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C O N F I D E N T I A L SECTION 01 OF 06 BANGKOK 007335

SIPDIS

SIPDIS

STATE PASS USTR FOR BWEISEL, CWILSON
STATE PASS USPTO FOR KHAUDA, KFERRITER
COMMERCE FOR JKELLY
HHS/OGHA FOR ABAHT, EELVANDER

E.O. 12958: DECL: 12/08/2016
TAGS: ECON ETRD KIPR TH
SUBJECT: NEXT STEPS FOR THAILAND'S COMPULSORY LICENSE BID

REF: BANGKOK 7133

Classified By: DCM A. Arvizu for reasons 1.4 (b) and (d).

¶1. (C) Summary: On November 29, the RTG Ministry of Public
Health (MoPH) issued a statement announcing a compulsory
license (CL) on efavirenz, a Merck-patented medicine used to
treat HIV/AIDS patients. The Ministry's statement cited the
high price of the drug as a barrier to access to effective
HIV drugs, and declared its intention to import generic
versions of the drug and also produce domestically. Supply
issues may also have been a factor in MoPH's decision. Merck
was not notified prior to the announcement and to date has
not had the opportunity to meet with decision makers at the
Ministry. While Thailand probably has complied with both its
own law and the WTO in its action, the lack of prior
consultation with Merck and the absence of any attempt to
negotiate pricing with the U.S. firm weaken MoPH's arguments
and suggest the MoPH is being heavily influenced by activist
NGOs. We do not believe the major RTG economic ministries
are aware of either the details or the implications of the
MoPH decision, something we hope to remedy. Although many
believe we are facing a fait accompli, it may yet be possible
to avoid CL implementation: Merck plans to counter MoPH's
announcement with a price reduction and, with USG help, hopes
to salvage its patent. However, increasing numbers of
HIV-positive patients and spiraling treatment costs may bring
about further RTG moves on compulsory licenses. Embassy
action request is contained in para 28. End Summary.

¶2. (U) This is an action request, see para 28.

¶3. (C) As reported in reftel, on November 29, the Ministry
of Public Health's Department of Disease Control announced a
compulsory license on efavirenz, an HIV/AIDS medicine
patented in Thailand by U.S.-based pharmaceutical firm Merck
& Co. Although both Embassy and Merck caught wind of the
Ministry's intention soon before the announcement, no branch
of the RTG attempted to give official notification
beforehand. Embassy officers have subsequently contacted
relevant RTG officials, NGO reps, and Merck representatives
to obtain a more comprehensive picture of the facts
surrounding the CL action, as well as the political and legal
context of the decision.
¶4. (C) On December 4, Merck formally requested a meeting
with the Minister of Public Health, Dr. Mongkol Na Songkhla,
to discuss the Ministry's compulsory license of their
product. According to Merck, the Minister's office suggested
the meeting request be pushed down to the Director General of
the Department of Disease Control, but Merck has yet to
receive an official response and still hopes for a meeting
with the Minister. (Separately, the Minister of Commerce,
Mr. Krirk-krai Jirapaet, has tentatively agreed to meet with
Merck on December 20.)

How did it come to this?
------------------------

¶5. (C) The use of efavirenz has rapidly increased in Thailand
due to ever increasing numbers of HIV-positive patients and
an RTG commitment in 2005 to supply antiretrovirals (ARV) to
all eligible patients. A UNAIDS report earlier this year
estimated that approximately 580,000 Thais are HIV-positive.
Of these, only 133,000 are actually eligible for treatment,
the rest either unaware of their HIV status, yet to show
symptoms and not yet in need of treatment, or have such an
advanced case of AIDS that drugs can not halt their decline
in health. U.S. Center for Disease Control (CDC) estimates
92,000 Thais are now on ARV therapy. The RTG has set a goal
to have 122,000 on treatment by the end of 2007. Most
HIV-positive patients are on a locally produced first-line
treatment known as GPO-vir, a combination of d4T, 3TC and
nevirapine. However, 10 to 15 percent of patients have an
adverse reaction to nevirapine or are otherwise unable to
take the medicine. Merck's efavirenz is an effective
substitute for nevirapine, but its use can triple the cost of
treatment. Given Thailand's income level and a greater than
one percent rate of HIV prevalence, Merck says it sells
efavirenz at a "no-profit" price, its lowest price globally.
Approximately 13,000 patients receive efavirenz through the
government's health insurance programs and several thousand
more outside these programs. With a lower price, MoPH has
said it hopes to move up to 100,000 patients to a therapy
including efavirenz to avoid the reactions to nevirapine
altogether. We believe MoPH's plans to dramatically increase

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the number of patients using efavirenz is one factor behind
the decision to seek a CL for this medicine.

¶6. (C) The CL decision can be viewed as the culmination of a
long campaign by many health and HIV/AIDS NGOs in Thailand.
These groups have long advocated compulsory licenses for ARVs
and other patented medicines. As articulated here, the basic
NGO argument has been that access to life-saving medicines is
directly related to the price of those medicines, that the
government should have greater control over supply, and that
the commercial interests of for-profit pharmaceuticals firms
should take a back seat to saving lives. The contributions
of private sector pharmaceuticals companies in fostering
innovation in fields like HIV/AIDS treatment is given short
shrift, if it is mentioned at all. Opponents of actions such
as CL are condemned as money-grubbing foreign capitalists
profiteering on the blood of poor and desperately sick Thais.
Consistent with this characterization, the Minister of
Public Health was hailed in media headlines here for his
"brave" decision on CL. We suspect that Thai public opinion
on this decision generally is supportive of the Minister.

CL Decision Timeline
--------------------

¶7. (C) Against this background, a commitment by the RTG to
provide ARVs to eligible HIV/AIDS patients and a concomitant
concern over rapidly increasing projected costs won sympathy
to the idea of a compulsory license among key officials
within the MoPH. According to a MoPH contact, earlier this
year the National Health Security Office (NHSO), a
semi-independent institution that manages Thailand's
universal health care coverage program, made the initial
proposal to the MoPH. The former Minister accepted that
something had to be done and appointed a subcommittee to
further examine the issue. MoPH later brought in related
agencies including the Department of Intellectual Property to
provide legal advice. After the September 19 coup, the new
Minister picked up the issue and moved it forward to a
decision to issue the license. Foreign Minister Nitya
Pibulsonggram told DCM that the MoPH later presented the
decision to the cabinet as a done deal. We do not believe
the Cabinet was made aware of the potential significance of
this decision, particularly with regard to its potential
impact on the perceived foreign investment climate in
Thailand.

¶8. (C) The decision has the hallmarks of new MoPH Minister
Mongkol Na Songkhla's personal involvement. A medical doctor
by training (he received some of his graduate training in the
Netherlands), Mongkol is a lifelong civil servant. He rose
up through the ranks of the RTG health services, serving much
of his early years as a medical officer in some of Thailand's
poorest rural districts. This experience has, evidently,
made him an ardent supporter of public morals campaigns and
laws, especially in the area of alcohol abuse. His efforts
have not always been well received by the easy-going Thais.
As Minister, his recent "clean up the town" initiatives
include a proposed ban on alcohol advertising, and raising
the legal drinking age to 25. The latter proposal was
particularly poorly received. Critics have stated that
besides being out of touch with public opinion, such
far-reaching proposals go beyond the appropriate brief of an
appointed, interim government. One of his closest aides is
Senior Adviser on Health Economics Suwit Wibulpolprasert, a
strong ally of HIV/AIDS NGOs here and, we believe, a strong
advocate of the NGO agenda on provision of HIV/AIDS
medicines.

Do we have a CL?
----------------

¶9. (C) There remains some confusion among the RTG and
observers as to whether the MoPH has in fact issued a
compulsory license. In their November 29 statement, the MoPH
stated that the Ministry "exercised the right" against
efavirenz "by giving the right to the Government
Pharmaceutical Organization". The first of the Ministry's
self-imposed conditions on the compulsory license was that
"the right shall be applied immediately...." The Department
of Intellectual Property termed this as a statement of intent
rather than the actual compulsory license. However, MoPH
statements to the press have not mentioned any further steps
in the licensing process they believe they need to take to
begin importing or producing generic efavirenz, nor any

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intention to further negotiate with Merck as the patent
holder.

¶10. (C) The MoPH statement listed three conditions for the
license:

a) The right shall be applied immediately and end by December
31, 2011; (Note: Merck's patent expires in 2013.)

b) Provision of the drug will be enough for not more than
200,000 HIV-infected people per year, exclusively for
infected people who are eligible under the National Health
Security Act, insured persons under the Social Insurance Act
and eligible persons under the government welfare on health
for officials and employees; (Note: these three programs
together cover the overwhelming majority of Thais.)

c) Royalty fee to be paid to the patent holder shall be set
at not more than 0.5 percent of trade value of the generic
drug by the GPO.

¶11. (C) The statement also declares that the Ministry's
Department of Disease Control shall notify the patent holder
and DIP without delay. On December 1, Merck picked up the
official notification from the Ministry. The letter notifies
Merck that MoPH has taken the right to the drug and assigned
it to GPO. It does not request any further consultation or
negotiation.

The law
-------

¶12. (C) MoPH's statement cited Section 51 of the Thai Patent
Act for authority to issue the license. Under Section 51, a
government entity may issue a compulsory license "(i)n order
to carry out any service for public consumption or which is
of vital importance to the defense of the country, or the
preservation or acquisition of natural resources or
environment or to prevent or alleviate a severe shortage of
food or medicines or other consumer goods and foodstuffs, or
for the sake of other public interests." DIP sources say
MoPH is using the latter, acting "for the sake of public
interests."

¶13. (C) There are a number of drafting flaws in Sections
46-51 that cover compulsory license procedures which make it
difficult to interpret what is the proper procedure for
issuing a compulsory license under Section 51. For example,
Article 51 requires that the RTG pay a royalty "under Section
48, paragraph 2." Section 48 states that "the patentee is
entitled to a royalty under Sections 46, 47 and 47bis";
however, Section 51 specifically states that compulsory
licenses issued under that article shall not be subject to
the provisions of Sections 46, 47 and 47bis.

¶14. (C) As to timing and pre-negotiation, the first paragraph
of Section 51 appears to allow a government entity to exploit
any patented invention and later "inform the patentee in
writing without delay." The second paragraph of Section 51
requires the government entity to "submit its offer setting
forth the amount of royalty and conditions for the
exploitation to the Director-General (of DIP). The royalty
rate shall be as agreed upon by the (government entity) and
the patentee, and the provisions of Section 50 shall apply
mutatis mutandis." The RTG would appear to have followed
these procedures by (1) announcing the compulsory license,
(2) notifying Merck in writing and (3) then entering into
negotiations solely relating to the royalty amount. This
appears to be the DIP's interpretation of Section 51.

¶15. (C) However, Merck's local legal counsel believes that
the language applying Section 50 mutatis mutandis could be
reasonably interpreted as requiring the following: (1) MoPH
applies to DIP to authorize the compulsory license, (2) MoPH
and the patentee enter into royalty negotiations mediated by
DIP, (3) either the parties agree on a royalty or DIP sets
the royalty, and (4) DIP issues a compulsory licensing
certificate. The problem with this interpretation is that
the procedures laid out in Section 50 relate back to licenses
granted under Sections 46, 47 and 47bis. Again, Section 51
specifically states that compulsory licenses issued under
that article shall not be subject to the provisions of
Sections 46, 47 and 47bis.

¶16. (C) When asked why MoPH had not approached Merck to

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request authorization on reasonable commercial terms as
required by the WTO TRIPs Article 31, DIP responded that MoPH
is using exceptions under Article 31(b) for "public
non-commercial use." (NOTE: Embassy has seen a Reuters News
press report quoting MoPH officials that "informal talks" to
get a lower price from Merck had failed. Merck flatly denies
that any such talks have taken place.)

Getting behind the price and supply issues
------------------------------------------

¶17. (C) In their statement announcing the compulsory license,
MoPH gave as their rationale that the patent on efavirenz had
kept the price double that of comparable generics and posed
an obstacle to access to drugs for HIV patients. They
pointed to availability of alternative generics at 700 baht
per month per patient, half the price the RTG pays for
Merck's patented version.

¶18. (C) The Government Pharmaceutical Organization (GPO), a
state-owned profit generating enterprise, would be
responsible for importing the drug. GPO officials have not
been forthcoming on precisely where and under what pricing
conditions they would import efavirenz, but have mentioned
India as the likely source. GPO is reportedly under orders
from the MoPH to keep the final price of efavirenz to 700
baht. Earlier this year, Indian generic producers Ranbaxy
and Cipla announced that they would make generic efavirenz
available to developing countries for USD 240 per year. At
the current exchange rate, the price for Thailand would be
approximately 710 baht per month. However, the listed price
is F.O.B. and the final delivery price including shipping and
customs charges would likely be closer to 800-850 baht per
month. Thai Food and Drug Administration (FDA) says that FDA
approval could be waived but that GPO is moving through the
process anyway and could win approval through FDA's expedited
process in a matter of weeks.

¶19. (C) Merck claims that they sell to the MoPH for 1310 baht
per month, plus 7.5 percent VAT, approximately 1400.
However, they also sell directly to NGOs for 1040 baht, the
higher RTG price reflecting additional local costs imposed by
the RTG. Merck has told us that higher production rates for
efavirenz have provided greater economies. If asked by the
RTG, Merck says that it could negotiate away some of the
additional local costs and work the price down to 850 baht,
close to what the RTG would pay to import a generic version.

¶20. (C) The GPO has reportedly already developed efavirenz
and is in the process of testing and doing bioequivalence
studies (the drug compound is easily replicable). GPO
officials said they hoped to begin local production of
efavirenz by June, 2007. MoPH's statement quoted GPO's
chairman that it could produce efavirenz for 700-800 baht for
a monthly treatment of 30 pills. It also put expected
production capacity at 5 million pills, enough to treat
approximately 14,000 patients annually. GPO's actual costs
will not be known until production begins, but Embassy notes
that an ARV pricing guide put out in 2005 by Medecins Sans
Frontieres shows GPO as a consistently high cost producer in
comparison to Indian generic producers, typically double the
price for the most common ARVs. Whether GPO can bring their
costs for efavirenz equivalent to those of the Indians is
questionable.

¶21. (C) Although GPO has yet to pass a U.S. FDA or WHO
certification process, U.S. CDC says the quality of GPO's
antiretrovirals is sufficient. Responses to ARV treatment
have been as good as any program in the U.S. and levels of
resistance development are within an acceptable range.
Nevertheless, the lack of certification excludes GPO from
participating in the President's Emergency Plan for
Antiretrovirals (PEPFAR). The Global Fund is also restricted
from purchasing GPO-produced ARVs, and purchases only FDA-
and WHO-approved second line ARVs for use in Thailand.

Supply Problems?
----------------

¶22. (C) Separately, Medecins Sans Frontieres (MSF), the
health NGO that has promoted issuance of compulsory licenses,
maintained that there were also supply issues with Merck's
provision of efavirenz, adding another reason to issue a CL.
Paul Cawthorne, MSF's Head of Mission in Bangkok, told
Econoff they had documented cases of shortfalls at hospitals

BANGKOK 00007335 005 OF 006


that had resulted in treatment interruptions for HIV
patients. Hospitals have occasionally called on MSF to
provide from their own meager stocks of efavirenz to meet
these shortfalls. MSF's own investigation concluded that the
sharp increase in demand for efavirenz worldwide had strained
Merck's supply chain and had resulted in shortages. Merck's
local representatives acknowledged the increase in global
demand in recent years (Thailand itself went from 2,000 to
over 20,000 patients on efavirenz in three years) that had
stretched global supplies. In 2004 in Thailand there was one
instance of a supply interruption, but Merck claims the
problem was MoPH's inability to conclude a contract in time
rather than a lack of available supply. Merck insisted that
Thai hospitals had never suffered shortfalls due to Merck's
inability to supply the drug. They did not dispute that
hospitals may have occasionally run dry of efavirenz, but
suggested the blame lies with gaps in MoPH's own domestic
distribution system. Merck noted that at no time has the RTG
approached them to discuss supply issues regarding efavirenz.

Proposed Actions
----------------

¶23. (C) Notwithstanding what is probably an overwhelmingly
pro-CL public opinion climate here, consensus on the wisdom
of the compulsory license is not universal within the RTG.
Merck says its first notification of the MoPH's intention was
from a staffer at the Ministry who disagreed with the
decision and hoped Merck could squelch it in time. MoC and
MFA contacts have also been less than enthused with the
compulsory license decision. Some officials in these (and,
probably, other) ministries are likely to view the CL
decision as the latest uncoordinated move by the increasingly
controversial Minister of Public Health.

¶24. (C) From a trade policy viewpoint, we have always
regarded the great value of the CL card as providing leverage
in governments' negotiations with pharmaceutical firms on
pricing. Used with skill, the CL card can be used to obtain
lower prices while avoiding the costs and other problems
inherent in setting up new manufacturing or import
arrangements. What we find odd in this case is that the RTG
evidently never entered into price negotiations with Merck.
We suspect that the economic ministries of the RTG would also
find this odd (we doubt they are currently aware of these
details). Merck's offer to reduce its price for efavirenz
may convince the RTG it remains in their interest, financial
and otherwise, to keep the patent intact and continue to
source the original ARV directly from the company. Keeping
the compulsory license open would give the RTG a face-saving
way out, allowing the Ministry to chalk up a success in
reducing the price of the drug while maintaining the option
to produce and/or import if supply problems ever arose.

¶25. (C) As our first proposed action, we suggest that senior
Embassy officers brief the appropriate RTG ministries on the
details of this issue, and suggest that the RTG enter into
price negotiations with Merck. (We will stress that we are
not questioning the legal right of Thailand with regard to
issuance of a CL.) Such a move would be in the spirit of the
WTO's CL provisions (which envision the CL option as being a
last resort); is fair given the considerable assistance Merck
has provided to Thailand over the years; would send the right
signal to other foreign investors; and could well lead to an
economically optimal solution for Thailand.

Better Public Outreach, Please
------------------------------

¶26. (C) On this issue, for-profit medicines providers have
been completely outmaneuvered in Thailand. Their role in
saving lives through innovation has been almost totally
obscured, replaced with the image of rich foreigners taking
advantage of sick, defenseless Thais. Taking control of
technology through a CL is, in this climate, perceived as a
brave (and virtuous) act. In previous discussions with PhRMA
representatives, we were told that most PhRMA companies
believe that the issue of medicines IP is not of interest to
the majority of Thais, and that a broad-based public outreach
campaign would only serve as a lightning rod for opponents
and make the situation worse. We believe that Thailand has
emerged as a front-line state on the medicines IP issue and,
notwithstanding the relatively small market here, merits
increased attention by PhRMA. The placement of additional
PhRMA public relations resources in Thailand is fully

BANGKOK 00007335 006 OF 006


justified, in our view.

¶27. (C) There is some urgency to our call for additional
resources. The MoPH has announced its intention to issue
compulsory licenses on other ARVs, most notably
lopinavir/rotinavir, sold under the brand name Kaletra, a
second-line ARV produced by U.S.-based Abbott Laboratories.
At approximately 7000 baht per month, the treatment is seven
times more expensive than available first-line treatments.
As HIV-positive patients build resistance to initial
treatments, a growing percentage will need to move to more
expensive second-line treatments such as Kaletra. The World
Bank recently predicted that continuation of Thailand's
policy of providing HIV/AIDS medicines to all eligible
patients would raise overall health costs by 23 percent, and
noted Thailand could save upwards of USD 3.2 billion over the
next 20 years by using compulsory licenses. Although price
negotiations may save Merck's patent this round, it is quite
likely that the RTG will seek a compulsory license again in
the near future.

¶28. (C) Action requested: We are unable to hazard a guess on
the likelihood of success of our proposed actions; some
knowledgeable observers here believe we are facing a fait
accompli. In any case, we think we have a strong case to
make to the RTG on this issue. That fact, plus the
considerable stakes involved for U.S. pharmaceuticals firms,
convinces us that the effort is worthwhile. Therefore,
Embassy requests Washington agencies' concurrence as soon as
practicable on the actions outlined in para 25.
BOYCE