In a move with far reaching implications for the debates around pharmaceutical patents, innovation and access to medicines, the Indian patent office issued its first ever compulsory licence in the post TRIPS era.

While health activists, generic manufacturers and several academics lauded the decision, the multinational pharmaceutical industry was up in arms.

The facts of the case are thus:

In August 2011, Natco, an Indian generic manufactured applied for a compulsory licence in respect of Bayer’s patent covering an anticancer drug, Sorefanib Tosylate, meant for patients with advanced kidney and liver cancer.

Underlying the Indian Patents Act is the philosophy that if an intellectual property owner abuses her statutorily granted monopoly by engaging in prohibitive pricing (where a patented drug is priced out of the reach of the average consumer) or by failing to supply adequate quantities of the IP good to the public, a compulsory licence will issue (after three years from the date of grant of the patent).

Constituting what many regard as a classic text-book case for compulsory licensing, the Controller General of Patents, PH Kurian found that all the grounds prescribed in section 84 of the Indian Patents Act for the issuance of a compulsory licence had been met, namely:

1. Bayer supplied the drug to hardly 2% of the total patient population of approximately 8000 patients that required the drug. Therefore, the reasonable requirements of the public with respect to the patented drug (Nexavar) were clearly not met.

2. Bayer’s pricing of the drug was excessive and did not constitute a "reasonably affordable" price. It charged Rs 2.8 lakhs for a months' supply of the drug, whereas Natco was willing to supply the same quantity at Rs 8800 per month.

3. Since Bayer did not manufacture reasonable quantities of the drug in India, but merely imported it, it could not be said to have complied with the “working” requirement under the Indian Patents Act. The Controller held in pertinent part that “'worked in the territory of India" under section 84 meant manufactured to a reasonable extent in India."

The Controller then proceeded to issue the licence, stating that Natco ought to pay 6% of its net sales to Bayer as royalty.

Local Working:

The Controllers decision on “local working” is likely to prove controversial, since almost 90% of MNC drugs are not manufactured in India, and therefore susceptible to compulsory licences. However, a close reading of the decision suggests that it is backed by cogent reasons and tenable under the law.

For one, Section 83 of the Act makes clear that patents are not granted only for the purpose of “importation” of the patented product. Secondly, the Indian Patents Act uses the terms "working" and "importation" quite distinctly throughout the Act, making it evident that "working" as used in the Act cannot include "importation".

Some argue that a “local working” provision contravenes the mandate under Article 27 to not “discriminate” between locally produced and imported patented products. Given the fact that in the WTO Canada case, the panel stated that discrimination meant “unjustified differentiation”, one could argue that “local working” is a “justified” differentiation. For one, the Paris Convention clearly stated that “importation” would not amount to working of  a patent, and that if a patent wasn’t worked, this could be treated as an  “abuse”. Secondly, TRIPS is premised on the promise of technology transfer to developing countries. And a local working provision is geared towards encouraging such technology transfer. By forcing patentees to “work” their patents in India, the regime encourages local use/transfer of the said technology. A similar provision on “local working” in Brazil’s regime was challenged by the US—however, the case was later withdrawn and there was no ruling.

This decision of the Indian Patent Office is particularly important since it is not a “government” licence stricto sensu, where the government itself issues and works the licence (sometimes referred to as “government use”), as was the case in Brazil and Thailand. Rather this licence was triggered by the application of a private party (Natco) and the government issued this licence in its capacity as a quasi-judicial authority. In other words, the licence was not issued at the “discretion” of the government, but upon the satisfaction of certain pre-requisites, which when fulfilled, entitled a third party such as Natco to demand a licence.

It bears noting that the licence is very legal in nature and scope and helps temper the excesses of a patent monopoly to achieve public health ends. It is also perfectly compatible with TRIPS, notwithstanding the U.S. Commerce Secretary John Bryson’s recent anguish that this licence amounted to a “dilution of the international patent regime”

Compulsory Licences and Incentives to  Innovate

The key question now is: Would such licences decrease incentives to innovate? Thus far, there is no empirical work demonstrating that licences stultify the rate of innovation. The few studies available indicate that licences do not have any significant demonstrable effects on the rate and pace of innovation. Illustratively, Colleen Chien empirically tests the rates of patenting and other measures of inventive activity before and after six compulsory licences over drug patents issued in the 1980s and 1990s. She observed no uniform decline in innovation by companies affected by compulsory licences and found very little evidence of a negative impact.

More importantly, one needs to ask whether all countries in the world need to contribute equally to Bayer’s R&D efforts. Or whether countries such as India with significant numbers of poor patients can devise policies to induce lower priced drugs in the market, without worrying excessively about Bayers’ incentives to innovate, given that such incentives are more than adequately provided by western markets such as the US and EU. After all, some of the biggest innovators today benefitted from lax IP regimes in the past. Illustratively, Switzerland, which houses some of the world’s leading drug originators today refused to introduce product patents till 1977 and it was only after considerable pressure and bullying from Germany that it finally yielded.  (See Dominique S. Ritter, Switzerland's Patent Law History, 14 Fordham Intell. Prop. Media & Ent. L.J. 463 (2004).

Lastly, it must be borne in mind that a compulsory licence is not an evisceration of the patent, as is sometimes made out to be in media reports. Rather, it embodies what Calabresi and Melamed in their seminal piece describe as a “liability” rule, where the patentee continues to hold the patent and is entitled to a reasonable royalty from every new player entering the market. This advantage (in terms of compensation through royalties) cannot be understated, particularly in a market like India, where the consumer market is highly differentiated in terms of purchasing power. Drug originators typically cater to very high-income consumers, while generics are able to tap into middle and low-income consumer segments as well. Consequently, the possibility of a new generic entrant entering a market segment hitherto untapped by the originator, rather than simply displacing the patentee’s existing customer base is high. To this extent, a compulsory licence may permit an innovator to profit from newer untapped markets.

Shamnad Basheer is the Ministry of HRD Professor of IP Law at the National University of Juridical Sciences (NUJS), Kolkata and founder of Indian IP blog, SpicyIP. He has written on this licensing order at SpicyIP and in an editorial for the Indian Express. His earlier writings on this theme (including a report here) were relied on by the Controller General in his order.