Envisage

A Bridge Too Far

by Sarah Fister Gale

January 2008

Intellectual property laws are designed to protect patent holders, but they include an option called compulsory licensing that has lead to much frustration and discussion in the pharmaceutical industry. Compulsory licensing is intended to be a last resort for the poorest nations to break patents on drugs needed in emergency circumstances when negotiations with pharmaceutical manufacturers fail. Primarily used by countries with large burdens of HIV/AIDS, compulsory licensing is intended to provide affordable medical treatments for the most vulnerable populations. The reality, however, is that the current guidelines for who, when and why compulsory licenses are issued by countries are too vague to be appropriately implemented in those circumstances that truly require it. And, even when a compulsory license is issued, the extreme poverty, lack of technical knowledge, and morass of tariffs and other financial red tape means that those patients most in need of critical drugs are still unlikely to gain access to them.

Vagaries Abound

A government issues a compulsory license to local manufacturers to produce a patented product or process without the consent of the patent owner. It is one of the flexibilities on patent protection included in the World Trade Organization’s agreement on intellectual property, called the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, which took effect in 1995. Part of the problem with the TRIPS agreement is that it does not specifically list the reasons that might be used to justify compulsory licensing. The Doha Declaration on TRIPS and Public Health states that each country is free to individually determine the grounds for granting compulsory licenses.

Article 31 of the TRIPS Agreement does list a number of non-specific conditions for issuing compulsory licenses. In particular it states “such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time.” However, it also states “this requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.”

Even when a compulsory license has been issued, the patent owner has to receive “adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization;” however, it does not define how to determine what “adequate remuneration” or “economic value” might be.

Eric Noehrenberg, director of public health advocacy for the International Federation of Pharmaceutical Manufacturing and Associations in Geneva, Switzerland, notes that the vagaries in the guidelines enable some countries to take advantage of the compulsory licensing option. “Compulsory licensing is part of TRIPS, but it should be used as a last resort,” he says. “It is clear [in Article 31] that this instrument is to be used if deals with the patent holder can’t otherwise be reached. However, some countries are using it as a first choice.”

Noehrenberg also points out that compulsory licenses don’t just negatively impact the patent holder, but it also creates an environment that allows for lower quality manufacturing processes in which drugs are developed without the technical guidance of the manufacturer itself. “Compulsory licensing doesn’t guarantee product quality, and it can lead to drug resistance,” he says, noting that in those situations, it is the patients who suffer.

All About Access?

There is no easy solution for getting critical drugs to patients in under developed countries, says Daniel Cahoy, associate professor of business law at Penn State’s Smeal College of Business, in University Park, Pa., USA. However, he doesn’t see compulsory licensing as the answer. In his 2007 research paper titled “Confronting Myths and Myopia on the Road from Doha,” Cahoy writes that the problem with compulsory licensing is that the rules are fuzzy, particularly as they relate to compensation to patent owners.

“I’m not suggesting that compulsory licensing be abolished or that it is necessarily a bad thing, but it is a somewhat dysfunctional system,” Cahoy says. “We need to think about what we want compulsory licensing to do.” He also says that ambiguous international rules outlining when and how governments may “break” pharmaceutical patents may end up significantly reducing incentives for innovation while at the same time failing to increase access to medicines. “It can undermine incentives to conduct research into essential medicines for medical emergencies in developing countries,” he says. “That is counterproductive to what TRIPS was meant to do.”

In the long term, compulsory licenses also have political implications, as companies and countries that hold the original patents to drugs are less likely to invest in nations that are forcibly copying their products. For example, in November 2006, Thailand issued a compulsory license for the Merck & Co. drug Sustiva (efavirenz). Then in February 2007, Thailand announced it also would break the patent for Abbott’s Kaletra—a lopinavir & ritonavir combination—through compulsory licensing, and that a number of other drugs for a variety of illnesses would follow.

In response, Abbott announced that it would no longer apply for licenses to sell seven of its newest products in Thailand, including a new heat resistant once-daily form of Kaletra. The country was also then placed on a U.S. Trade Representative “priority watch list” of countries seen to be committing intellectual property piracy.

A Three-Tiered Approach

In his paper, Cahoy defines an alternative approach to compulsory license remuneration during public health crises based on a country’s individual ability to pay. In Cahoy’s three-tiered model, derived from proposals put forth by others, the least developed countries would have the royalty process eliminated in medical emergencies. Middle-developed countries would receive small breaks and relaxation of full compensation of royalties, which would be clearly quantitatively defined. The royalty rate would be based on each country’s position on [the United Nation’s] Human Development Index. “The lower they are on the Index, the less they pay,” he says.

Cahoy says that industrialized nations could get compulsory licenses, but they would be required to pay full market price, even during a pandemic. In cases outside of a public health crisis or antitrust violations, Cahoy’s approach establishes full market compensation as the default policy for every country. He also identifies the adoption of a national exhaustion rule, which would limit importation into non-licensing countries, and manufacturing limits as important elements to any new compensation system.

“This system would be better because it’s predictable,” Cahoy says. “It could be debated and at least would allow pharmaceutical companies to plan and have open discussions about the impact of a compulsory license situation.”

Cahoy also believes that, with more predictable compulsory license rules, almost every country will be likely to negotiate with the patent holder for an alternative solution before breaking a patent. He also notes that it leads to better and more profitable resolutions if both parties can come to an agreement.

One example of an alternative resolution is the work conducted by Gilead Sciences in India. Gilead recently gained public attention for granting generic licensing deals to 10 Indian pharma manufacturers to distribute its HIV drug Viread (Tenofovir disoproxil fumarate) in India and 95 other resource-limited countries. More than 5.1 million people are believed to be infected with HIV in India—the second highest incidence of the disease after South Africa. The company is hoping to get a patent in India soon.

“Our goal is to provide better access to HIV drugs,” says Gregg Alton, senior vice president and general counsel, for Gilead Sciences, Inc., in Foster City, Calif., USA. According to Alton, Gilead feels that by licensing multiple manufacturers, it will intensify competition and drive down prices while still allowing the Indian firms to make a profit. Because local manufacturers have stronger ties in the community, and because they don’t have to make the investments in research, they have a greater opportunity to profit from manufacturing Viread for those regions than Gilead will. “We spent five years developing the processes for Viread before it launched,” he says, noting that with the technology transfer from Gilead, these manufacturers will have their manufacturing operations up and running in less than a year. “They will rely on high-volume, low-margin business models and will have incentives to find ways to drive manufacturing costs down.”

Alton also believes that adhering to high-quality manufacturing standards will give these firms a competitive market advantage. At a minimum, all facilities receiving licenses must be pre-qualified by the World Health Organization, and several of them are also pursuing certification from the U.S. Food and Drug Administration, he reports.

Jerry Norris, director of the Center for Science and Public Policy for the Hudson Institute, in Washington D.C., USA, agrees that fast-tracking these types of voluntary licenses for true generics reinforces the production of quality drugs. “The licenses go to responsible producers who follow good manufacturing practices,” he says. “It guarantees that patients receive a true generic versus a copy drug, and more drugs get to the people who need them.”

Public Versus Patient Health

Although achieving compromises over how patented drugs will be manufactured for low-income countries can be considered a victory, the reality is that for some nations, any price for drugs is too high, Norris says. He points out that even if a compulsory license pushes drug prices down to the cost of manufacturing, that price is still well out of reach of the most desperate patients. In the least developed countries, a dollar a day for drugs is an impossible luxury when food and clean water is barely attainable.

Norris suggests that the failure of the global system to get drugs to the neediest patients is in part because the wrong parties are at the negotiation table. “This is an issue of macroeconomics, not health,” he says. “To that end, we should be talking to the ministers of finance not just the ministers of health.”

The conflict, he notes, is that health departments are after cheap drugs fast in the wake of a medical crisis, while trade development offices will recognize the long-term benefits of building relationships through generic licenses versus breaking patents and facing the consequences. “Ministers of finance understand issues around breaking patents, such as the competition for international investment, but the case isn’t being made to them,” he says.

He also points out that drug delivery is focused on public health not patient health, and while that may garner a good price to a government, it doesn’t guarantee a reasonable price to the end user. “Governments often mark up drug costs with taxes, tariffs and duties, making the final price to patients higher than even the pharmaceutical company’s price,” Norris says, adding that the drug companies often get blamed for the price increase. “Pharma becomes the punching bag in these situations. It’s a huge public relations problem.”

While there is no easy solution to medical health crises in any country, maintaining open communication and cooperation between governments, manufacturers and patients is imperative, adds Mark Grayson, deputy vice president, communications and public affairs, for The Pharmaceutical Research and Manufacturers of America (PhRMA) in Washington, D.C., USA. “The best thing is for countries and pharmaceutical companies to work together so that patients get the medicines they need in a timely fashion.”

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