Intellectual property: Pharmaceuticals, public health and subtle exploitation

If China is the factory of the world, then India is the pharmacy of the world, exporting over 60% of production to the developing world, most noted for supplying generic ARV medicines. Courtesy of India's generic drugs, such as CIPLA's (2001) triple fixed dose combination tablet (FDC) - approved by the WHO, prohibitive costs of $10 000-15 000 per person each year were reduced to $350, further decreasing to $140 annually.

Then came 2005, signifying the deadline of the transition period for compliance by low- and middle-income countries (LMICs) to the Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS), designed to protect the 'intellectual property' rights (IP) of Big Pharma. Prior to TRIPS, drugs were considered 'basic needs'; countries were better able to formulate systems structured to serve socio-economic needs. Unlike many developing countries in the position to develop local industries, India did not buckle to the pressure exerted by systemically powerful nations eager to penetrate 'public health' markets.

Post-2005, India continued its attempt to manouver, as smoothly as possible, the jagged edges of TRIPS's draconian IP rule-of-law: In 2007, India's High Court ruled against the Swiss pharma giant Novartis, refusing the company right of patent for a modified version of an existing drug - an old IP move feigning 'innovation', designed to prolong patent life.

By 2008, 96 of 100 countries purchased generic ARVs from India, with Indian products comprising 80% of donor-funded developing country markets, and 87% of total purchase volumes. In Africa, just 7% of ARVs are Western patented medicines, while more than 90% are generic drugs, chiefly produced by Indian corporations.

The drastic cost difference between the two has often been packaged as one formulated to recoup costs of research. Big Pharma claims that generic companies - manufacturing existing medicines, are able to bypass these costs.

Yet, as has been frequently noted, such claims cannot withstand scrutiny. As MIT Professor Rebecca Henderson noted in a Pfizer newsletter over a decade ago, "Research has been, in general, largely funded by the American taxpayer, and in the past has resulted in products that have revolutionized medicine."

In 2003, Médecins Sans Frontierès (MSF) documented in a letter to Robert Zoellick U.S. Trade Representative, ahead of CAFTA negotiations: 'MSF was able to pay between 75% and 99% less for generics than the government of Guatemala paid for originator drugs. For example, the price of the ARV d4T (40mg) from Bristol-Myers Squibb was $5,271 per person per year compared with just $53 per person per year from a generic manufacturer.'

Ironically, some 80% of Western ARVs are purchased in developed countries, rendering developing markets in continents like Africa, almost irrelevant. South Africa, of course, was in the eye of the storm when 39 drug companies brought suit against the government for including generic medicines in the legal framework of the Medicines Act. In April 2001, the companies withdrew their suit following intense engagements on the part of the government, and especially, national and international civil society resistance, notably the Treatment Action Campaign (TAC). But the rumble began long before that, evidenced in the 'Battle of Seattle' (1999) when as many as 100 000 protestors took to the streets, challenging the structural injustice of globalisation.

India's own shining progeny - Fareed Zakaria, would describe the protests that helped give birth to global change as, 'anti-democratic'. According to Zakaria, those who protested were 'rich and privileged'. (The rest, we beg to differ, could not afford the plane tickets.)

Yet beyond the obvious public health genocide caused by the greed of pharmaceutical corporations, intentionally holding developing governments hostage (according to the Doha Declaration, 'The TRIPS agreement does not and should not prevent members of the WTO from taking measures to protect public health'), there exists another more subtle form of exploitation:

IP constitutes the most substantial class of intangible assets - geographically mobile sources of vast corporate income that remain difficult to financial evaluate via arms length transfer pricing. This is especially true concerning transactions between subsidiaries of the same corporation. More often than not, intangible assets are shifted to secrecy jurisdictions such as Delaware, specialising in IP holding companies that provide 100% tax exemption on royalty income - one of several tax holidays.

Big Pharma corporations like Pfizer, Novartis, Glaxosmithkline, - as well as over 60% of Fortune 500 multinationals, all maintain entities in Delaware, taking full advantage of ring-fenced legal and financial opacity tools. In addition to banking secrecy and zero disclosure of beneficial owners, Delaware allows for parent companies to establish holding companies within two days, producing nothing, conducting no economic activity in the state, and generally hosting just one shareholder (the parent company). Such entities, allowing the parent company to pay the newly created entity a 'fee' for use of IP, serves as a passive conduit converting taxable income to passive non-taxable profit. The entity's sole purpose is to own and 'manage' laundered income generated from IP.

Intentionally weak and easily circumvented global rules regulating trade facilitates considerable leeway to exploit - and misprice, the value of intangible assets. A Pfizer patent, for instance, may be worth $100 million or a $10: by and large, the company internally determines the value of IP, imputing a 'market price'. Intra-company trading, accounting for 60% of global trade, is 'governed' by arms length transfer principles, a system endorsed by the OECD, itself comprised of the world's systemically powerful 'developed' countries. The OECD acknowledges too that intangible assets are 'one of the most important commercial developments in recent decades'. Intra-company mispricing not only distorts and manipulates the proposed neoliberal concept of the market (as most efficient allocator of price and resources), but simultaneously drains developing countries of sustainable tax revenues.

More recently, the Anti-Counterfeiting Trade Agreement (ACTA), secretly drawn up by an ad-hoc group of rich countries beginning in 2008, and endorsed by US President Barack Obama in March 2010, seeks to further lock down any loopholes diminishing the all-encompassing power of the IP kings. This includes vehicles such as 'borders measures' concerning any TRIPS-related goods imported, exported or 'in-transit'. Vessels passing through rich countries carrying generic goods for poor countries - irrespective of whether such goods are legal at source and destination jurisdictions, may be held up for seemingly as long as the intermediary nation deems fit. Such systems certainly promote a kind of socialism - but only for the uber-wealthy. Meanwhile, the poor are forced to pay with their wallets - and their lives.

Thanks to the system underpinning TRIPS, arms length transfer pricing, and the like, IP kings not only make a killing from patents but from secrecy jurisdictions too.

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* John Christensen is an economist and the director of the Tax Justice Network (TJN). Khadija Sharife is the southern Africa correspondent for The Africa Report and visiting scholar at the Center for Civil Society (CCS), based at the University of Kwa-Zulu Natal.
* This article was first published in The New Age (7 December, p. 12).
* Please send comments to [email protected] or comment online at Pambazuka News.