Excerpt from UK Commission on Intellectual Property Rights Report, Integrating Intellectual Property Rights and Development Policy, Published September, 2002.

Chapter 2 - Health
Pages 44-48

Compulsory Licensing for Countries with Insufficient Manufacturing Capacity

Paragraph six of the Doha Declaration directs the TRIPS Council to develop an expeditious solution to the problem faced by certain countries not having sufficient manufacturing capacity in the pharmaceutical sector. It defines the problem as the inability of these countries to use compulsory licensing to obtain needed pharmaceuticals from a producer located in their territory. A compulsory licence ordinarily could be used for this purpose - the country could authorise through a compulsory licence a domestic producer to produce the product within its territory, or an importer to procure from elsewhere. The countries identified as having this problem, however, cannot turn to a domestic producer for products under this approach, and would need to rely on a producer from another country.

We agree that it is important to get the interpretation or amendment of TRIPS right, bearing in mind the longer term scenario when patent protection will apply to countries that can currently produce and export generic copies of patented drugs. The ultimate need is to create a pro-competitive solution for the market in patented drugs in developing countries after TRIPS is fully in force which allows expeditious procurement of drugs in a sustainable manner at the lowest possible cost. This applies whether we are considering the direct procurement of patented drugs where there are a range of therapeutic substitutes, or about procurement under compulsory licensing.

Compulsory licensing needs to be viewed as a means to an end. The end in this case is to help achieve the lowest possible cost of medicines in developing countries in order to facilitate access. The only point of compulsory licensing in this context is if it will help to achieve this. As noted above, aside from the legal and administrative aspects, compulsory licensing will only be effective if the compulsory licensee sees the possibility of a reasonable return from his investment while also supplying at a significantly lower price than the patentee (or his licensee).

While there are now several countries, particularly those with significant domestic markets, with the capacity to produce copies of drugs cheaply, this will become more difficult after 2005. There will be no incentive, as now, for manufacturers in these countries to reverse engineer newly patented drugs and take the other steps necessary for manufacture and sale (including obtaining regulatory approval), because the domestic market would be closed. Thus the ready supply of generic substitutes for patented drugs now available will gradually disappear. Potential compulsory licensees would therefore have to charge a price closer to full economic cost (including start-up and manufacturing costs) as compared to the possibility of providing off-the-shelf generics at prices where start-up costs have already been amortised to some extent on the domestic market. Moreover, if the necessary investment is only triggered by the availability of a compulsory licence, there will inevitably be long delays before the drug actually reaches the intended patients.[73] In addition, there is some evidence that reverse engineering of new medicines is intrinsically more difficult in biopharmaceuticals than in traditional process chemistry.

This suggests that, without special arrangements, the possibility of compulsory licensing being a vehicle for price reductions will be more limited than at present, even in the few technologically advanced developing countries. For most countries, the only feasible supplier may be the patentee (or his licensee).

We therefore see the problem identified at Doha as being as much economic as legal. A quasi-legal solution as may be identified in the TRIPS Council is necessary, but is by no means sufficient to solve the problem we have outlined. In particular the quasi-legal solution is less likely to be effective the more compulsory licensing is hedged around with restrictions. Such restrictions reduce the likelihood that such licensing can be an effective bargaining tool for developing countries negotiating prices with patentees – it can be effective only if the compulsory licensing alternative is a viable economic proposition.

Legal Aspects

In this section we consider and comment on the various proposals put forward by different countries and groups of countries to address the WTO resolution of the problem identified in paragraph 6 of the Doha Declaration. This revolves around the substance of Articles 28 (Rights Conferred), Article 30 (Exceptions to Rights Conferred) and Article 31(f) of TRIPS, where Article 31 deals with “Other Use Without Authorisation of the Right Holder”. Article 31(f) provides that a compulsory licence must be “predominantly for the supply of the domestic market of the Member authorising such use.”

Countries with no or insufficient manufacturing capacity cannot therefore issue a compulsory licence to a domestic manufacturer, or to one overseas because patents are territorial. At present they could issue a compulsory licence to an importer, who could source the supply from a generic manufacturer in a country where the product is not patented. After 2005, this option will not be possible for drugs that are patented in the supplier country.

The practical effect of this provision is to render the compulsory licensing provisions practically worthless for the very countries which are likely to need it most – namely the poorest. With limited domestic manufacturing capacity, there is no one to invoke those provisions in those countries. This is plainly unsatisfactory and the Doha Declaration rightly recognised that a swift solution should be found to this problem.

There are a number of interpretative problems raised by the Doha Declaration, a few of which we note in passing. The Declaration notes that countries are free to determine the grounds on which compulsory licences are granted (paragraph 5b), and the right to determine what constitutes a “national emergency or other circumstances of extreme urgency” (paragraph 5c). The latter provision reflects the shortcut in procedures allowed in these circumstances in Article 31(b) of TRIPS. Thus paragraph six refers to procedures for compulsory licensing in the pharmaceutical sector needed to address “public health problems…especially those resulting from HIV/AIDS, tuberculosis, malaria and other epidemics” (paragraph 1).[74] It does not, as sometimes assumed, refer only to compulsory licensing in situations of emergency or urgency. Nor is it limited to a particular type of disease.

It also needs to be clarified which countries have no or insufficient manufacturing capacity. Again we think this requires an economic interpretation. If production of a needed medicine is technically possible but extremely costly, there is no point in issuing a domestic compulsory licence. If the objective is affordable access to medicines of appropriate quality and quantity, then the solution should allow production in the most economically viable manner, whether domestically or overseas. Developing countries generally favour an interpretation of “manufacturing capacity”, that takes account of economic criteria (for example, whether the capacity is such that economic production is possible in the envisaged circumstances), and place emphasis on a country’s ability to decide the criteria on a product by product basis. Developed countries, with one exception, suggest that criteria for defining this should be drawn up, without defining what these might be.[75]

Since the Declaration also allows LDCs not to apply pharmaceutical patents until 2016, countries that take advantage of this provision will not be able to issue compulsory licences, nor will any country where a patent has not been taken out. At present, such countries may be able to import cheaper supplies from other countries without patents on the relevant products, but again this situation will change after 2005. Thus paragraph six, while referring specifically to compulsory licensing, is clearly intended to address this wider context of action to address the affordability and accessibility of medicines, particularly in developing and least developed countries.

The Declaration does not specify which countries may act as suppliers to the countries in question. In order to maximise competition, and achieve the lowest prices possible, applying no restriction on which WTO members may act as suppliers would seem to be the logical market-based solution. For the same reasons, countries seeking a licence should logically seek out the most competitive compulsory licensee, wherever they might be located. Developing countries favour having the ability to import from suppliers in any country. One developed country favours the possibility of import from developed countries, but the EU has no fixed views and the US favours supply from developing countries only, as does the research-based pharmaceutical industry.

Five main solutions have been proposed to the problem mentioned in paragraph 6 of the Declaration which we examine in turn.

The Amendment of Article 31 of TRIPS. Article 31(f) could be deleted. However this may be regarded as altering the sense of the Agreement for compulsory licensing other than in relation to public health problems. The alternative is an amendment which would make a clearly demarcated exception to the restriction imposed by Article 31(f) covering compulsory licensing needed to address public health problems envisaged in the Declaration. Such an amendment to TRIPS would be very time-consuming and require ratification by national governments. An interim or provisional solution, such as a declaration of intent, and temporary waiver or moratorium on dispute settlement, could be provided to cover the period until any amendment is ratified. But many countries, both developed and developing may be reluctant to re-open TRIPS at all, because of the risk of other aspects of the agreement being opened up for renegotiation at the same time. Assuming a solution was found, it would then be necessary for a potential exporting country to delete the “predominantly” clause from its own legislation and to make sure that the grounds for compulsory licensing accorded with those envisaged in the Declaration. In the final stage compulsory licences would need to be invoked and paid for in both the importing and exporting countries, if there is a patent in both. The exporting country would need to be prepared, in any case, to issue a compulsory licence for the benefit of the importing country.

Developing countries have suggested a number of options for resolving the problem including the revision of Article 31 or deletion of Article 31(f), so as to ensure Article 31(f) would not apply to any laws, measures and administrative regulations including compulsory licences, adopted to protect public health and in particular to ensure affordable access to pharmaceutical products. Other developing countries note that under Article 31(f) there would be a need to issue compulsory licences in both the importing and exporting country which would be administratively burdensome. The EU favours the specific amendment to Article 31(f) described above. The US does not favour an amendment to 31(f), but a moratorium on dispute settlement proceedings to achieve the same effect.

Interpretation of Article 30. Article 30 provides for limited exemptions to patent rights that do not conflict with the normal exploitation of the patent. Under this proposed solution no amendment is required to TRIPS, nor a compulsory licence in the exporting country. One claimed advantage is that it would allow exports to countries where no patents exist on the relevant medicine. All that would seem to be required is an “authoritative interpretation” under Article IX of the WTO agreement, adopted by three quarters of WTO Members. This would clarify that an exception under patent rights to allow export in the circumstances envisaged in the Declaration is legitimate. National legislation in the exporting country would then need to be amended to ensure that the envisaged exception is incorporated. One issue with this proposed solution is whether the “Doha exception” would be compatible with the conditions of Article 30. An interpretation of this Article in a recent Disputes Settlement Panel[76] suggested that the “limited exceptions” should be interpreted narrowly. This was in the context of justifying Canada’s provision of an exception for early working by potential competitors for the purposes of obtaining regulatory approval. There is a case to be made that an exception, as suggested here, is “limited” to particular circumstances as defined in the Declaration. It could also be said that it does not “unreasonably conflict” with the normal exploitation of the patent, being for export at low prices, provided the “legitimate interests” of the patentee are safeguarded (for example, preventing diversion to other markets). Moreover, the legitimate interests of third parties (people suffering from diseases in developing countries) would need to be weighed appropriately against those of the patentee. For the most part the very different circumstances applying here, as contrasted to those in the Canada case, means this WTO case law is of limited relevance.

Some developing countries particularly favour the Article 30 solution, noting that it solves the problem of double remuneration under Article 31, and removes the need for a compulsory licence in the exporting country. In terms of administrative procedures they feel it is the least burdensome option. It should also be noted that activist NGOs think the Article 30 option is preferable to other options.

Moratorium or Waiver. An alternative is the proposal for a moratorium or waiver for exports in the “Doha circumstances”. Advocates argue that a waiver is the most expeditious solution noting that it could provide legal security and still avoid the need for either amendment or authoritative interpretation of the TRIPS agreement. The conditions for a waiver could be set out in advance to define the circumstances in which they would apply. Obviously there would be a need to set these out very clearly and unambiguously to the satisfaction of all WTO members. This has not yet been attempted and clarity may inevitably be compromised in negotiations on the criteria.

The WTO Ministerial Council would have to agree the criteria under which Members may be exempted from complying with the provisions of the TRIPS Agreement. Both in the case of a moratorium and a waiver, however, interested parties may only invoke protection under the Agreement if national legislation has been changed to implement the exemption to the 31(f) requirement.[77] If national legislation is not changed, a patentee may still make a case in national courts in spite of the fact that a WTO waiver or moratorium applies. It also needs to be remembered that a waiver requires regular review by the Ministerial Conference/General Council if granted for a period of more than one year.

The EU have suggested that a waiver (or moratorium) might be necessary while the amendment they propose to 31(f) is agreed. Some developing countries have suggested that that a waiver (or moratorium) would not amount to a sustainable and legally predictable solution. By contrast the US has suggested that a waiver or moratorium is more likely to achieve an expeditious, workable, transparent, sustainable and legally certain solution. We also understand that the pharmaceutical industry supports a proposal on these lines.

Non-Justiciability. The proposal for a non-justiciability option would achieve much of the Article 30 approach by a different means. It would operate in a similar manner to the position of TRIPS on the exhaustion of rights (paragraph six of TRIPS). By authoritative interpretation or amendment of the Agreement, it would be decided that settlement disputes under TRIPS would not be used to in relation to exports undertaken as envisaged in the Declaration. However, it is unclear exactly how this proposal would be implemented.

Export by a Nation with a Compulsory Licence. A final option, which is not in the hands of the WTO, is that countries which have the capacity to reverse engineer and manufacture, and large local markets for the required medicines, may issue compulsory licences in accordance with their own legislation. In that case, a proportion of the supplies manufactured could be offered for export to countries in need (on the basis of a compulsory licence for import if necessary) in a manner that did not breach Article 31(f). A compulsory licence can also be granted to remedy anti-competitive practices (Article 31(k)), and in this case the restriction on exports would not apply. But this option depends on the supplying country having legitimate grounds for issuing a compulsory licence in the first place, on its having a large enough market that exports constitute less than half of total production, and on its willingness to export.

The choice between these options will be worked out politically, but we strongly emphasise our concern that whatever the legal solution adopted by the WTO is, it should proceed upon the following principles. First, it should be quickly and easily implementable with a view to a long term solution. Second, the solution should ensure that the needs of poor people in developing countries without manufacturing capacity are given priority. Third, it should seek to ensure that conditions are established to provide potential suppliers the necessary incentive to export medicines that are needed

Economic Aspects

Whatever means are utilised to achieve the objectives at Doha, developed countries will require safeguards to prevent leakage of product from the intended recipient to other markets, and to ensure that production is only for export to the affected country, not for domestic sale. They may also require actions through WTO to ensure all Members are fully informed of the nature of the transaction in a transparent manner. Whatever safeguards are finally agreed upon, the crucial issue is that the economics of supply to one particular country with a limited market may be insufficient to attract potential generic suppliers. Moreover, if prices offered under compulsory licensing are to be as low as possible, then there should be competition between more than one supplier at the point of ordering, if not for the actual supply. To allow therefore for economies of scale, and a degree of competition, it is important that small markets are grouped together as much as is possible.

An obvious solution is for groups of countries with the similar needs for essential drugs to group together. International institutions, such as WHO or the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM) may also have an essential role to play in facilitating and financing group purchases of medicines from both brand and generic manufacturers.

A way needs to be found to reconcile the nature of the solution adopted with the objective of providing medicines of the appropriate quality at the lowest possible cost. If that cannot be achieved, the legal solution will have little practical reality. Nor will the option of compulsory licensing be effective as a negotiating tool.

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