Patents and the Public Interest
Sep 8th 2010, C.P. Chandrasekhar

In a proactive move to ensure a fair balance between the protection of intellectual property rights and protection of the public interest, the Department of Industrial Policy and Promotion of the Ministry of Commerce and Industry has chosen to put out a discussion paper on the issue of Compulsory Licensing of Patents. Compulsory Licensing (CL) involves providing an agent other than the holder of the patent for a product or process to produce or market that product without the consent of the patent holder. In principle, the right of the government to resort to compulsory licensing can be invoked when the patent holder does not work the patent, or does so in a manner that is inimical to the public interest, leading to ”unreasonable prices”, inadequate technological progress, or inability to deal with public health or other emergencies.

The factors motivating the release of the paper is clearly spelt out. With India having signed on to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) under the WTO and with it having suitably modified its Patents and Trade Marks Acts as well as having enacted the Designs and Geographical Indications Act, it has a transparent regime for the protection of intellectual property (IP). However, any regime that protects IP must provide for ways to prevent the misuse of that protection or of its use in situations where it obviously hurts the public interest. One of the accepted and tested mechanisms to deal with such situations of improper use is compulsory licensing. The paper claims to be motivated by the desire to ”develop a predictable environment” for the use of such measures.

None can criticize this benign motive. But, stated in this fashion it underplays the significance of the paper and the discussion that it seeks to initiate. The paper is also welcome and significant because it spells out the circumstances in which the compulsory licensing option is available to the government, as defined by international and domestic treaties and laws. The discussion it generates would, therefore, hopefully help clarify when it would be appropriate for the Indian government to exercise this legal right and intervene in favour of the public interest and against the holder of a patent.

Such a discussion is important because, as the paper notes, after India amended its Patents Act to make it TRIPS-compliant and recognize product patents, the government has not exercised the right to compulsory licensing even once. This is despite the fact that in a crucial public health-related area like drugs and pharmaceuticals the transition to the new regime must have made a considerable difference. As is widely recognized, the pure-process and no-product patenting regime of the past had helped ensure both adequate availability and low prices of essential drugs within the country.

The government’s reticence to exercise the CL is not because such caution is the norm across the world. In fact, developed countries such as Canada, the United Kingdom and Italy and developing countries such as Brazil, Thailand, Malaysia, South Africa and Kenya have resorted to such licensing in the case of drugs and pharmaceuticals, especially during the past six years. While noting the excessive caution on the part of the government of India, the discussion paper also underlines an important issue. While much of the discussion of compulsory licensing has been in the context of the need to ensure local working of the patent to support public, non-commercial use (as in the public health system) or to deal with national emergencies, the TRIPS agreement does not restrict the right to compulsory licensing to such situations. In fact, when the aim of the measure is to deal with anti-competitive practices, the agreement provides considerable flexibility to governments. In most areas there are no restrictions on the circumstances in which a CL can be issued nor is the procedure to be adopted for issuing a CL specified. Even in the case of drugs and pharmaceuticals there is no restriction that such measures should be taken only to address public health concerns. Thus, states the discussion note, ”significant flexibility is provided to the member countries for the issue of a CL.” Fortunately for India, because of public discussion and debate, our own Patents Act has not foreclosed the ability of the government to make appropriate use of this flexibility.

Having underlined these issues the paper makes an important contribution by seeking to illustrate the implications of the flexibility available in the case of the drugs and pharmaceuticals sector. It begins this discussion by considering whether there is a case for intervention in the public interest in this industry, where policy should be motivated by the objective set by The National Pharmaceutical Policy 2002 of ensuring ‘abundant availability at reasonable prices of good quality essential pharmaceuticals of mass consumption’. While India had been able to make substantial progress in this direction over the years, especially during the years when the government did not recognize product patents and allowed patented drugs to be indigenously produced using alternative processes, there is, according to the paper, cause for concern about the development of the industry in recent years.

To start with, despite past achievements, the objective of ensuring adequate availability at reasonable prices of essential drugs has not been realized. It was for this reason that the draft National Pharmaceutical Policy 2006 had included among the government’s objectives the tasks of: a) ensuring availability of good quality medicines at reasonable prices; and (b) improving access to essential medicines for the common man and the poorer sections of the population. In particular, it drew attention to the high prices and consequent low demand for drugs needed to treat cancer and HIV/AIDS.

The discussion note also draws attention to the forty-fifth report of the Department Related Parliamentary Standing Committee on Health and Family Welfare which had expressed its concern about:

a. The high prices of newly patented medicines which were not being regulated by the National Pharmaceutical Pricing Authority.

b. The increasing incidence of unorthodox practices such as the substitution of regulated drugs with alternatives incorporating new ingredients so as to avoid regulation.

c. The super profits being generated by some drug companies that were exploiting their monopoly position and setting the prices of their products substantially above cost.

d. The takeover of Indian drug companies by foreign companies and the need to ensure that major Indian pharmaceutical companies remain in Indian hands.

Examining recent developments in the industry the discussion paper too finds that there is: (i) evidence of growing concentration in the drugs and pharmaceuticals industry, driven by mergers and acquisitions; (ii) evidence of increasing control of firms in the industry by multinationals through acquisition of large Indian firms; (iii) evidence of a growing focus on export markets even when domestic needs are being inadequately met; and (iv) evidence that anti-competitive practices may be resulting in high and unreasonable prices. Moreover, argues the paper, foreign acquisitions of Indian firms besides strengthening their oligopolistic power deriving from patents, may weaken the government’s ability to intervene to realize its drug policy objectives. This, in its view, could happen for a number of reasons. To start with, large Indian pharmaceutical companies, which are been taken over by foreign companies, may not be willing to apply for a Compulsory License even if eligible. Thus, when the government notifies a public emergency (for example) and recognizes the need for issue of a CL for a particular drug, adequately capable manufacturers may not be available to apply for CL and work the patent at a reasonable cost. Foreign companies may also utilize the Indian companies they take over as conduits to sell higher cost patented drugs or branded generics rather than the cheaper generics that were being sold earlier.

All of this makes a case for strong intervention for dealing with structural processes that could lead or are leading to anti-competitive practices. The government should not only adopt but also go beyond the obvious option of exercising the right to compulsory licensing in times of emergency. It can do so by invoking the right under government use for non-commercial purposes provision or by invoking just the requirement to make available drugs at reasonable prices. Both TRIPS and the domestic legal framework centered on the Patents Act permit such intervention according to the paper. And they do so with rather lenient requirements for royalty payments (of say 5 per cent) linked on the one hand to the price of the drug concerned in global markets and on the other to the (relative) per capita income of the country issuing a compulsory license.

But intervention need not stop here. The government can invoke the Competition Act 2002 to examine whether the high price and/or inadequate availability of a drug is a consequence of an anti- competitive act or the abuse of a dominant position, and initiate suitable action if this is true. There is a study underway on the state of competition in the pharmaceuticals industry commissioned by the Competition Commission and it would be interesting to examine the implications of its findings in the light of the Department of Industrial Policy and Promotion’s views on the role of monopoly.

The government can also review the decision to allow foreign equity investments of up to 100 per cent in firms in the pharmaceutical sector through the automatic route, and examine investments on a case-by-case basis to establish whether or not they could lead to outcomes that go against the thrust of the drug policy. And, finally, the government can extend the scope of drug price regulation to bring a larger number of drugs under its purview.

Thus, while the DIPP’s immediate concern is the issue of compulsory licensing, the implications of its analysis take it much further. The effort to initiate this debate and set its tone needs to be lauded. The paper makes it clear that much can be done even within the law as it stands if objectives and guidelines are clearly defined. It ends with a set of questions relating to the terms on which compulsory licenses should be issued and the original patent holder compensated. Hopefully they would spur a much-needed debate that leads to a more proactive policy than pursued hitherto in an area as crucial as drugs and health. This could then influence policy in other important areas as well.