Without Patent Reforms, Hungary Faces Trade Sanctions

IN what could be a blow to United States-Hungarian ties, Washington is threatening Budapest with trade sanctions to stop what it calls the institutionalized piracy of patented American drugs.

Even without American threats, Hungary's failure to modernize its patent system could quarantine it within a shrinking circle of trade outcasts.

Hungary has avoided patent reform longer than most former East-bloc countries. Its law permits the manufacture and sale of drugs with Western-patented active ingredients if local companies alter the production process. Hungarian drugmakers call it "reproductive pharmacology;" critics call it "me-too" manufacturing or piracy. "The fine shades of the Hungarian patent law are unresolved, because you can steal with slight changes in the process," says Alajos Dornbach, a Hungarian member of parliament and ref orm proponent.

Bristol-Myers has not brought its flagship drug Capoten to the local market because a state-owned company's copy is too inexpensive to compete with. Sales of the copy earned the Hungarian company Egis $9.4 million last year, according to market researchers Felax-Pharmapack Hungary. Since copying is legal and therefore precludes litigation, the German drug company, Bayer AG, has lobbied the Hungarian Health Ministry to stop sales of a copy of Ciprobay, which a Bayer source calls "our most important drug."

The US Trade Representative's Office (USTR) placed Hungary on its "watch list" and "priority watch list" in 1991 and 1992 respectively. The moves were warnings that, without reforms, Budapest could face special "301" trade sanctions. After talks in March yielded no agreement, on April 30 USTR chief Mickey Kantor gave Budapest until Aug. 1 to commit to changing its patent system. Trade sanctions could end duty-free status on products which last year amounted to about $164 million, or 51 percent of Hungary 's exports to the US.

The patent impasse has prevented Hungary and the US from signing a Business and Investment Treaty, which would provide legal protection for investors of both countries. By the end of last year, the $2.1-billion US investment in Hungary comprised 49 percent of all foreign capital here and exceeded American investment in the former Czechoslovakia and Poland combined. Still, a Hungarian negotiator says the treaty would offer Budapest "important psychological assurances" about US economic commitment.

"The US wants to support Hungary's opening to the West," a US trade official says. But the lack of a business treaty "makes us both look bad. If the most progressive country in eastern Europe can't conclude a basic, pro-forma agreement on investment protection with its biggest investor, what kind of message does this send?"

Budapest says it is ready to change its patent law - as its associate membership agreement with the European Community obliges it to do by 1997 - but wants to exempt 72 US-patented drugs. The USTR says this would defeat the purpose of reform.

Hungarian drugmakers face a bleak future without patent reform. Since 1990, all countries in the region, with the exception of a few central Asian republics and parts of the former Yugoslavia, have switched patent regimes or committed to doing so. Hungary, the exception, must look farther to reach shrinking markets, most of them in the third world.

"The Americans are very tough, but very fair," says Gustav Vekas, vice president of Hungary's National Office of Inventions. "The question is whether we want to go to the periphery or join the community."