Compulsory Licences Positive For The South, With Conditions, Study Finds

Compulsory licences can provide an efficient way to decrease prices of drugs in developing countries but the conditions of issuance of a licence influence the benefits countries can derive from them, particularly if the countries have a technology gap, according to an economic model presented this week at the World Intellectual Property Organization.

Eric Bond and Kamal Saggi of the Vanderbilt University (US) Department of Economics published a paper in April 2012 on compulsory licensing, price controls, and access to patented foreign products, analysing the role of price controls and compulsory licensing on access to a patented northern product for southern countries.

Saggi presented the findings of the paper and explained the model leading to those findings on 29 May in the context of the WIPO seminar series on the economics of intellectual property.

Saggi said the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which requires enforcement of intellectual property rights, has had the most effect on developing countries. This is particularly the case with pharmaceutical products, he said, as most developed countries already had strong IP rights enforcement, and patent enforcement has the potential to eliminate cheap local suppliers of necessary medicines.

The TRIPS Agreement [pdf] contains a set of flexibilities that can be used by developing countries. Article 31 on “Other use without authorisation of the right holder” gives a list of situations in which developing countries can preclude IP rights but under a set of conditions. Among these is that those countries should try to obtain authorisation from the right holder, and that the right holder should get “adequate remuneration.”

Although compulsory licences are not effectively mentioned in TRIPS, he said, this is one of the flexibilities that developing countries can use to lower prices of essential medicines, such as HIV/AIDS treatments. The threat of a compulsory licence has also been known to lead the patent holder to lower its price, Saggi said.

Compulsory licences often occur in an environment where the price itself is controlled by the local government, according to Saggi. Price controls and compulsory licences are thus closely linked, he said. Compulsory licences encourage direct entry of the patented drug while price controls encourage voluntary licences, Saggi said.

Quality Issues with Local Products

Not all developing countries have the ability to produce a quality product locally, Saggi said. He cited the case of Thailand, (IPW, Public Health, 12 March 2007) which has used a compulsory licence on the HIV/AIDS drug Kaletra. The quality of the drug produced by the Thai government pharmaceutical organisation (GPO-vir) proved to be substandard, he said. The Global Fund to Fight HIV-AIDS, Malaria and Tuberculosis granted the GPO-vir US$ 133 million in 2003 so that it could upgrade its plant to meet international quality standards. The fund withdrew its support in 2006, according to Saggi, since the Thailand GPO had failed to meet the World Health Organization quality standards. Saggi said he did not know if the issue had been resolved by the Thai government since then.

Saggi also cited Brazil, which issued a compulsory licence in 2007 on the HIV/AIDS medicine Efavirenz, after failing to negotiate a price with Merck. However, Farmanguinhos, the Brazilian government laboratory, was unable to immediately manufacture the drug due to its lack of technological know-how, he said. It took Farmanguinhos two years to be able to supply the drug to the local market, he said, but for a much lower price than the one of the branded product. In the meantime, Brazil imported the drug from India, he added.

A member of the audience asked about the definition of “quality” in the context of the study. Saggy answered that in the model, quality was defined as the willingness of the consumer to pay for the drug. “If at the same price the consumer prefers the patented good to the one produced by the local manufacturer, I have a quality difference,” he said.

Nevertheless, although developing countries may not be able to do as good a job of producing the medicine as the patent holder, “the use of compulsory licences makes the South better off,” Saggi said, in part because the threat of a compulsory licence induces entry of the drugs on the local market and lowers the fee at which voluntary licencing occurs.

Members of the audience also asked about compulsory licences being issued by northern countries, which were not taken into account in the study.

The paper [pdf] can be found on the WIPO website, as well as the video of the presentation.