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BW Businessworld

Where Patents Fear To Tread

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When India’s Controller General of Patents announced a ruling on March 9, 2012 that granted a non-exclusive and non-assignable compulsory license to Natco Pharma to manufacture and sell a generic version of Bayer’s Nexavar, a drug used to treat advanced-stage liver and kidney cancer,NGOs and patent advocacy groups applauded. The ruling meant that Natco could now sell a monthly dose of the life-saving medicine for Rs 8,800 ($172), a discount of 97 per cent on the innovator price.

What seems not to have been considered are the likely far reaching and disturbing implications that this ruling has for global commerce and development, such as the inadequacy of competition and trade policy standards.

Protecting Intellectual Property

We know that a society’s ability to generate, exploit and share technological advance is possibly the most important driver of economic value creation. Policymakers endeavour to promote non-specific conditions to incentivise entrepreneurial risk taking. Patents are a key example of this. They stimulate risky research and foster innovation and diffusion.

But there are risks, even in this. One, overloaded patent officers may grant monopoly status to an already existing technology. Next, patents may give rise to monopolistic pricing or, by means of technology licences or standard setting, affect related stages of production and use in ways that result in welfare losses. To remedy the former risk, technology assessment may be broadened by inducing third parties to challenge the validity of patents in court; addressing the latter
might call for price discrimination to eliminate welfare losses or for the use of compulsory licensing to increase market choice. Each response is fraught with conceptual and practical difficulties related to patenting, reference pricing, parallel trade and valuation. The issues become even more complex in the context of pharmaceutical products and emerging markets.

For many years, product patents were not awarded for pharmaceuticals: Japan and Switzerland did not offer such protection until 1976/77; Spain, Portugal, Greece and Norway followed in 1992. Drugs were simply deemed too important to patent and leave vulnerable to monopoly abuse. However, mounting costs and risks in drug development and the difficulty of otherwise securing commercial advantage eventually tipped the balance in favour of legally enforceable exclusivity. And so, following the inclusion of the agreement on trade-related aspects of intellectual property rights (TRIPS) in World Trade Organisation (WTO) rules in 1994, members were obliged to honour pharmaceutical patent protection by 2016.

TRIPS relies on national patentability criteria with respect to incremental innovation or functional equivalency and provides for enforcement, dispute settlement and transition mechanisms to ensure minimum standards for protecting intellectual property rights. As such it regulates among other things parallel imports, the use of exclusive marketing rights and the protection of undisclosed test data. At the same time, member countries commit to common compulsory licensing standards when seeking market relief. But particularly with regard to the latter, perspectives continue to differ.

Protecting Public Need
Since its adoption by the 1883 Paris Convention, compulsory licensing has been allowed in almost all patent systems to respond to anti-competitive, non-working or blocking behavior or cases of public need. However, countries with comparatively lower levels of local patenting activity tend to view patents as a vehicle to access technology from abroad rather than to stimulate innovation. Between 2001 and 2007, developing countries made use of TRIPS stipulations to issue more than 52 compulsory licenses for pharmaceutical products alone. Breaking patents became a means to enforce technology transfer and price concessions.

TRIPS permits compulsory licenses to enable production mainly for domestic use (i.e. 51 per cent of capacity) when reasonable commercial negotiations have failed; without prior negotiation when a national emergency or other circumstance of extreme urgency has arisen; or without prior negotiation if production is for “public, non-commercial use.” In addition, reacting to the global spread of HIV/AIDS, the Doha Declaration on TRIPS of October 2001 affirmed that countries may undertake compulsory licensing for broadly defined public health reasons. Further negotiations resulted in a waiver of production limitations if a country lacks manufacturing capabilities or to remedy an anti-competitive practice. In addition, various other TRIPS provisions, particularly with regard to compensation requirements and licensing practices, were expressed in ways that gave member countries considerable discretion in formulating domestic laws to safeguard the ‘public interest.’ Needless to say, what is in the public’s interest depends on who is defining it.

Conflicting Interest?
The challenge observed by many in emerging countries is that TRIPS-compliant patent enforcement translates into higher prices for life-saving drugs, delayed generic competition and weakened local production. Consequently, compulsory licensing becomes a vital tool to elevate access to medicine as a right above the concerns for trade.

For example, Thailand issued compulsory licenses for heart disease and cancer drugs under the ‘public non-commercial use provision’ to be able to deliver on its universal healthcare promise. Having achieved universal coverage after more than 50 years of protracted political debate, Thailand is leading an emerging market trend towards improving healthcare that is rapidly expanding in terms of both the share of the population and the range of drugs that are included. As part of this trend, governments are distributing drugs to patients free of charge - an action which, in the absence of any WTO definition, may very well be considered ‘public non-commercial use.’ Yet, by applying the ‘public non-commercial use’ rationale to non-emergency, non-infectious diseases, such as cancer and heart disease, Thailand is converting compulsory licensing into an effectively unconstrained method of pure cost containment.

Furthermore, a widespread use of this model would not only require the developed world to shoulder a disproportionate share of the necessary R&D expenditures but at the same time present it with an attractive option to shed that burden. To avoid this rather bleak outlook for the future of pharmaceutical R&D, there is an urgent need for a WTO panel review. Strengthening intellectual property rights incentivises research on diseases that are specific to developing countries, promotes technology transfer through the localisation of R&D and production investments and thereby contributes to improving typically inadequate health service infrastructures.

(Ralf Boscheck is Professor of Economics and Business Policy at IMD. The views expressed here are his own)