The pandemic caused by COVID 19 and the subsequent slowdown in international trade have highlighted certain challenges faced by a globally integrated supply chain, such as shortages of personal protective equipment (PPE), drugs, ventilators and testing material. This pandemic shows how a widespread crisis can disrupt international commerce. One proposed solution to battle shortages resulting from collapsing global supply chains is to expand domestic production capacities for pharmaceuticals, medical devices and PPE.
Beginning in the 1980s, strengthening environmental policies and rising labour costs in western countries caused a shift in consumer goods manufacturing from domestic-based to foreign-based, primarily in India and China. As much as 60% of active pharmaceutical ingredients (API) are produced in China while 70% of finished pharmaceuticals (such as tablets) are produced in India. This translates to 70% of all finished prescription drugs in Canada and 90% of all components used in drugs manufactured domestically originating from abroad.
Will COVID-19 foster a reversal of globalization?
The Economist Intelligence Unit (EIU) contends that COVID 19 will cause a shift from globalization to regionalisation and diversification. This shift can already been seen in the United States, where politicians have introduced bills calling for API and drug purchases from China to cease. However, global supply chains that took many years and large investments to establish cannot be repatriated quickly or cheaply.
The US is responsible for 44% of global pharmaceutical consumption whereas Canada accounts for 2%. Our southern neighbour may not be the best indicator of how successfully Canada increase domestic production. Should Canada follow suit with its smaller market and smaller overall pharmaceutical consumption, it may find itself facing steeper costs with only a modest improvement in supply chain security.
Alternatives could include a diversification of the international supply chain. Such a change would also have its own pitfalls, including creating a redundancy of operations and diminishing efficiency. Nonetheless, the move away from centralized production in one country could bring significant opportunities to Canada. Rather than rely on manufacturing plants overseas, some investors may prefer to finance new plants in a country such as Canada. In this case, the challenge would be to ensure that Canada has the specialized work force and materials to ensure a swift transition into more regional production.
As most modern medicines comprise ingredients sourced from multiple countries, an entirely self-sufficient pharmaceutical model would be difficult for any one country to sustain. Innovation is also enhanced by the exchange of ideas and expertise. For example, international clinical trials allow health professionals around the globe to pool their research, resources and know-how in the search for a vaccine or treatment for COVID-19.
Domestic production and intellectual property rights
Medicines, medical devices, vaccines, test kits, reagents and even some PPE are often protected under intellectual property laws, most frequently by patents. Any move to repatriate supply chains must account for the rights of patent owners.
Sections 19 to 19.3 of the Patent Act allow the Commissioner of Patents to authorize the use of a patented invention if the government establishes that it has made efforts to obtain from the patentee on reasonable commercial terms and conditions the authority to use the patented invention and that its efforts have not been successful within a reasonable period. Under these provisions, the government can forego negotiating use with the patentee in cases of “national emergency or extreme urgency”. However, it is not clear what constitutes a national emergency or extreme urgency.
Section 19.4 of the Patent Act
On March 25, 2020, Canada's emergency COVID 19 response Bill C 13 added section 19.4 to the Canadian Patent Act. It requires the Commissioner of Patents to authorize the Government of Canada and any person specified in the application to make, construct, use and sell a patented invention to the extent necessary to respond to the public health emergency described in the application and that is a matter of national concern as confirmed by the Chief Public Health officer.
Under section 19.4, the patentee will be paid in an amount that the Commissioner of Patents considers adequate, taking into account the economic value of the authorization and the extent of the benefit derived from the patented invention. There is no indication as to how this remuneration will be calculated, whether current market price will be taken into consideration or whether the patentee will be able to negotiate more favourable terms. Under the prior compulsory licensing regime, (which is no longer in effect) and under the current compensation rates set by the Commissioner for section 19.1 to 19.3, compensation was set at 4% of the net selling price or 15% of the net selling price of the drug in bulk. In nearly all cases, the royalty payable to the patent owner was fixed at 4% of the net selling price of the drug in dosage form or 15% of the net selling price of the drug in bulk. It is not known whether the Commissioner of Patents will take the position that the prior rate may serve as a guideline for setting compensation under section 19.4. These royalties are well below what would be negotiated in many commercial licenses.
Under section 19.2, a patentee could appeal the Commissioner's decision to the Federal Court. Section 19.4 seeks to limit the patentee's remedies to applying to the Federal Court for an order requiring the Government of Canada or any authorized person to cease making, constructing, using or selling the patented invention only in a manner that is inconsistent with the granted authorization. Should section 19.4 be invoked (it has yet to be), an affected patent owner could nonetheless seek to challenge any decision and attack the validity of the legislation. The Commission cannot make an authorization under 19.4(1) after September 30, 2020. Although this provision has not yet been extended, it could be re-invoked at any time.
WTO and the TRIPS agreement
Canada's patent regime is part of an international system governed by several treaties. While patents are national in scope, patent owners use patent portfolios to protect their intellectual property in their principal global markets. Patent rights have been enshrined in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Canada-United States-Mexico Agreement (CUSMA).
Any attempt to restrict international trade could result in retaliatory actions from Canada's trade partners. In 2016, the United States imposed tariffs on Chinese imports and saw China take retaliatory action by introducing their own tariffs on US goods. Any protectionist strategies put into place must therefore consider current trade relations, trade agreements (TRIPS, NAFTA/ CUSMA) and commercial viability of the Canadian pharmaceutical market.
Articles 3, 4 and 27 to 29 of the TRIPS Agreement protect patent rights and confer on WTO members treatment no less favourable with regard to the protection of intellectual property to that enjoyed by nationals of any one member country. World Trade Organization (WTO) members can formally institute proceedings before the Dispute Settlement Body (DSB) for any alleged violations of the TRIPS Agreement.
Disputes between member countries of the WTO are governed by the Understanding on Rules and Procedures Governing the Settlement of Disputes. A member of the WTO may file a complaint that another member country is acting inconsistently with a TRIPS obligation or any other obligation under a WTO agreement. The complaining member submits a request for consultation and states the agreements which it alleges have been violated. A panel is then formed to review the allegations and ultimately prepare a report for implementation by the DSB.
In cases where a dispute arises over the implementation of the report, proceedings may ensue, including referral to the initial panel on implementation. In cases of non-implementation by the losing member, the parties can negotiate compensation pending full implementation of the report. However, if no agreement can be reached, the DSB authorizes retaliatory action by the winning member pending full implementation of the report.
Canada is no stranger to such action, having faced two complaints under the TRIPS Agreement. One was filed by the United States in 1999 regarding the term of protection granted to patents that were filed in Canada before October 1, 1989. Another complaint was filed by the European Communities and their member states in 1997 pertaining to early working and stockpiling of pharmaceuticals.
NAFTA / CUSMA
CUSMA, replacing the North American Free Trade Agreement (NAFTA), allows the governments of parties (United States, Canada or Mexico) to avail themselves of the dispute settlement recourses set out in Chapter 31 of CUSMA if they consider that an actual or proposed measure of another party is inconsistent with its obligations set out in the agreement. Only the governments of CUSMA parties may initiate complaints against one another.
However, NAFTA set out a dispute resolution procedure to resolve a complaint brought by an individual investor from one party against the party in which the investment is located. In this manner, individual investors could complain that a government of a NAFTA party failed to protect intellectual property rights, described as “investments” under NAFTA Chapter 11. Under CUSMA Chapter 14, investor-state dispute settlement proceedings will only be permitted for Mexico and the United States. Canada will no longer be able to bring such proceedings, nor will the other parties be able to bring such proceedings against Canada.
However, CUSMA Chapter 14 provides for “legacy investment” claims which must be brought within three years after NAFTA's termination. A “legacy investment” is an investment made by an investor of another party in the territory of the party established or acquired between January 1, 1994 and the date of NAFTA's termination, and which existed on the date of CUSMA's entry into force, therefore on July 1, 2020. Canada may therefore avail itself of arbitration for these legacy investments in accordance with the provisions of NAFTA Chapter 11.
As the investor challenge provisions are broadly framed in the treaties, there are multiple ways that a dispute between a foreign owned business and a government can lead to a claim. An investor challenge against section 19.4 of the Patent Act could potentially rely on the “expropriation and compensation” obligation found in NAFTA Article 1110:0, whereby the government of a party may not nationalize or expropriate an investment in its territory or take a measure that is tantamount to nationalization or expropriation, without compensating the investor for the expropriation. A challenger could argue that expropriation in this context can include a government regulation which restricts the use of or limits the value of the investment.
Controlling the entire supply chain
Does Canada have the infrastructure to produce medicines, vaccines, medical devices, test kits or PPE on a national scale? Lack of facilities, knowledge about production and formulation of new drugs and skilled workers are practical barriers that Canada must overcome in order to re-establish a domestic pharmaceutical manufacturing industry.
In addition to finding a specialized work force and materials to transition into more regional production, drug manufacturers will also need to control the entire supply chain. Prior to the current pandemic, drug manufacturers had gradually moved overseas to benefit from globally distributed supply chains. As global demand for essential medication increased in light of the pandemic and producing countries banned the export of a number of APIs for fear of domestic shortages, the Minister of Health recognized that drug shortages in Canada could be imminent. On March 30, 2020, the Interim Order Respecting Drugs, Medical Devices and Foods for a Special Dietary Purpose in Relation to COVID-19 was issued, whereby Health Canada and the Canadian Food Inspection Agency may address critical supply issues in an expedited manner when shortages occur.
Export bans on some APIs during the pandemic have shown Canadians the importance of ensuring reliable access to critical medical supplies. Drug manufacturers may be required to demonstrate that they have access to a secure supply, for example by securing diverse sources of materials, if their usual supply chains are disrupted.
Canada has previously sought to stockpile essential medicines and equipment. However this strategy is limited by cost, shelf life and the difficulty of forecasting which products should be stockpiled. The 55 million N95 masks stockpiled in Ontario following the SARS epidemic expired before they could be used in the current COVID 19 pandemic.
Moreover, stockpiling is most effective before a national emergency hits. In an attempt to stockpile ciprofloxacin owing to the heightened concern about anthrax's use as a biological weapon following 9/11, Canada sought to purchase the drug from a generic manufacturer at a cost of 1.50 CAD rather than buying from the patent owner at 2.50 CAD per tablet. As a national emergency had not been declared, Canada could not benefit from the compulsory licensing scheme and found itself narrowly avoiding a lawsuit for patent infringement.
When US border officials stopped a shipment of N95 masks headed for Canada back in April, Canadian officials scrambled to secure an export ban exemption to keep critical PPE supplies flowing into the country. The federal government also launched the COVID-19 Challenge: Made in Canada filtration material for the manufacture of N95 respirators and surgical masks. The COVID-19 Challenge – Point of Care and Home Diagnostic Kit for COVID-19, seeks to fill another perceived gap in domestic supply.
Domestic production of PPE has increased significantly since March 2020. Many of the raw materials are locally sourced, and Canadian companies and labour are ready and willing. A Montreal warehouse was transformed into a mask factory in two months. The company supplies the Government of Canada with surgical masks and has scheduled its first shipment of N95 masks for Fall 2020 .
The federal and Ontario governments have also secured a deal with 3M to produce N95 masks in Canada. The $70-million dollar investment will serve to boost production of N95 masks at a plant in Brockville, Ontario to 100 million medical-grade N95 masks per year.
Environmental and workplace considerations
New Canadian API manufacturers would have to respect Canada's environmental and labour laws which may be more stringent than those in jurisdictions where many APIs are currently made. This will increase the cost for products manufactured here.
According to a 2014 Industry Canada paper the Canadian pharmaceutical market was already being eclipsed by the strong growth of emerging markets in China, Brazil, India and Russia. Growing demand for pharmaceuticals and cost savings encouraged global pharmaceutical companies to shift production to these emerging markets. The report concluded that this presented an opportunity for a mix of contract service providers, smaller Canadian-headquartered companies and larger foreign companies, to carry out complex manufacturing processes for certain products in Canada. Their proximity to the end market in Canada and the United States could be an advantage in addressing safety and legal liability concerns that could arise.
In response to the pandemic, Canada has pledged $275 million to fund research and ensure a domestic supply of potential vaccines. Canada has also taken steps to allow domestic producers to obtain compulsory licencing for patented products.
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