Impact of Natco v Bayer: A Giant Step Towards Reasonably Priced Healthcare

(Also read the article 'Game Changer In The Generic Industry' by Jasmine  Kaur)

Introduction

In March 2012, the Indian Controller of Patents granted India’s first compulsory license under Section 84 of the Patents Act, 1970 to M/s Natco Pharma Ltd[1]. The order was in relation to Bayer Corporation’s patented anti cancer drug Sorafenib tosylate [2], marketed as Nexavar, which was made for the treatment of Renal Cell Carcinoma-RCC (kidney cancer) and also for the treatment of Hepatocellular Carcinoma-HCC (liver cancer)[3].

Compulsory licensing is 

‘the authorization permitting a third party to make, use or sell a patented invention without the patent owners consent’[4]. This mechanism was recognized by TRIPS to increase accessibility to generic drugs[5]. Compulsory licensing under the Indian patent law is said to be the most comprehensive non-voluntary licensing system in the world[6]. We must be cautious in applying the mechanism of ‘compulsory licensing’ since pharmaceutical industries and other industries dependent on intellectual property may avoid engaging in foreign direct investment if they lose trust in India’s promises to protect and enforce patent rights[7].

Analysis of Natco v. Bayer

The grounds for grant of the compulsory license in Natco v. Bayer were that ‘reasonable requirements of the public’ were not met with.  Section 85 of the Patents Act requires the Controller of Patents to take into account three factors, namely:

·         the nature of the invention, the time which has elapsed since the sealing of the patent and the measures already taken by the patentee or any licensee to make full use of the invention;

·         the ability or the applicant, to work the invention to the public advantage;

·         the capacity of the applicant to undertake the risk in providing capital and working the invention, if the application were granted, but shall not be required to take into account matters subsequent to the making of the application.

The case had raised three substantial issues with regard to section 84(1)(a, b, and c) such as whether the reasonable requirements of the public with respect to the patented invention have not been satisfied, the patented invention is not available to the public at a reasonably affordable price and the patented invention is not worked in the territory of India. The condition on the reasonable requirement of the public was not met is very interesting yet challenging one as based on the economy concept on demand exceeding the supply whereby product supplied by Bayer available in limited quantities[8].

The conclusion ‘reasonable requirements of the public’ were not met with, can be drawn be mere observation of the number of bottles of Bayer imported per year, as can be seen in the table below:

	Total Patients	Bottles per month (required)	Bottles imported in 2008	Bottles imported in 2009
Liver Cancer	20,000	16,000	Nil	200
Kidney Cancer	8,900	7,120	Nil	200

The license is valid till expiry of the patent in 2021. The Controller of Patents order requires Natco to make the drug available to the public at a cost of not more than Rs. 8,880 for a pack of 120 tablets (one month's therapy) as against Rs. 2.8 lakhs sold by Bayer[9]. This is a price difference of nearly 97%. The license is non-exclusive and non-assignable.  The government orders also make it necessary for Natco to supply the drug free of cost to at least 600 needy and deserving patients per year. Natco must also pay Bayer a quarterly royalty at 6% of the net sales of the drug.

Option of Revoking Patent

In the Novartis, the IPAB held against the grant of a patent, since the drug known as ‘Glivec’ costs Rs 1,20,000, a price that the IPAB found to be way beyond the reach of the common man. This was probably the first time that any country had denied a patent itself on the ground of "excessive price"[10].

The question arises that if a patent can be denied on these grounds then even ‘Sorafenib tosylate’, Bayer’s Patent, could have also been revoked on grounds of high price and insufficient supply. The question of granting a compulsory license would not even arise.

Impact of Natco v. Bayer

After Natco was granted a Compulsory License, Cipla announced its intention to move towards more extensive differential pricing tactics for several of its highly priced anti cancer drugs[11]. The company said in November 2012 that its lung cancer drug Erlocip would cost Rs 9, 900 for 30 tablets instead of Rs 27,000 and Rs 3,700 for 10 tablets, down from Rs 10,000. This amounts to an up to 63% cut in prices of three anti-cancer drugs[12].

Cipla has gained international fame and proclaim when it reduced the prices of HIV medications to significantly low levels and it appears to be doing the same with cancer drugs now.

It is also worth noting that Roche had also announcement that it would slash the price of its anticancer drugs to dramatically low levels.  The decision of Natco v. Bayer is therefore beginning to considerably impact the global market for drugs and reasonably priced healthcare.

TRIPS Compliance

Article 7 of the TRIPS states ‘The protection and enforcement of intellectual property rights should contribute to the promotion technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge in a manner conducive to social and economic welfare, and to balance of rights and obligations’. Also, Article 8 (1) goes further to state ‘members may in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development provided that such measures are consistent with this (TRIPS) Agreement’. From the above Articles 7 and 8 of the TRIPS Agreement, we can observe that TRIPS Agreement gives importance to the national interest of each respective country in implementing or amending their laws accordingly. From the researcher’s observation, using the mechanism of compulsory licensing is another alternative route to produce generic medicines and seems like a pre-adoption of TRIPS Agreement before implementation of product patent protection in 2005 by India, and this certainly is not an ultimate solution for India as it should be thriving for the excellence in the development of medical technologies in relation to the generic pharmaceutical industry.[13]

Many argue that the grant of compulsory patent in the Natco-Bayer case was not in accordance with TRIPS as far as the issue of “local working” requirement was concerned. Indeed the Controller held that the mere importation of goods incorporating the patented invention does not prevent the issuance of a compulsory license (in the case at hand Bayer imported in India small quantities of its patented drug). Just the local production of the relevant goods by the patent owner or with its consent could prevent it. However, the Controller also rejected the argument put forward by Bayer according to which the low quantities required in India would not have justified setting up a manufacturing facility by Bayer in that country.

In reaching its decision, the Controller also relied on a provision of the Indian Patent Act, ie Sec. 83(b). It states that patents are not granted merely to allow patent owners to enjoy monopolistic rights for the importation of the patented goods.

Having said that, it seems that the above findings do not take in due consideration the TRIPS debate surrounding the working requirement and might be in violation of TRIPS itself. It is indeed believed that the above provisions of the Paris Convention as well as Article 31 TRIPS have to be read and interpreted together with Article 27(1) TRIPS, according to which “patents shall be available and patent rights enjoyable without discrimination as to […] whether the products are imported or locally produced”. In other words, this provision clarifies that where national legislations impose a local working requirement (as the Indian Patent Act does), patentees should have the possibility of satisfying such requirement by showing to have imported locally the patented product. Article 27(1) has therefore an impact on compulsory licenses. This has been confirmed by the WTO Panel’s decision in Canada - Patent Protection of Pharmaceutical Products: it was held that the non-discrimination principle under Article 27(1) also applies to Article 31.

It should be further noted that the local production requirement is also rejected under EU law[14]. The Court of Justice of the European Union released a decision with reference to the old Italian provisions on compulsory licenses, according to which said licenses were granted in case the patentee did not manufacture locally the products incorporating the invention. The Court held that this provision basically had the effect of encouraging patent owners to locally produce the patented products rather than to import them from other Member States[15]. They therefore amounted to, stressed the Court, measures having an equivalent effect to quantitative restrictions on imports under (what is now) Article 34 of the Treaty for the Functioning of the European Union.

Bolar provisions

India has not implemented data exclusivity in its Patent Act. The ‘Bolar exception’ is defined as the early working requirement which permits the use of an invention relating to a pharmaceutical product to conduct and obtain approval from the health authority before the expiration of the patent for the purpose of commercialization of generic therapeutic equivalent just after the expiration of a patent or speed up the entry of generic pharmaceutical products[16].

The importance of Bolar provision can be seen in the case of Roche Products IncvsBolar Pharmaceuticals Co which denied the Bolar of the right to start to start Food and Drug Administration (FDA) approval process before the expiration of a patent[17]. Data exclusivity prohibits authorities from relying on the originator data for the approval of subsequent products, and effectively delays the development and market approval of generics. In the absence of provisions for reliance on the originator data, generic manufacturers would have to conduct their own clinical trials to establish the safety and efficacy of pharmaceuticals drugs[18]. For example United States provides data exclusivity for a period of five years[19].

Suggestions and Recommendations

Grant of compulsory licenses should never compromise with the future investments in the pharmaceutical sector. After India became a signatory to the TRIPS agreement and amended it’s the Patent Act to comply with TRIPS, the pharmaceutical sector has grown in exponentially. It has really become an area of extraordinary growth and has the drive required for the association of a number of foreign and Indian Companies.

Therefore, a developing country such as India, being the member of World Trade Organisation (WTO), should comply with TRIPS Agreement. However, compulsory licensing and Bolar exceptions will be of benefit to India to develop affordability of drugs and healthcare. Indian Patent Amendment Act 2005 should not just be a medium for pre and post-grant opposition; though it cannot be denied it is important to prevent evergreening of patent and encouraging patentee to disclose significant invention[20]. The Managing Director and Chairman of Cipla, Dr. Yusuf K Hamied, being a chemist himself, suggested a TRIPS North and TRIPS South, where north would comprise of 600 million people in the developed world while the south would comprise the 3 billion people of the Third World[21]. India should apply at least the minimal or moderate requirement of TRIPS provisions into their legislation to achieve public health objectives and patentability should be judged primarily on the basis of its technological merits.

Developing countries such as India are more vulnerable to pressure by foreign governments and companies when a compulsory license is issued in comparison to cases where a patent is refused for ‘technical’ arguments relating to the lack of inventive step. The extended use by developing countries of the TRIPS flexibilities will fulfill the objectives of the individual countries and contribute to set precedents that other countries may benefit from. There are a variety of measures that countries may apply to mitigate the monopolistic effects of granted patents. Some of them may be instrumental, directly or indirectly, to policies that encourage domestic production. For example, the experimentation exception may facilitate ‘inventing around’, the acquisition of voluntary or compulsory licenses, or legal challenges against invalid patents. The ‘Bolar exception’ and protection of test data under unfair competition law (without exclusivity) may widen the room for the operation of the local pharmaceutical industry. Compulsory licenses for failure to work a patent or for ‘refusal to deal’ may give way for local production in various industries[22].

Last but not the least, amendment of the Indian Patents Law in 2005 complying with the TRIPS Agreement for the benefit of bilateral and free trade agreement and flexibilities given in the TRIPS itself is will benefit generic pharmaceutical industry in improving accessibility and provide affordability of medicines, without being deceived into the TRIPS-PLUS obligations which is a continuing legal challenge for India. Some state that India should resist removing any flexibility because any trade agreement which would result in India not being able to produce generic medicines, will certainly affect other developing countries. We cannot avoid the use of patents in compliance with TRIPS but we can utilize some of its intellectual property rights in a minimum way for the development of their generic industry towards achieving public health objectives.

Royalty Guidelines

Some guidelines as to the amount of royalty in case of compulsory license must be laid down. In Natco v. Bayer the Controller had set the royalty at 6% after noting the following explanation:

“I have also carefully analysed the royalty practices/guidelines generally adopted globally. United Nations Development Program (UNDP) specifically recommended that rates normally be set at 4% and adjusted upwards as much as 2% for products of particular therapeutic value....In the present case, I am satisfied that anything lesser than 6% would not be just and reasonable given the facts and circumstances of this case as discussed above. Hence I hereby settle that the royalty be paid to the patentee in this case shall be 6% of the net sales of the drug by the licensee.”

It appears that the only reason that 6% was granted is because that was the highest that UNDP had recommended. No other factors were taken into account while setting this value. Remuneration for compulsory licenses cannot be an arbitrarily chosen amount, without considering a certain set of factors. According to the guidelines of the Japan Patent Office the royalties in case of non-voluntary license of patent must be between 0 to 6%, based to the following formula:

“Royalty rate = value * utilization ratio * increase/decrease ratio * exploration ratio”[23]

·         Value: The ‘value’ is set on the basis of value of working of the invention. The standard rates are as follows[24]:

Value of Working of the invention	Standard rate incorporated in the formula
High	4%
Medium	3%
Low	2%

·         Utilization Ratio: "Utilization Ratio" considers the significance of the invention in relation to the product. When the invention is itself the product, the ratio is 100%. Otherwise the ratio is the proportion that represents the value of the part compared to the value of the whole invention[25]. Needless to say, the utilization ratio can never exceed 100%.

·         Increase/Decrease Ratio: Between 50-150% depending on the following:

a.       Necessity of the patent for public interest,

b.      Deserves a particularly high or low royalty fee,

c.       The patent is not particularly novel and other similar inventions exist,

d.      Other special conditions.

·         Exploration Ratio: This ratio ranges from 50 to 100%. A lower ratio is used when:

(a) Large amount of capital is necessary to conduct research for the industrialization of the invention,

(b) Large amount of capital is necessary to advertise and promote the product which incorporates the invention[26].

Conclusion

Patent law has been enacted to encourage novelty, technical advancement, and technological development. Novel drugs are far more expensive than generic medicines. It may be after several of trials on numerous permutations and combinations that a molecule reaches the market and the patients. Not to mention the millions and billions spent on R&D of the drug[27].

Given that compulsory licensing has now officially begun in India, courts and other regulatory agencies should be cautiously avoid integrating issues of patentability with that of patent abuse. Any potential abuse such as excessive pricing can always be dealt with through instruments such as compulsory licensing.

The effective use of compulsory licensing as a legal weapon will certainly assist India in promoting technology transfer, and India should avoid undermining and underutilizing the compulsory licensing system just for export purpose or to increase the economies of scale. For instance India should set Brazil compulsory licensing as a good benchmark as strong provisions for compulsory licensing in the Brazil patent law were rightfully considered as an important asset in their negotiation with pharmaceutical industry.

Also, if the trend of compulsory license gains momentum and is managed appropriately, it will attract a significant amount of investments[28], leading to an exponential increase of FDI in this sector, putting India up the line of economic prosperity.

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[1] Compulsory License Application No. 1 of 2011, Natco Pharma Limited v. Bayer Corporation, Application for Compulsory License under Section 84(1) of the Patents Act, 1970 in respect of Patent No. 215758

[2] Patent No. 215758, Title of Invention:  Carboxyaryl Substituted Diphenyl Ureas, Granted on March 3, 2008

[3] Jasmine Kaur, Game Changer In The Generic Industry, Mowing the Law, April 3, 2012, at  http://mowingthelaw.blogspot.in/2012/04/game-changer-in-generic-industry.html

[4] N. S. Sreenivasulu, C. B. Raju, Biotechnology and Patent Law: Patenting Living Beings, Manupatra (2008), Chapter 6, page 187

[5] Patents, pills and public health, Can TRIPS Deliver? ( The Report of Panos Institute 2002) page 27

[6] J Kuanpoth, Patent Rights in Pharmaceuticals in Developing Countries : Major Challenges or the Future, Edward Elgar Publishing, (2010), page 167

[7] See generally, Robert Bird and Daniel R. Cahoy, The Impact of Compulsory Licensing on Foreign Direct Investment: A Collective Bargaining Approach,  American Business Law Journal, Volume 45, Issue 2, Summer 2008, page 2

[8] “84. Compulsory licenses.

(1) At any time after the expiration of three years from the date of the sealing of a patent, any person interested may make an application to the Controller alleging that the reasonable requirements of the public with respect to the patented invention have not been satisfied or that the patented invention is not available to the public at a reasonable price and praying for the grant of a compulsory license to work the patented invention.

(2) An application under this section may be made by any person notwithstanding that he is already the holder of a license under the patent and no person shall be estopped from alleging that the reasonable requirements of the public with respect to the patented invention are not satisfied or that the patented invention is not available to the public at a reasonable price by reason of any admission made by him, whether in such license or otherwise or by reason of his having accepted such a license.

(3) Every application under sub- section (1) shall contain a statement setting out the nature of the applicant' s interest together with such particulars as may be prescribed and the facts upon which the application is based.

(4) In considering the application filed under this section the Controller shall take into account the matters set out in section 85.

(5) The Controller, if satisfied that the reasonable requirements of the public with respect to the patented invention have not been satisfied or that the patented invention is not available to the public at a reasonable price, may order the patentee to grant a license upon such terms as he may deem fit.

(6) Where the Controller directs the patentee to grant a license he may as incidental thereto exercise the powers set out in section 93.”

[9] Supra n. 3

[10] Spicy IP, Breaking News: Indian IP Tribunal Denies Patent To Novartis' Glivec, (July 2009) at http://spicyipindia.blogspot.in/2009/07/breaking-news-novartis-loses-glivec.html

[11] Rupali Mukherjee,Cipla may cut prices of other cancer drugs too, Times of India, May 5, 2012

[12] Divya Rajagopa, Cipla slashes prices of 3 cancer drug by up to 63%, Economic Times, November 9, 2012

[13] Zaveri , The TRIPS Agreement and Generic Production of HIV/AIDS Drugs in C Bellman, G Dutfield and RM Ortiz (eds), Trading In Knowledge : Development Perspectives on TRIPS, Trade and Sustainability, Earthscan UK USA (2003), page 149

[14] Case C-235/89 the called European Court of Justice

[15] Ibid.

[16] See Report of the WTO Panel, Canada - Patent Protection for Pharmaceutical Products, WT/DS114/R (2000).

[17] Kamini Shanmugaiah, The Legal Challenges Faced By The Pharmaceutical Industry Particularly In India: An Analysis Of The Compulsory Licensing System And Section 3(D) Of The Patents Amendment Act 2005, presented at seminars at International Legal Conference 2011 organised Northern University of Malaysia.

[18] P Malhotra, Impact of TRIPS in India: An Access to Medicine Perspective ( Palgrave MacMillan 2010) 27; as cited in Kamini Shanmugaiah, The Legal Challenges Faced By The Pharmaceutical Industry Particularly In India: An Analysis Of The Compulsory Licensing System And Section 3(D) Of The Patents Amendment Act 2005, presented at seminars at International Legal Conference 2011 organised Northern University of Malaysia.

[19] Supra n. 17

[20] Chandra , ‘Patent Laws in India in T Pagge, M Rimmer and K Rubenstein(eds), Incentives for Global Public Health: Patent Law and Access to Essential Medicines Cambridge University Press (2010), page 393

[21] BI AbdelGafar, The Illusive Trade Off: Intellectual Property Rights, Innovation Systems and Egypt’s Pharmaceutical Industry: Policy Options Under TRIPS: Reality or Illusion ( University of Toronto Press Toronto, Buffalo and London 2006); as cited in Kamini Shanmugaiah, The Legal Challenges Faced By The Pharmaceutical Industry Particularly In India: An Analysis Of The Compulsory Licensing System And Section 3(D) Of The Patents Amendment Act 2005, presented at seminars at International Legal Conference 2011 organised Northern University of Malaysia.

[22] Supra n.17

[23] James Love, World Health Organisation & UNDP,  Remuneration guidelines for non-voluntary use of a patent on medical technologies,  Health Economics and Drugs TCM Series No. 18 (World Health Organisation 2005),  page 68

[24] Ibid.

[25] Supra n. 23, page 69

[26] Ibid.

[27] UNCTAD/ICTSD, Resource Book on TRIPS and Development (2005)

[28] Margaret Chon, Intellectual Property and the Development Divide, 27 Cardozo L. REV. 2821, 2863 (2006) (“Foreign direct investment is thought to be an optimal way for developing countries to increase their knowledge capacity, technical innovation and ultimately their economic growth.”).