since its ARVs will be taken care of, South Africa may not be so keen to preserve all of its compulsory licensing rights vis a vis all its other public health medicines. That portends trouble down the road.

Details of the Competition Commission Case

By their very nature, patents are anti-competitive because they enable the patent holder to exclude other manufacturers and vendors. Therefore, although "normal" exploitation of patent rights might not constitute an anti-competitive practice, excessive prices and refusals to license might be held anti-competitive in particular settings. Thus, the most promising pro-competition/public health arguments focus on both exclusionary act and excessive pricing doctrine and on a resulting access/affordability gap for the product. Given that the South African competition scheme is designed to prohibit exclusionary acts, it is possible to argue that exclusivity, and its associated higher prices, deny access to those who need medicines, justifying the issuance of a compulsory license. Similarly, if medicines are not being provided on a reasonably affordable basis, bearing some reasonable relation to the costs of production, or if exclusionary refusals to license unreasonably restrict competition and lower prices, then a country could issue a compulsory license. Because anti-retroviral medicines have been largely discovered and developed with public money,1 because industry profits have been so high,2 because the prices of anti-retroviral drugs have been grossly inflated, and because the industry has resisted licensing competition, there is a strong argument that patent-holders of essential antiretrovirals have abused their market position and that an export-promoting, Article 31(k)3 compulsory license could be issued.

An alternative access gap theory focuses on patents as essential facilities, facilities that must be licensed to others so that a competitor can supply the product. A particularly important version of this theory focuses on the issue of downstream innovation, product improvement, or product combinations. Here, the essential facilities doctrine is utilized where a follow-on product cannot be marketed without approval or a license from one or more patent holder4 and where fixed-dose combination medicines can't be produced without licenses from several competing patent holders.

As discussed above, the fixed-dose combination, essential facilities theory is particularly important in light of a recent recommendation of the WHO recommending fixed-dose ARV combinations as a first line therapy in resource poor settings. Drug companies do not make fixed-dose combinations of the most effective ARV combinations because patents on the different medicines are held by different companies and those companies have been unwilling thus far to cross-license medicines with competitors.5 This refusal has had negative public health consequences because it increases patients' pill burden and complicates patient compliance with complex pill-taking schedules. Generic companies, on the other hand, face no such constraint and gladly produce combination medicines when patent rules do not prevent them from doing so.

The South African Competition Act 89 of 1998 provides remedies for anti-competitive practices and presumably permits anti-competitive compulsory licenses as a remedy. Section 8 of the South African Competition Act prohibits dominant firms from engaging in excessive pricing, refusing access to an essential facility, and engaging in other exclusionary acts:

8. Abuse of dominance prohibited. It is prohibited for a dominant firm to -

• (a) charge an excessive price to the detriment of consumers;
• (b) refuse to give a competitor access to an essential facility when it is economically feasible to do so;
• (c) engage in an exclusionary act, other than an act listed in paragraph
• (d), if the anti-competitive effect of that act outweighs its technological, efficiency or other pro-competitive gain;

Section 1 provides key definitions:

• (viii) 'essential facility' means an infrastructure or resource that cannot reasonably be duplicated, and without access to which competitors cannot reasonably provide goods or services to their customers;
• (ix) 'excessive price' means a price for a good or service which

• (aa) bears no reasonable relation to the economic value of that good or
• service; and
• (bb) is higher than the value referred to in subparagraph (aa);

(x) 'exclusionary act' means an act that impedes or prevents a firm entering into, or expanding within, a market; (xii) 'goods or services', when used with respect to particular goods or services, includes any other goods or services that are reasonably capable of being substituted for them, taking into account ordinary commercial practice and geographical, technical and temporal constraints;

In its recently announced decision, the South African Competition Commission supported three theories for issuing a pharmaceutical compulsory license. Under the first theory, compulsory licenses should be granted whenever it can be shown that there is a gap between need for the medicine and its accessibility due to excessive pricing, in other words, whenever an "above market value" price contributes to the access gap. The second theory involves the failure to grant voluntary licenses which can be considered exclusionary where the anti-competitive effect of non-licensing outweighs any "technological, efficiency or other pro-competitive gain." Under the third access-to-an-essential-facility theory, a compulsory license should be issued whenever a patent holder's failure to grant voluntary licenses denies consumer access to a competitor's product. This theory has particular salience with respect to downstream innovation, such as fixed-dose combination drugs. Just as dominant firms are prohibited from charging excess prices that limit access, they are prohibited from engaging in exclusionary acts such as refusing to supply scarce goods to a competitor when supplying them is economically feasible. This essential facilities/refusal to deal rule applies most strongly where a generic company is seeking a license to make a fixed-dose combination of medicines patented by several different companies.

Menzi Simelane, a commissioner at the Competition Commission, said in the Commission's media release in October that "Our investigation revealed that each of the firms has refused to license their patents to generic manufacturers in return for a reasonable royalty. We believe that this is feasible and that consumers will benefit from cheaper generic versions of the drugs concerned. We will request the Tribunal to make an order authorising any person to exploit the patents to market generic versions of the respondents patented medicines or fixed dose combinations that require these patents, in return for the payment of a reasonable royalty. In addition, we will recommend a penalty of 10% of the annual turnover of the respondents' ARVs in South Africa for each year that they are found to have violated the Act."

The announcement today is more self-congratulatory and praises the voluntary agreement as "substantially similar to the successful outcomes which we would have hoped to achieve at hearing before the Tribunal, namely the issuing of licenses to generic manufacturers of antiretroviral drugs. We think it is far more important to have broadened access to cheaper ARVs for people with HIV/AIDS through price reductions by generic manufacturers [than getting a fine or administrative remedy]. The introduction of generic substitutes should result in a drastic reduction in the prices of antiretroviral drugs."

Given the willingness of drug companies to go to court to enjoin Competition Tribunal cases (recent court case settled only after a three-year hiatus), given uncertainty about untested legal merits of the Competition Commission case, and given deaths attributable to delay, it is understandable that the TAC and other activists in South Africa and elsewhere are cautiously celebrating yet another hard-won victory against pharmaceutical hegemony. Just as it had in Brazil, the credible threat of compulsory licenses forced concessions from major drugs companies in Brazil additional price reductions and in South Africa expanded licenses. These agreements will be most useful if they set a standard for voluntary licenses being negotiated in the shadow of compulsory licensing threats elsewhere. At a minimum, these licenses should permit sales in public, private, and NGO sectors, expand geographical scope to reach efficient economies of scale, be open to a reasonable number of producers, permit combination of licenses and production of fixed-dose medicines, and be based on modest royalties. Only when robust generic production is achieved, for AIDS and other life-saving medicines, will the treatment gap in poor countries be closed. Only then will recovery lines get longer than death queues.

1. Consumer Project on Technology, Additional Notes on Government Role in the Development of HIV/AIDS Drugs (Feb. 23, 2000).

2. Public Citizen's Prescription Drug Update - Drug Company Profits (Oct. 11, 2000) (a 38% return on equity, making the pharmaceutical industry the most profitable sector in the U.S. economy).

3. Fortunately, as referenced above, there is a predominately-for-the-domestic-market exception in Article 31(k) where a patent-holder has been found to have anti-competitively abused its patent, by excessive pricing or otherwise, in the producing country. In these circumstances, a generic producer operating under a compulsory license

could produce on a large scale for export, most relevantly even where a non-special, non-Paragraph-6 compulsory license had been granted in the importing country. Since TRIPS provides no definition of what might constitute an anti-competitive practice and since Article 1 states that Members should "determine the appropriate method of implementing the provisions of [TRIPS] within their own legal system and practice," it seems clear that individual countries are permitted to develop definitions of anti-competitive behavior so long as they are not transparently TRIPS-nullifying. In this regard, Article 40 directly empowers Member states to address anti-competitive practices in licensing agreements.

4.Cf. Robert Pitofsky, Donna Patterson and Jonathan Hooks, The Essential Facilities Doctrine under U.S. Antitrust Law, 70 Antitrust Law Journal 443 (2002); Valentine Korah, The Interface Between Intellectual Property And Antitrust: The European Experience, 69 Antitrust Law Journal 801 (2002).

5. GlaxoSmithKline does make a fixed dose of its own patented ARVs and one of these, Combivir, is an important therapy. However, Trimune, its three-medicine, fixed-dose combination is no longer a recommended therapy.

6. Section 7 states "A firm is dominant in a market if - (a) it has at least 45% of that market; (b) it has at least 35%, but less than 45%, of that market, unless it can show that it does not have market power; or (c) it has less than 35% of that market, but has market power.

7. Section 1 also provides guidance on interpretation of the Act:

(2) This Act must be interpreted -

• (a) in a manner that is consistent with the Constitution and gives
• effect to the purposes set out in section 2; and
• (b) in compliance with the international law obligations of the
• Republic.

(3) Any person interpreting or applying this Act may consider appropriate foreign and international law.

Section 2 defines the purposes: 2. Purpose of Act The purpose of this Act is to promote and maintain competition in the Republic in order -

• (a) to promote the efficiency, adaptability and development of the economy;
• (b) to provide consumers with competitive prices and product choices;
• (c) to promote employment and advance the social and economic welfare of South Africans;
• (d) to expand opportunities for South African participation in world markets and recognise the role of foreign competition in the Republic;
• (e) to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and
• (f) to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons.