Worldwide: Fair Remuneration For Compulsory Licensing

Last Updated: 3 August 2017
Article by Monika Shailesh

Most Read Contributor in India, December 2018

Research and development especially in the pharmaceutical sector is a time consuming, expensive and a resource intensive process. To top it all, said R&D also involves a considerably high risk of failure. On the other hand, innovation in the pharmaceutical is imperative for tackling the ever-growing growing health problems around the world. The under developed and developing nations are often deprived from the expensive lifesaving drugs unless there is a statutory legislation for their protection or the innovators are altruistic. The monopoly enjoyed by the Pharma Companies because of the patent protection laws enable the said Companies to dictate the market price of the certain life saving drug. The framework allows pharmaceutical companies to justify their supra competitive prices based on the need to recuperate innovation expenses. The genius of the patent system is that it harnesses the market system to determine the reward for patent holders. However, this means that access is determined by the ability to pay, and some people may be deprived of access. The 2001 Doha declarations on the Trade Related Intellectual Property rights (TRIPS) agreement and public health declared that WTO members should implement intellectual property laws in a manner that promotes access to medicines for all. The TRIPS Agreement allows WTO Members to use a number of different restrictions and exemptions to patent rights, including cases where governments can authorize persons to use patents, even when the patent owner does not give permission. Although TRIPS agreement enable countries with wide-ranging preference and freedom over what grounds the compulsory license is granted, it also takes care of the interest of the innovator by requiring the member nations to negotiate with the innovator on "Reasonable commercial terms and condition" Many refer this as fair remuneration. The terms "reasonable commercial terms" and "adequate remuneration" are not defined in the TRIPS Agreement. WTO Members are free to determine the appropriate method of implementing the TRIPS Agreement, within their own legal system and practice, and this extends to the standards they apply for "reasonable" royalties, or "adequate" remuneration.

Practice of the State

Looking at the legislations of different nations and upon study of related judgments by respective Courts, it is evident that there is no single universal practice towards the "fair remuneration" approach for compulsory licensing; these practices change from nation to nation and sometimes within a nation too. Different industries observe different practices over the reasonable commercial terms approach toward Compulsory Licensing. Recently a number of countries have issued mandatory licensing for HIV/AIDS drugs. For example Malaysia set a royalty rate of 4%; Mozambique establishes a 2% royalty; Zambia set a 2.5% royalty; and Indonesia arrived at 0.5% royalty.5 There have been a number of royalty systems being proposed across the world and have established a useful framework for consideration. The evidence of compensation for private, market – based license arrangements provide an important context for making determinations of royalty and remuneration arrangements in case of compulsory license. It has been observed that there are quite a number of conflicts for cross-industry licensing averages. The pharmaceutical industry has however shown a much of a uniform agreements for royalty ranging from 4% to 5%, it is one of the higher licensing rates among all industries. While it is the duty of the State to make available the lifesaving drugs to all, the State should also ensure that a fair remuneration is given to the inventor or owner of the new drug. Approaches addressing the practical concerns regarding the administration of a system, as well as policy objectives shall be undertaken by the State. It should ensure that the remuneration system established for compulsory licensing shall keep into consideration the two paramount issues, first the remuneration system so established should not be too complex and second being that the royalty system should not present barrier for access to medicines. For countries able and willing to make somewhat more complex determinations of royalties, a range of appropriate factors should be assessed, though not all are required, and not all will apply in any given circumstance. These include but are not limited to:

  • Therapeutic value of the medicine, including the extent to which it represents an advance over other available products;
  • The ability of the public to pay for the medicine;
  • Actual, documented expenditures on development of the medicine;
  • The extent to which the invention benefited from publicly funded research;
  • The need to respond to public health exigencies;
  • The importance of the patented invention to the final product;
  • Cumulative global revenues and profitability of the invention;
  • The need to address anti-competitive practices.

Recommended Approach to Adequate Remuneration6

Different nations may prefer dissimilar methodologies to compensation based upon administrative capability, resource constraints, global norms concerning support for R&D, and policy objectives concerning access on one hand and innovation on another. The following approaches are considered reasonable and appropriate methods of setting remuneration.

UNDP Guidelines 2001

This method calls for a simple system where the base royalty rate is fixed at 4% of the generic product price. This can also be increased or decreased up to an extent of 2% based on the special factors like a product being particularly innovative or if the government has been paying the R&D expenditures. This remuneration system is simple and easily predictable. The administration of this system is not complex while on the same time it is also flexible to take care of the special conditions.

Japanese Patent Office (JPO) Guidelines 1998

Japanese Patent Office in the year 1998 published the guidelines for royalties for the non-voluntary licensing system for government owned patents. JPO guidelines allowed the use the patents for normal royalty of 2% to 4% of the price of the generic product. This can be altered by 2% i.e. increased or decreased by as much 2% giving an absolute range of 0% to 6%. The 1998 JPO guidelines include a "utilization ratio", which is used to allocate royalty payments among patent owners, when the product consists of combination of multiple inventions. This is particularly useful when setting remuneration for fixed-dose combinations or other medicines that combine many different patented inventions. (The utilization ratio can be used independently with any of the other methods of setting royalties.) JPO guidelines are considered more complicated in terms of administration while they are also termed as an elaborate version of 2001 UNDP guidelines.

Canadian Export Guidelines 2005

The Canadian Government established the system and guidelines for commercial compensation to inventors in case of compulsory licensing. The Canadian government did this in order to export to countries that lack the capacity to manufacture medicines. These guidelines are a sliding scale of 0.02 to 4% of the price of the generic product, based upon the country rank in the UNDP Human Development Index (UNHDI). For most developing countries, the rates are less than 3%, and for most countries in Africa the rate is less than 1%. The Canadian methodology can be understood as advantageous norm for those countries facing severe resource constraints in providing access to medicines for all. The rate is easy to calculate, and the rates are relatively low, thus avoiding large deviations from the marginal costs of medicines. The Canadian method is less useful for middle or high-income countries that have both the capacity to pay more and the need for a remuneration system that will appeal for global norms concerning the sharing of R&D costs.

Tiered Royalty Method (TRM)

This methodology of royalty for compulsory licensing adopts a whole new approach, here the royalty calculation is not based upon the price of the generic product, but it is dependent on the price of the patented product in the high income country. The base royalty is 4% of the high-income country price, which is then adjusted to account for relative income per capita or, for countries facing a particularly high burden of disease, relative income per person with the disease. In this method the value of the royalty is based on the therapeutic value (the high income price) and capacity to pay. It is a more rational framework that caters to sharing the actual R&D cost that has incurred in developing the new patented idea. It can be viewed as a more sustainable idea for some middle or high income countries that are concerned with sharing the R&D cost. The TRM provides for much higher royalties in middle- and high-income countries with low burdens of disease, and the lowest royalties for countries that have the lowest incomes and the highest of disease burden.

Medical Innovation Prize Fund (MIPF)

The MIPF technique involves making all drugs available to consumers at generic prices. With the MIPF methodology, compensation is not awarded to pharmaceutical innovators by a royalty or per-unit profit. Rather, they receive a portion of a national budget for rewarding medical innovation among owners of competing products. These payments are allocated according to each product's contribution to improved health outcomes. The MIPF can also be implemented to provide for remuneration for products that more closely address health care priorities, including products that are developed to address global neglected diseases, or medicines that are developed in anticipation of future needs, such as treatments for a disease like Severe Acute Respiratory Syndrome (SARS) that is currently contained, but which presents an important health care risk. The MIPF approach provides the greatest rewards for products that are actually used and that provide incremental health care benefits. The MIPF approach can be implemented in countries of different levels of development, income and health care priorities. It is recommended that the overall level of funding for a MIPF approach increase with national income and the level of development.

Federation of Indian Chambers of Commerce & Industry (FICCI)'s Position on Compulsory Licensing7

GENERAL COMMENTS

  • Compulsory Licensing provisions in Indian patent law appear to be liberal and make use of the flexibilities provided in the TRIPS Agreement almost fully.
  • The effectiveness of these provisions in the post TRIPS era has not yet been tested properly. There have been no applications for Compulsory Licensing except two requests under Sec 92 A. But those two requested suffered from initial infirmity in that they did not have minimum essential documentation such as notifications by the least developed country concerned.
  • There has been no instance of any application on account of either national emergency or non-availability of an essential drug or on account of the price of an essential drug.
  • There has been no empirical study to find out the reasons for non-resorting to Compulsory Licensing by Indian pharmaceutical sector. Only a thorough investigation into the whole matter can bring out the shortcomings of the existing provisions on Compulsory Licensing including the procedural aspects. This study should look into the legal, economic and public health aspects of the issue. This study should particularly examine whether public health in India suffered for want of use of CL and whether it would have been better had the Compulsory Licensing provisions been used. It should also bring out the reasons for Indian pharma companies not exploring the Compulsory Licensing route.
  • Compulsory Licensing procedure should be simple and easy to follow.
  • It is not necessary to have Compulsory Licensing for all diseases. For common sicknesses without any significant health impact and for which multiple medicines are available, it is not necessary to go for Compulsory Licensing.
  • It is also ordinarily not necessary to go for Compulsory Licensing for generic medicines, unless there is an acute shortage of such medicines or they are priced very high.
  • Compulsory Licensing should be reserved for health emergencies such as epidemics and non-availability of essential drug at a reasonable price.
  • Use of Compulsory Licensing should not serve as a disincentive to investment in drug discovery.
  • Individual cases will have to be examined on their own merits.
  • Guidelines should not make things more constrictive. The objective should be facilitation of entry of newer and better drugs in the market and their easy availability at reasonable price. Therefore, Compulsory Licensing should not be used routinely, but only in exceptional circumstances.
  • In the absence of an application procedure, selection of a company to manufacture a Compulsory Licensing product will lead to many complications. For one a company should be capable and willing to manufacture the product and for another there should not be any discrimination among companies.

FICCI has suggested supplementing the Manual of Patent Practice and Procedures (MPPP) with exhaustive reference and learning material. The learning material can be in the form of booklet that could contain the cases of grant of Compulsory License abroad by countries like USA, Canada, Japan etc. and explain the conditions under which those Compulsory License were granted.

CONCLUSION

It is evident that that the respective government policies and practices plays a vital role for formulating a rational and practical approach towards determining a reasonable structure for adequate royalties and remuneration for the manufacture or sale of a product under compulsory licensing.

  • The method of determining the royalties or remuneration for the patent holders whose patent is used under compulsory license arrangement shall be simple and practical. It should not be difficult or unclear to govern. Well-structured royalty guidelines will not only reduce the intricacy but will also provide assistance for adjudicators. It will also serve to increase transparency and predictability.
  • The Government guidelines or the laid down rules and regulation for deciding the royalties and remuneration for the patent holder, shall formulate the entire process in such a way that it shall cater to divide the remuneration in a rational and transparent way among patent holders in case a product uses multiple patents. So that in case if a product uses multiple patents the interest of all the stake holders are assured. The scheme for setting fee for compulsory licensing, should forestall and take care of the need to divide fee payments among various patent holders when the product is subject to multiple patents. This could either be based on the value added to the product by each individual patent or in the simplest way equal distribution of fee to all the patent holders.
  • The most important aspect of setting up of a system of deciding the fee or the remuneration for the patent holders in case of compulsory licensing is to keep the interest of the users of the product intact. Since the main focus of compulsory licensing is to make available the costly product to the general masses which otherwise do not have access to the critical life support systems like medicines and medical equipment's. The system shall concentrate on striking a balance where the product remains in reach of the poor masses while upholding the patent holder's interest

Footnotes

5 http://www.who.int/hiv/amds/WHOTCM2005.1_OMS.pdf  

6 http://www.who.int/hiv/amds/WHOTCM2005.1_OMS.pdf  

7 http://ficci.in/SEdocument/20143/Compulsary-Licensing.pdf  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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