Affordability versus innovation: Is compulsory licensing the solution?

1 Background

The intellectual property right in pharmaceuticals has long been debated due to its direct impact on the socio-economic aspects of the society. While the industrialized countries of the West, having better innovative capacity, always favored higher patent protection laws, the developing nations, which were mostly based on import of technology and new products, wanted liberal patent rights [1].

The developed countries have tried to negotiate stronger intellectual property protection agreements with the developing nations many times but no common ground was laid in any conference until the early 1980s. The developed countries, in an attempt to achieve patent protection, persuaded World Intellectual Property Organization (WIPO) to link multilateral trade negotiations to the international intellectual property protection in the Uruguay Round in 1986 [2–4].

In 1984, the US amended section 301 of the US Trade Act of 1974 and authorized the US President to restrict trade with countries where patent protection is insufficient. This led to the trade of many developing countries being affected by this law. After several years of negotiations in 1994 the Uruguay round of agreement occurred which incorporated a comprehensive set of minimum standards of intellectual property rights internationally, termed Trade-Related Aspects of Intellectual Property Rights (TRIPS). In 1995, World Trade Organization was set up which replaced the General Agreement on Tariffs and Trade [5]. Faced with increasing global pressure and with a desire to sustain the trade relations with the Western world, most of the countries agreed to TRIPS.

Prior to TRIPS the laws related to the international intellectual property rights including patents, trademarks, designs and utility models, were guided by the Paris Convention of 1883 and the revised laws of 1967 [6]. These laws gave the liberty to the countries to form their own patent laws applying to both product and process patents.

With the TRIPS agreement, the stringent patent policies led to exclusive monopolistic rights to patentees, which in turn led to higher prices. With the rising burden of the AIDS epidemic the developing countries faced the huge burden of patients who could not access the antiretroviral medicines because of unaffordability. After large scale humanitarian protests, in 2001 the Doha Declaration was introduced in TRIPS agreement. This was done to reassure developing countries that they could use the flexibilities given under TRIPS in order to safeguard against a public health emergency. The TRIPS flexibilities were a set of norms that allowed room for variations in implementation of TRIPS obligations. These included the right of countries to define the patentability criteria subject to their countries requirements, issuing compulsory licenses under specified conditions, allowing parallel import of drugs and use of competition policies to limit the ill effects of monopoly created by patents. However the use of compulsory license was restricted only for domestic use and not for exportation to other nations. This raised concerns in the less developed nations as they lacked the infrastructure and capacity to manufacture the drugs so the issuance of compulsory license made less sense to them. To overcome the issues raised in this regard, on 30 August 2003 an agreement was reached by WTO on paragraph 6 of the Doha declaration. Paragraph 6 gave a waiver to the Article 31 (f) and 31 (h) of TRIPS agreement which specified the use of compulsory license to allow manufacture for domestic use [7]. So the drugs produced under compulsory license can now be exported with certain prerequisites to support the least developed nations which lack manufacturing capacity and skill. Compulsory license was also an effective means of bargaining instrument [8] as illustrated in Table 1.

A literature search using Pubmed, Google Scholar and EconLit was performed using the MesH terms: “Compulsory Licensing”, “Pharmaceutical”, “Drug” and “Patent”. Parallel searches were also performed on “World Intellectual Property Organization”, “World Health Organization” and “World Bank and Annual Health Reports” of countries. The countries selected for detailed study include Brazil, Canada, India and South Africa. The criteria for selection of these countries was based on the fact that Brazil, India and South Africa are BRICS countries that have a huge pharmaceutical industry and form a good representative of the developing countries with high potential to produce drugs at low cost. While Canada- Rwanda is a special case where a developed country has used compulsory license to help a developing nation. In each focus case in depth analysis is done about the circumstances which led to issue of compulsory license, what legal mechanism was followed and how it affected the outcomes.

3 Compulsory license in context of Canada

The history of compulsory licensing in Canada goes back to 1923 when the first compulsory licensing on drugs was issued. The Patent Act in Canada of 1869 was amended to permit the compulsory licensing for pharmaceuticals [9]. Only active pharmaceutical ingredients manufactured in the country were allowed under this license in order to check for affordable prices of the medicine and also to make it consistent to incentivize the innovator. However, the capacity of the generic producers was limited in the country during that time so the provision of compulsory licensing was explored to a limited degree. Only 22 licenses were granted from 1935 to 1969 in Canada [10]. In 1969 the Patent Act was again amended in Canada to permit compulsory license for importing active pharmaceutical ingredients for manufacturing medicines in Canada. The aim of this amendment was to foster growth of the domestic generic drug industry and to achieve low medicine prices. In 1987 the Amendment in Patent Act became a law. Bill C-22 was passed with an objective to increase investment in research and development in Canada by strengthening intellectual property rights, regulating the drug prices by establishing the Patented Medicines Prices Review Board thereby improving the health of citizens along with economic development and multilateral relations [11]. Bill C-22 also stated that patents will be issued for 20 years from application filling date. The reason for strengthening patent laws was part of the Free Trade Agreement with the US, made in 1987. So the aim was to support US drug companies’ patent rights: the US offered to spend more on R&D in Canada in exchange [12].

In 1991 the final draft came out from the Uruguay Round of General Agreement on Tariffs and Trade (GATT) and subsequently in 1992 there was final draft of North American Free Trade Agreement (NAFTA). To align the Canadian law with respect to GATT and NAFTA the Patent Act was amended in 1992 with the introduction of Bill C-91. Subsequently Bill C-91 became law in 1993 and abolished compulsory licensing to incorporate TRIPS provisions. So until 2004 there was no provision for compulsory licensing in Canada, but in 2004 Jean Chretien pledged to Africa to use the Access to Medicines Act. The Act was first to use the flexibilities under the WTO waiver decision in 2003 to allow the compulsory license for exporting low cost generic drugs to a selected list of countries under Canada’s Access to Medicine Regime (CAMR), where the countries concerned do not have significant drug manufacturing capacity. The use of compulsory licensing was limited to export and domestic use was not permitted. Moreover the safety and quality requirements of drugs produced under this regime will be same as for Canadian market and they will have different color coding and labelling to distinguish them from the ones which are marketed in Canada. Table 2 illustrates the price difference of same fixed dose combination drug as offered by different companies [13].

While the Act was hugely supported by the civil society, the process of implementing the law was criticized as being very lengthy, confusing and cumbersome, even by the generic manufacturing firm Apotex, which got the first compulsory license. However, Industry Canada, a department of Canadian government, advocated that the bill was formed to help less developed nations which lacked drug manufacturing capacity, and it allowed drug makers to export drugs on humanitarian grounds and not on the basis of lucrative transactions [14]. The compulsory license case of Canada was the first in its kind to use the flexibility permitted under WTO to provide access to medicines to another country in a broader strategy to assist less developed countries to reduce suffering. Canada notified WTO in 2007 to have issued a compulsory license to Apotex to produce and export TriAvir, a triple combination AIDS drug to Rwanda.

The onus of informing WTO and Canadian government about the need for medicine and finding a suitable pharmaceutical company in Canada which could produce the drug was entirely the responsibility of importing country. Interestingly the regime for exporting drugs under compulsory license can also be applied to a non-WTO country if they are listed in CAMR [9]. M e ´ decins Sans Frontières (MSF) presented a report in a conference in 2006, titled “Neither Expeditious, Nor a Solution: The WTO August 30th Decision is Unworkable. An illustration through Canada’s Jean Chretien Pledge to Africa” illustrated the problems associated with the act [15]. Some of the issues raised were related to the restrictions imposed on the medicines that can be exported under a compulsory license. This pointed out that only Schedule-1 drugs are allowed to be exported and there is also a limit on the quantity of the medicine. The license also only lasts for 2 years while the process of acquiring a compulsory license is relatively cumbersome. The European Union, Norway, Switzerland, China and South Korea also allow compulsory license to permit production and export of medicines to less developed countries, but those laws never been used and put to practice [16]. Although not perfect, Canada’s access to medicine regime is the only regime to date that has delivered a drug under the Doha Declaration to help another country in reducing suffering.

Brazil is amongst the few developing countries which applied for compulsory licensing to guarantee universal coverage domestically to antiretroviral drugs. The game changer in this case was the National AIDS Program (NAP) which successfully implemented free diagnosis and antiretroviral treatment [17]. This was possible not just due to strong legislation to provide access to the treatment, but also due to increased public sector manufacturing of low cost generic versions thereby reducing the dependence on imported patented drugs. Civil society played a key role right from formulation to implementation of the NAP.

The public health system in Brazil started distributing free drugs to treat opportunistic infections associated with HIV right from 1988 and began giving free antiretroviral single drug Zidovudine in 1991 [18]. However, Law 9.313, which gives the right to receive free antiretroviral therapy to all eligible patients in public health facilities, was introduced in 1996 [19, 20]. NAP is a centrally managed nation-wide program which delivers antiretroviral therapy through public hospitals or health centers having AIDS Drug Dispensing Units (ADDU). Sistema Unico de Saude was a system laid down by civil society activists in 1988 to provide universal health coverage at state and municipal levels [21]. They used Article 196 of Brazilian law to advocate for the federal government responsibility to provide universal healthcare. NAP was based on the infrastructure of Sistema Unico de Saude [22]. In 1998 a computerized drug logistics system was employed for supply chain management which was named as Sistema de Controle Logístico de Medicamentos (SICLOM). To track the number of patients a network of public laboratories was also included in the program which provided CD4 count and HIV testing without any charge [23]. Another computerized system to control the laboratories SISCEL was included under the National AIDS program.

The count of HIV infected people in Brazil was around 597,000 in 1980 [20] and the number of AIDS patients registered was about 222, 356 during 1980 to 2001. Within one year of the launch of NAP the number of reported HIV cases in public health facilities increased because more people were now diagnosed and many people with HIV shifted from private to free public health system. In 1997 approximately 35,900 individuals received antiretroviral drugs; the number increased to 55,600 in 1998 then to 73,000 in 1999 and 105, 000 in 2001.

In consequence the government budget on antiretroviral drugs also spiraled upwards from 34 million US dollars in 1996 to 224 million US dollars in 1997 and 303 million US dollars in 2000 [24]. The increased expenditure was partially due to the inclusion of more patented drugs in the National AIDS program such as Lopinavir, Nelfavir and Efavirenz.

Due to the rising cost and increasing number of patients it became unsustainable to run the National AIDS Program. But at the same time the positive outcome and effectiveness of the program in substantial morbidity reduction also made it necessary to continue the program. Since 1995–2000, AIDS mortality fell by nearly 54% in Sao Paulo alone [24]. Subsequently the cost savings due to reduction in hospital admissions and decreased opportunistic infections was nearly 1·1 billion US dollars during 1997–2001.

Until the 1980s there was no law on intellectual property rights on pharmaceuticals in Brazil. Like all other developing countries Brazil was allowed a grace period to comply with TRIPS agreement by 2005. However under increased global pressure an industrial property law was passed in 1996 in Brazil [25], the same year when the government committed to free antiretroviral drugs [19].

The Brazilian patent law also allowed the pipeline patent or revalidation patent mechanism in 1996 which provides market exclusivity rights to a product for which a patent has been filed but not yet granted in Brazil but has already been granted a patent in other countries. This led a number of antiretroviral drugs such as Abacavir, Lopinavir, Efavirenz and many other drugs to get pipeline patents practically without any technical examination [26, 27]. Brazil started granting pharmaceutical patents in 1997 and soon the patented drugs under national AIDS program increased the medicine expenditure budget. Soon the drug prices rose from 54% within a year from 1989 which reflected lack of pharmacovigilance comprising a multitude of factors like import from multinational foreign firms, closure of 1700 local generic firms and hyperinflation [28]. Refer to Table 5 for analyzing prices of the generic and patented Sorafenib drug. Figure 1 shows the trend of AIDS patients under national program in Brazil and the cost of medicine [29].

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Fig.1

Trend of AIDS patient per year in National AIDS program in Brazil and the cost of antiretroviral medicine Efavrirenz 600 mg tablet (price in US dollars) before and after implementation of compulsory license. Source: Da Silva et al., 2012 [29]; Cherian, 2016 [8].

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Fig.2

Price of Sorafenib per kg that API sold in different countries (price in US dollars). Source: Hill et al., 2016 [45]; Cherian, 2016 [8].

In order to promote local production of generic antiretrovirals, Generic law 9.787 was passed in 1999 which also specified preference to generic drug procurement [30]. It was observed that 47 percent of antiretrovirals which accounted for 19 percent of expenditure on drugs in NAP came from domestic firms [24], with the rest from international firms in 1999. With focused generic domestic industry promotion and capacity building by 2001 Brazil was able to produce 13 antiretroviral drugs locally. In 2001 about 63 percent of antiretrovirals were produced by a domestic firm. Most of the domestic production of antiretroviral drugs comprised of non-patented first line drugs [22].

Due to rising costs and the increasing number of HIV patients it became essential to amend the patent laws and in 2001 a number of flexibilities were provided in patent laws. These included a requirement of prior consent from the Brazilian Drug Regulatory Authority before granting a pharmaceutical patent [31, 32]. In Chapter 7 of Industrial property law which was passed in 1996, Law no. 9.279, Section III described the provision for issuing compulsory license. Article 68 of the law gave the provision of issuing compulsory license on the basis of non-working of the patent in the country, Article 71 gave the provision in case of public health interests and emergencies, Article 73 specified it under anti-competitive behavior.

With a sound generic domestic industry and amended patent laws, Brazil started using the flexibility offered by TRIPS in terms of compulsory license to negotiate prices of the patented medicines until 2006 [32]. Refer to Table 3 for price negotiations.

In 2001 Brazil considered breaking patents if Roche did not reduce the cost of Nelfinavir and similarly for the drug Efavirenz patented by Merck. Soon Merck reduced the cost of Efavirenz by 60 percent [33]. Roche also agreed to reduce the price of Nelfinavir [34] but the reductions were deemed inadequate. In 2005 the Brazilian government considered issuing a compulsory license for Lopinavir patented by Abbott. After negotiations, the government agreed to pay 1380 US dollars per patient per year to Abbott for the old version and for heat stable version to pay 1518 US dollar. The prices remained higher than the international prices [35].

The first line antiretroviral treatment given in NAP comprised of Zidovudine, Lamivudine and Efavirenz in 2005.The cost built up due to high imports [36]. Efavirenz itself contributed to 21 percent of the total antiretroviral expenditure and Efavirenz with Nevirapine having even higher cost as both were under pipeline patent protection [37].

Even after hard price negotiations the newer patented antiretrovirals remained unaffordable. The government tried to negotiate the price of Efavirenz with Merck to be offered at a price given to Thailand for the same drug (USD 288 per patient per year) compared to Brazilian price (USD 580 per patient per year). A comparison was also made with the Indian generic version of the same drug which costs even less [38]. But Merck refused to reduce the price by more than 2%, following which a Ministerial Ordinance 886 was passed in 2007 announcing the issue of a compulsory license on import and generic manufacture of Efavirenz. The license was given for five years with a non-excludable and renewable clause along with a royalty payment at 1.5 percent of the purchase price of the drug. So the generic drug was imported in Brazil from Indian firms Ranbaxy and Aurobindo Pharma from 2007 to 2009, when the local production began by Farmanguinhos-Rio, LaFepe-Pernambuco, Globequimica, Cristalia, and Nortec [39]. Refer to Table 4 for prices of the Efavirenz drug. In 2012 the compulsory license on Efavirenz was renewed for another five years.

The case of Brazil reflects how a strong domestic generic industry, strong civil society and strong government commitment can prioritize health over monetary incentives to the innovation.

6 Compulsory license in Indian context

The Indian Patent Act is well maintained to become TRIPS-compliant though the government has never closed the door to the use of compulsory license. The government strongly believes that the legislative framework to safeguard intellectual property rights is intact in the country, however as per Doha Declaration each member has the right to grant compulsory license and also the freedom to lay down the rules upon which it can be issued authorizing a firm other than patent holder to produce the patented product or process to a defined extent even without consent of the patent owner. As stated in Section 84 of Indian Patent Act 1970, compulsory license can be issued after three years from the date of grant of the patent if the patent has not worked in the country and there is a public health emergency [40]. Moreover under the Section 92A of Patent Act 2005, incorporated the Waiver Decision of 2003, allowing a compulsory license to manufacture and export the patented drug to any country with insufficient pharmaceutical manufacturing capacity having public health emergency, provided such country has allowed import of the patented drug by notification.

The first case of compulsory license in India happened in the 9 March 2012 when the license was given to Hyderabad based pharmaceutical company Natco to produce a generic version of the anti-cancer drug, Nexavar used for treatment of liver and kidney cancer, which was patented by Bayer AG a German Pharmaceutical firm (patent number IN215758). The active pharmaceutical ingredient of the drug is Sorafenib Tosylate which is an oral tablet with a dosage strength of 200 mg. It was a non-assignable license to produce with no right to import the drug. The drug usage is limited to liver and renal cancer treatment. Along with this Natco had to pay a royalty fee to Bayer equivalent to 6 percent of the sales turnover of the Sorafenib produced under the compulsory license.

Before granting compulsory license NATCO requested Bayer to give voluntary license, failing which it applied for compulsory license. It was established that the patented drug was not working in the region and the cost of Sorafenib produced by NATCO was 8880 INR per patient per month while the same drug branded version Nexavar was 280,428 INR per patient per month [43]. It was reported that Bayer did not import Nexavar in the first year of patent grant and imported only about 2 percent of the drug from 2009–2011, which was deemed insufficient quantity and grossly inadequate for local needs. In 2011, the estimated number of patients requiring Nexavar in India was around 8900 but only 593 boxes to meet the needs of about 200 patients were supplied by Bayer. The drug was not locally manufactured in India and was imported from Germany and Bayer claimed that it was not suitable to manufacture the drug locally [44]. In America and European Union, Nexavar was given Orphan drug status [45], but due to high price it was not approved in the UK. The prices offered in the UK were almost similar to those in India.

The argument given by Bayer was that it did not manufacture in India due to economic reasons and it was a strategic reason to produce the drug in Germany, but that does not mean that patented drug has not worked in the territory. Bayer also argued that the drug was already made available at lower price based on the recommendations of oncologists. Bayer appealed the decision of compulsory license at the Intellectual Property Appellate Board, then to the High Court and to the Supreme Court, but all of these were rejected.

On these grounds the Patent Controller granted non-exclusive compulsory license to NATCO to produce a generic version of Nexavar. As per the remuneration recommended by UNDP royalty payments were set at 6 percent of total drugs sold and on appeal by Bayer was increased to 7 percent.

On 4 March, 2013 a second case of compulsory license was filed in India by BDR pharmaceuticals for producing Sprycel with active pharmaceutical ingredient Dasatinib which is dispensed as oral tablet for treatment of Chronic Myeloid Leukemia [46]. It was however rejected. Sprycel was patented drug of Bristol Myers Squibb’s company with patent number IN203937. It was observed that BDR pharmaceuticals had not made any credible attempt to receive voluntary license from Bristol Myers Squibb’s company, and also it could not justify the ability to work the use of license to the public advantage.

The most recent case on 29 June 2015 where Lee Pharma, filed a compulsory licensing for the anti-diabetic drug Saxagliptin which is patented by Astra Zeneca (Patent number IN 206543). The grounds laid by Lee Pharma was that the patent has not met the public requirements and is not available at affordable prices and the invention has not worked in India. However, the application by Lee Pharma was rejected on the basis that it does not demonstrate the unmet requirement of the public. Moreover it was observed that Saxagliptin and other DPP-4 inhibitors anti-diabetic drugs were available at the same market price, such that the argument of Saxagliptin being unaffordable cannot be true.

So Indian law considers compulsory license as the sovereign right of government and is also legitimate under TRIPS agreement. At the same time it is evident from recent two filings that granting compulsory license is well thought-out and there is a legally laid down process where frivolous applicants are not entertained. It is argued that compulsory license granted is a conscious decision of India to safeguard public health of the country.

7 Compulsory license in context of South Africa

Patent law in South Africa is formulated in response to the catastrophic AIDS situation requiring public health intervention to control the cost of treatment. Despite the AIDS crisis, there has been weak adoption of the compulsory license, since it resulted in strong conflict from developed nations and a desire to remain accepted in the international trade and economic framework. While India and South Africa both have strong pharmaceutical industry, the reasons behind issuing compulsory licenses in South Africa was majorly due to AIDS public health emergency [47].

In the year 1997 the Medicines and Related Substance Control Act was signed under the leadership of Prime Minister Nelson Mandela [48]. This act was in response to the AIDS crisis in the country, so as to provide affordable antiretroviral drugs for HIV infected people in the country [49]. Under this act, the Minister of Health has the power to grant compulsory license – section10 [44] and allow parallel import of drugs in case of a public health emergency. Under section 22(c) it is stated that the compulsory license can be provided if the drug was initially marketed by the patent holder or with their consent [6] and there is no specific extent to which it can be provided. In fact the language of the act is a general statement highlighting that the compulsory license can be issued as deemed essential to maintain public health needs.

The Act was criticized by various developed nations, especially the United States. Approximately forty big pharmaceutical companies sued against South Africa Act claiming it to be violation of pharmaceutical patent rights [50]. However, violation of TRIPS by the Act is still an unsettled matter but South Africa definitely backed off seeing such a huge criticism of the Act internationally. In 2001 the pharmaceutical companies withdrew the suit filed [51]. The amendment in the Medicines and Related Substance Amendment Act was incorporated and it got passed in the Parliament to form the “South African Medicines and Medical Devices Regulatory Act (SAMMDRA)”. So even after the amendment of act to include TRIPS flexibilities, to date there has been no case of compulsory license granted by the government despite the huge burden of HIV [47, 52]. The pressure to sustain healthy relations internationally for trade and economic growth could be one potential cause of this.

8 Discussion and conclusion

There is a strong connection between economic development and patent laws. While some government adopted weak or no patent laws before TRIPS to ensure access to affordable medicines, others made patent laws deliberately such so as to promote the domestic pharmaceutical industry. With the TRIPS agreement countries were motivated and some were pressurized to strengthen intellectual property rights. In order to safeguard their global trade relations many developing countries changed their patent laws to comply with the TRIPS agreement, but were anxious about the price rise of the essential medicines due to patenting. To reassure them DOHA declaration came up in 2001 permitting flexibilities given in TRIPS agreement which any country can use in case of national interest and public health emergency. The use of compulsory license as type of TRIPS flexibility was only restricted for domestic purposes and the export was not allowed under the DOHA declaration. However many less developed countries still struggled to manufacture essential medicines using compulsory license due to lack of manufacturing capacity. So due to increase pressure from these countries a waiver decision came in 2003, in which the use of compulsory license was opened for export also under specified conditions.

In light of all these patent reforms this paper tries to look at the use of compulsory licensing in selected countries to understand the framework and policy implications in the respective context. The countries studied are a part of BRICS countries (except Canada). These countries have strong pharmaceutical industries and they have the potential to produce drugs at low cost and supply it to other low- and middle-income countries at lower cost. While the paper does not try to make generalizations about the patenting issues, here are some observed trends which are common. Most of the developed countries have the potential to innovate and reap the benefits of strong patent laws. Strong patent laws also look like a methodology used by industrialized nations to secure their prosperity, thereby deepening the divide between the rich and the poor. As many countries aim towards universal health coverage the access to affordable medicines makes it imperative to use compulsory licensing and it seems that the trend of compulsory license will move upward in the future. There is need to adopt a more sustainable model for financing of research and development activity of new drug innovation, but prior to that there is need for transparency on the amount of investment made in research by the pharmaceutical companies along with cost benefit analysis of the investment given the burden of the disease which is cured.

Linking trade benefits with stronger intellectual rights will force some less developed countries to adopt stronger patent laws where it becomes difficult to justify innovation and financial incentives to already most powerful industry at the cost of life of billions. The incentive to innovate should not restrict access to medicines. This needs a new financial mechanism to motivate investment in drug discovery. The mechanism could be through publicly supported research grants and prizes for innovation in drugs. This will also lead to promoting on area specific research guided by the burden of disease in the respective region and will bring hope to neglected drug discovery.

Conflict of interest

None to report.