Economics · Governance · International Affairs · Law · Public Policy

Compulsory Licensing for Generic Drugs

What is Compulsory licensing?

Compulsory licensing is when a government authorizes a party other than the patent owner to produce the patented product or process, without the patent owner’s consent.

Are these flexibilities new?

No. They always existed in the TRIPS Agreement, ever since it took effect in January 1995.

What is the general case?

For compulsory licensing, it’s when the generic copy is produced mainly for the domestic market, not for export.

 India is the world’s third-largest pharmaceutical drug producer by volume; in 2011 the domestic pharmaceutical market reached a record of US$12.2 billion in sales. India only began issuing patents for drugs in 2005 in order to comply with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The TRIPS Agreement explicitly allows compulsory licensing as long as procedures and conditions set out in Article 31 of TRIPS are fulfilled. The TRIPS Agreement does not specifically list the reasons that might be used to justify compulsory licensing. However, the Doha Declaration on TRIPS and Public Health confirms that countries are free to determine the grounds for granting compulsory licences.

The TRIPS Agreement does list a number of conditions for issuing compulsory licenses, in Article 31. In particular:

  • normally the person or company applying for a license has to have tried to negotiate a voluntary license with the patent holder on reasonable commercial terms. Only if that fails can a compulsory license be issued, and
  • even when a compulsory license has been issued, the patent owner has to receive payment; the TRIPS Agreement says “the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization”, but it does not define “adequate remuneration” or “economic value”. Compulsory licensing must meet certain additional requirements: it cannot be given exclusively to licensees (e.g. the patent-holder can continue to produce), and it should be subject to legal review in the country.

In 1994 India became a part of the World Trade Organization (WTO) and signed the agreement on trade-related aspects of intellectual property rights (TRIPS) and as part of that, it was required to recognize all international patents including those within the food and health. Compulsory licensing is a provision provided under TRIPS, though it has hardly ever been implemented in any of the western countries especially for pharmaceuticals. The compulsory license was granted to NATCO under Section 84 of the Patents Act.

Under Section 84 (1) of the Indian Patent Act, any person may request a compulsory license if, after three years from the date of the grant of a patent, the needs of the public to be covered by the invention have not been satisfied; the invention is not available to the public at an affordable price; or the patented invention is not “worked in,” or manufactured in the country, to the fullest extent possible. During the golden days of Indian Generics – India (as per the patent act of 1970) did not recognize patents in areas considered vital to human life – food and health. Therefore none of the pharmaceutical patents were valid in India, allowing Indian companies to manufacture generic medicines without licensing to the originators as long as the process used for manufacturing was different from that used by the original company. The Indian pharmaceuticals became experts in reverse engineering. This allowed Indian generics to compete in the world market most importantly by providing medicines at an affordable prize to areas of the world that badly needed them.

The month of March saw a landmark decision by an Indian Court, wherein it granted compulsory license to an Indian pharmaceutical – NATCO to manufacture generic version of the drug Nexavar thereby breaking Bayor’s monoplogy on this life saving drug for Hepatocarcinoma. Bayer acquired an importing license for Nexavar – the company’s brand name for the drug sorafenib tosylate in 2007; the patent on the drug was granted one year later.  The company has claimed that Nexavar’s sales in India were undermined by the marketing of a similar drug by another domestic generic producer, CIPLA, which it had sued for infringement. According to the Indian Patent Office’s decision, the German drug-maker did not begin importing the drug to India in 2008 and only small quantities were available during the following two years. Bayer “took no adequate or reasonable steps to start the working of the invention in the territory of India on a commercial scale and to an adequate extent,” the decision notes. “The drug is exorbitantly priced and out of reach of most of the people,” the patent authority wrote in its 62-page decision. “The product in question is not a luxury item but a lifesaving drug and it is highly important that a substantial part of the demand be met strictly. In the present case, even 1 percent of the public doesn’t derive benefit of the patented drug.” In its compulsory license request, Indian generic manufacturer Natco proposed selling sorafenib tosylate at Rs. 8,800 per patient per month – approximately US $175 – resulting in a 97 percent price cut compared to Nexavar. The compulsory license has been granted until 2020. Natco is not entitled to export the drug or to outsource its production.

The Indian Patent Office also said that Natco must pay royalties to Bayer on a quarterly basis at the rate of 6 percent of the net sales of the medicine, in accordance with remuneration guidelines set forth by the United Nations Development Programme. Patents were an incentive for pharma companies to invest in drug development. Drug development is an expensive venture that requires millions of dollars being spent without returns. When a miracle drug is finally produced, patenting and exclusive manufacturing rights allow these companies to make sufficient profits to justify their previous investments, as well as to invest in future innovations. So a big debate now is if such decisions (viewed as) against Baylor and Novartis, hamper the process of innovation in drug development? Do they discourage pharma companies from investing in innovation?

Moreover, as the well-known IP lawyer Shamnad Basheer points out in his interview to Frontline, the generics tap into a market that is not catered to by these giants – the middle and low income group. This group of the population cannot afford the patented drugs at their exorbitant prices and have to rely only on generics. By licensing to generic producing companies the pharmaceuticals can not only increase the reach of their drug but can also make sufficient profits (through royalties).

Secondly, in cases of epidemics and life threatening situations availability of a drug is solely humanitarian and it should be implemented as such. Whatever the loss incurred by the company might be, it cannot be worse than the loss of lives due to unaffordability of the life saving drugs. For example – anti-retroviral drugs manufactured by Cipla proved to be a boon for HIV patients in Africa. The availability of generics in this case has obviously not had an effect on the viability or profits of the pharmaceuticals. So why is there such a big hue and cry over incentives for innovation, protecting the interest of the pharma companies? Maybe it is time to turn around and protect the people for whom the drugs are actually manufactured rather than the profits (which seems to be the only direction companies are heading in).

In this situation also the patent owner has to be paid. The authorities will ultimately decide if the payment is adequate and the TRIPS Agreement says the patent owner must be given the right to appeal in that country as well. Earlier it mainly was used to supply the domestic market (paragraph (f) of Article 31) but now the Doha Ministerial Conference decided that this should be changed so that countries unable to manufacture the pharmaceuticals could obtain cheaper copies elsewhere if necessary. The obstacles will be removed only if the laws are changed. This is where their laws complied with the original TRIPS provision by requiring production under compulsory licensing to be predominantly for the domestic market. So far Norway, Canada, India and the EU have formally informed the TRIPS Council that they have done so. The 2003 decision (sometimes called the “Paragraph 6” decision because it refers to that that paragraph of the Doha declaration) only deals with compulsory licenses to produce for export. Possibility of issuing compulsory licenses to supply domestic markets was always possible.

While the research-based pharmaceutical industry is clearly supportive of the objective of improving access to innovative medicines, compulsory licensing will not solve larger problems regarding access to medicines and healthcare.  The challenge for courts in the developing world is to balance intellectual property rights against the need for affordable medicines for an ever increasing number of patients. Although there is no clear sign that they will do so, if developing countries begin to routinely use compulsory licenses, we may witness a ‘race to the bottom’ in which governments in the developing world fail to support research and innovation in public health and science.  In the absence of the investment made by innovative industries, and the resulting R&D, there would be no generic medicines for the world’s patients.  It can be argued that the responsibility to promote the development of new drugs lies with all countries, not solely those in the west.


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About the Author

AshnaAshna Narain Singhani is pursuing her LL.M. (Human Rights) from National Law School of India University, Bengaluru. Her core areas of interest are Women and Child Rights under National and International Laws. Her motivation to pursue LL.M. in human rights stems from her interest in International Law, particularly regarding the need to promote human rights. She has a keen interest in Legal Research as it helps in promoting awareness amongst the masses regarding the core issues. In the rare hours when she is free, she enjoys listening to music and travelling. With this interest in mind, she is currently interning with the Model Governance Foundation.

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