Thailand's Ministry of Public Health has announced plans to grant a five-year compulsory license to produce a lower-cost version of Merck's (NYSE:MRK) anti-retroviral drug, Efavirenz -- a move that appears to be legal under the World Trade Organization's Doha Declaration (an amendment to the WTO's TRIPS Agreement).

Thailand is looking to save on the cost of Efavirenz by reducing the price by 50%, from $67 monthly to $38.50 monthly, according to the ministry's Department of Disease Control. Meanwhile, Merck claims it makes no profits off Efavirenz in Thailand and that the Thai government did not consult the company before deciding to issue the compulsory license.

While supporters of the generic manufacturing license say the move could increase Thailand's ability to negotiate lower prices with other drug firms, the decision could result in trade repercussions for Thailand.

Provisions on "compulsory licensing" are written into the TRIPS agreement on trade-related intellectual property rights. Thus, governments can issue compulsory licenses to allow other companies to make a patented product or use a patented process under license without the consent of the patent owner -- but only under certain conditions aimed at safeguarding the legitimate interests of the patent holder. TRIPS, or Trade-Related Aspects of Intellectual Property Rights, is an agreement drawn up by the World Trade Organization to ensure that intellectual property rights are respected within international trade.

Article 31 (f) of the TRIPS agreement stipulates that a compulsory license must be issued predominantly for the supply of the domestic market of the member granting the license. Anti-retroviral virus treatment for HIV was the main impetus for this initiative, and WTO members agreed to address the HIV/AIDS pandemic while "maintaining our commitments in the TRIPS [a]greement."

The Agreement states that governments can issue a compulsory license if a patent owner abuses its rights by, for example, failing to offer its product on the market, or offering it at a price that is too high for potential buyers to afford. Competitors can then produce the product or use the process under government license without fear of prosecution. In the case of generic drugs, compulsory licenses can be issued because of the high (and, for developing nations, often unaffordable) prices charged by the major pharmaceutical companies for their products.

In Thailand, the Government Pharmaceutical Organization said it will import generic Efavirenz until it is able to produce the drug itself, estimated to be sometime in June 2007. Under the license, Merck will receive a 0.5% royalty on sales of the locally produced drug. The organization already manufactures a generic version of Nevirapine, a drug used in HIV/AIDS cocktails, but many HIV-positive patients are resistant to it.

Efavirenz was approved by the FDA in 1998 for use in combination with other anti-retrovirals in adults and children with HIV infection. Efavirenz is used with other medications to treat HIV infection in patients with or without AIDS. The drug is in a class of medications called non-nucleoside reverse transcriptase inhibitors (NNRTIs) that work by slowing the spread of HIV in the body. Efavirenz does not cure HIV infection, and it may not prevent someone from developing HIV-related illnesses or from spreading HIV to other people. In 2004, global combined sales of Crixivan (indinavir)/Stocrin (Efavirenz) reached $256 million.

Thailand's Health Ministry has argued that it cannot afford to import Efavirenz and that thousands of Nevirapine-resistant HIV/AIDS patients would likely die without a cheaper version of the drug on the market. By producing its own generic version of the drug, Thailand will be able to treat 100,000 HIV-positive people, compared to 17,000 who have access to the drug now.

On its face, this seems like a good outcome for people who need access to cheap or free medicines. But don't kid yourself that this is due to a benevolent government out to save its people from suffering. This really comes down to the Thai government saving itself more than $100 million over the next five years.

That's not to diminish the catastrophe unfolding. Thailand's runaway AIDS epidemic has produced more than 1 million people, or 1 in 60 Thais, already infected with the virus, giving Thailand the 15th-largest population of HIV-infected people in the world. Thailand has recorded 1,088,692 HIV/AIDS cases, and, of these patients, 534,065 have died. Today, AIDS is the leading cause of death in Thailand. More than 50,000 are expected to die in Thailand from AIDS-related causes in 2006, according to a World Bank study.

However, while the real and immediate need for treatment for AIDS patients in Thailand is without question, Thailand had a GDP estimated at $550.2 billion in 2005, and its military expenditures were equal to about 1.8% of GDP, or about $9.9 billion, in 2003. One has to wonder how many patients could be treated if only a small portion of this money were diverted to pay for additional medicines.

The Thai compulsory license won't make much of a dent in Merck's bottom line, since the market for AIDS drugs -- estimated at $4 billion a year -- is not a major moneymaker for drug companies. Drug companies tend to make the bulk of their profits in relatively affluent markets like the United States and Europe, which are very lucrative for treatments for heart disease, cancer, and diabetes.

In the case of AIDS treatments, two-thirds of the people infected with the virus live in impoverished sub-Saharan Africa. Companies such as GlaxoSmithKline (NYSE:GSK) and Bristol-Myers Squibb (NYSE:BMY) often sell their AIDS drugs at reduced prices, or simply give them away in impoverished regions.

However, nothing in life is ever free, and trying to kill the goose that laid the golden eggs will only bring short-term gain with long-term pain. Pharmaceutical companies rely on government-granted patents to protect their huge investments in researching and developing new drugs. It takes 10 to 15 years and costs $800 million, on average, to bring a new medicine to market. If some countries try to break patents to get out of paying, guess who's going to foot the bill? Or worse, guess what medicines won't be developed?

Without patents to protect all the inventions necessary to develop a drug for a limited time, non-patent-holders could simply copy a drug, offering their versions at a reduced price since they did not have to spend money on development. This would seriously impact the pharmaceutical companies' ability to recoup their costs and reinvest in other research projects.

Related Links:

Related Boards:

Merck and GlaxoSmithKline are Motley Fool Income Investor selections. To find out why, and see the archive of all past picks, you can try the newsletter free for 30 days.

Fool contributor Stephen Albainy-Jenei is a patent attorney at Frost Brown Todd LLC, serving up chat at Feel free to write him with comments or questions.. Stephen doesn't own shares of any company mentioned in this article.