(Adds Merck statement in paragraph 5, background)

By Andrei Khalip

RIO DE JANEIRO, April 25 (Reuters) - Brazil took the first step toward breaking an AIDS drug patent held by Merck & Co. <MRK.N> on Wednesday when the Health Ministry decreed the drug was in the "public interest" and too expensive to buy.

Merck had declined Brazil's request for a sharp price reduction for Efavirenz. Now the decree by Health Minister Jose Gomes Temporao could lead to "compulsory licensing of the patent for public, noncommercial use," the ministry said in a statement.

It said the government was considering imports of generic versions of the drug for Brazil's lauded AIDS treatment program, which guarantees free drug cocktails to patients in Latin America's most populous country.

A ministry spokeswoman said the breaking of the patent would make local production of a copy of the drug possible, although the statement did not mention that.

"Merck remains committed to reaching a negotiated agreement with Brazil," the pharmaceutical company said in a statement, adding that it "does not believe compulsory licensing is in the best interest of patients."

In 2005, Brazil threatened to break the patent for Abbott Laboratories Inc.'s <ABT.N> antiretroviral drug Kaletra. The two sides later agreed a price reduction. Previously, Brazil had also managed to hammer out price cuts without resorting to the actual patent breaks.

Brazil wanted Merck to cut the price of Efavirenz to $0.65 per pill -- the same price paid by Thailand -- from $1.59 per pill paid by Brazil, the ministry said. It estimates 75,000 of Brazil's 200,000 patients use the antiretroviral formula.

Supplying a patient with Efavirenz for a year costs Brazil $580, compared with $166 for a similar generic drug. Importing the cheaper version will save Brazil $30 million a year.

Brazil produces low-cost generic drugs that have been on the market for years. But it needs new generation medicines to efficiently combat the disease.

The country's spending on antiretroviral drugs doubled to nearly 1 billion reais ($495 million) in 2005 from 2001, according to last year's Brazilian report for the United Nations.

Brazil has defied 1990s forecasts that the AIDS epidemic would ravage its young, sexually active population. It has stabilized the share of infected adult population at 0.6 percent -- in line with the proportion in the United States.

Begun in 1997, Brazil's free universal access to AIDS drugs has become a U.N.-recommended model for the developing world. The program also distributes free condoms and syringes.

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