The Compulsory Licensing of Pharmaceuticals: Will China Follow in India’s Footsteps?

Compulsory licensing is emerging as an additional mechanism by which developing countries can make the treatment of noncommunicable diseases (NCDs) more affordable to their populace. Under the World Trade Organization’s Trade-Related Aspects of Intellectual Rights (TRIPS) Agreement, compulsory licensing, which occurs when a government licenses the use of a patented innovation without the consent of the patent title holder, is a legally recognized means to overcome barriers in accessing affordable medicines.

Between 2001 and 2010, twenty four compulsory licensing episodes in seventeen countries were reported. Most of these episodes ended in a price reduction for the specific drug in question through a compulsory license (CL), a voluntary license, or a negotiated discount. Also, most of the episodes involved drugs for HIV/AIDS and other communicable diseases, with only five cases involving drugs for NCDs such as cancer. In 2006, India announced it would issue a CL for the anti-cancer drug Imatinib Mesylate (Gleevec), although it ended up not doing so. Beginning in 2007, Thailand became the most active issuer of CLs for drugs targetting cardiovascular diseases and cancer.

In March 2012, the Indian Patent Office issued its first ever CL for Bayer AG’s blockbuster cancer drug sorafenib tosylate (Nexavar), authorizing a domestic generic drug-maker (Netco) to produce a low-cost version of the drug. This move is significant for three reasons. First, it would lead to a generic drug that is 97 percent less than the patented drug thus effectively ending the German pharmaceutical company’s monopoly over the drug in the Indian market. Second, it may signal other Indian generic producers to follow suit if the patent holders fail to supply drugs in large quantities at affordable prices. Third, it could encourage other developing countries such as China to issue compulsory licenses for drugs that treat NCDs.

China is facing a major epidemic of NCDs (e.g., cancers and cardiovascular and respiratory diseases), which accounts for more than 85 percent of the total deaths in the country. Annual new cases of cancer have reached 2.8 million (20 percent of world total), while 1.9 million people (or 24 percent of world total) die of cancer annually. Because of its lack of research and development capacity in the pharmaceutical industry, China has become heavily reliant upon imported patented drugs to treat serious conditions like cancer. Almost all of these medicines remain extremely expensive. Some can cost upwards of $80,000 per year. This becomes particularly problematic in China, where the annual per capital income is only about $5,000 and a majority of the patients still have to shoulder about 90 percent of the cost for treating catastrophic illness.

During the negotiation leading to the declaration of the TRIPS Agreement and Public Health, China worked closely with India, Brazil, Argentina, and other countries seeking to strike a balance between patent protection and public health. Indeed, after the successful conclusion of the negotiations, China immediately launched domestic procedures and became one of the earliest members to accept the Protocol amending the TRIPS agreement.

Surprisingly, thus far China has not officially used the flexibility in the TRIPS regime to produce low cost generic version of patented drugs for the benefit of its own population. It even prohibits the marketing in China of Indian made generic drugs. In June of this year, a Chinese newspaper accused the government of pursuing a series of policy measures in pricing, procurement, and reimbursement that had the effect of “protecting foreign firms and suppressing domestic firms.” In a recent conversation I had with a senior Chinese government official, I was told that the Ministry of Health did not have strong incentives to push for issuing compulsory licenses because it did not want to scare off the pharmaceutical related foreign direct investment in China. Instead, the Ministry prefers directly and quietly negotiating with Big Pharma for price discounts.

In June, China revised its legal framework to enable the approval of compulsory licensing for generic medicines. This raises the hope that the government may increasingly bypass Big Pharma patents and authorizes low cost domestic generic drug manufacturing. But given the slowdown in China’s economic growth and growing social political stability concerns, the incentives to encourage foreign pharmaceutical investment continue to be strong (if not stronger). In December 2011, China further revised its rules making foreign investment in the pharmaceutical industry subject to less regulatory scrutiny. India’s move in March may make its northern neighbor a more attractive destination for bio-pharmaceutical R&D investments. In a nutshell, don’t expect China to pull the trigger on compulsory licensing anytime soon.