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Will compulsory licensing become the norm? - Views on News from Equitymaster
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  • Mar 14, 2013

    Will compulsory licensing become the norm?

    It has now been a year since the Indian Patent office granted its first 'compulsory license' for a cancer drug - Nexavar (Sorafenib Tosylate) to Natco Pharma. Naturally the innovator of the drug was discontented by this decision. Let us now take a look at how things have progressed on this front.


    As per the WTO (World Trade Organization) - "Compulsory licensing is when a government allows someone else to produce the patented product or process without the consent of the patent owner. It is one of the flexibilities on patent protection included in the WTO's agreement on intellectual property - the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement".

    The TRIPS Agreement does list a number of conditions for issuing compulsory licenses, in Article 31. In particular:

    • normally the person or company applying for a license has to have tried to negotiate a voluntary license with the patent holder on reasonable commercial terms. Only if that fails can a compulsory license be issued. Thus, in 2010, Natco had filed for voluntary license for Nexavar, however Bayer had refused to grant license filed by Natco) and

    • even when a compulsory license has been issued, the patent owner has to receive payment. In this matter, the TRIPS Agreement says, "the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization", but it does not define "adequate remuneration" or "economic value". (As per public sources, Natco will have to pay royalty of 6% to Bayer for sale of Nexavar in India)
    Further, as per the TRIPS agreement, compulsory licensing is applicable only when the generic copy is produced mainly for the domestic market, not for export. In 2003, Malaysia was among the initial few countries which had promoted drugs through compulsory licensing. However now, many Asian countries such as Indonesia, Thailand, followed by India in 2012 are taking compulsory licensing route to promote cheaper medicines in their respective markets.

    The impact of pricing differentiation

    Price difference plays an important role in getting compulsory license. In Natco's case too, the company was able to get the rights of compulsory licensing, as it was able to produce the drug at a significantly lower cost. Indeed, Natco's drug is sold at a 97% discount to the price of the innovator's drug.

    But there were other important reasons too - Public requirement or unmet need and manufacturing outside India. As per various public sources, almost 90% of the MNC drugs are imported in India.

    Most of the time the drugs which are life threatening in therapies such as cancer, HIV etc are given rights of compulsory licensing.

    After Nexavar's approval, Natco is now considering additional launches in the oncology segment and other therapeutic segments. The company is working on approximately 4-5 such drugs, which have the potential to get compulsory license.

    Government is now looking to add new cancer drugs in the list

    The government has started the process of granting three more compulsory licenses, on cancer treatments from Roche and Bristol-Myers Squibb.

    The licensing moves apply to Roche's breast cancer drug Herceptin (Trastuzumab), and Bristol-Myers Squibb's leukemia treatment Sprycel (dasatinib) and breast cancer therapy Ixempra (Ixabepilone). It would be the first round of new compulsory licenses since India issued its first in March, on Bayer's kidney cancer treatment Nexavar.

    Stance of the Innovator companies

    In Nexavar's case, Bayer had filed various litigation suits against the Indian patent office as well as Natco. Various reasons were given by Bayer to protect its brand. But nothing has been working so far.

    Recently, the Indian Intellectual Property Appellate Board (IPAB) upheld a decision to allow Natco Pharma to sell a generic version of Bayer's cancer drug Nexavar. However, the royalty payment to Bayer was increased from 6% to 7%.

    Our View

    Competition is already intensifying in the domestic pharma market and there would be further challenges in store in the event that the new drug Pricing Policy comes into force. Thus, there could be some headwinds for the domestic pharma market going forward. In such a scenario, compulsory licensing will act as a low competition opportunity for a period of time. Besides Nexavar, Natco has already begun work on more such opportunities, and in that sense is ahead of the curve than other Indian companies. However as the government is in the process of bringing more drugs under compulsory licensing, the possibility of competition entering this space too cannot be ruled out.

    But there is the other side of the coin too. Though compulsory licensing looks attractive, there are barriers which could be raised by the innovator of the drugs, which should also be considered by investors. Thus, even after a company gets compulsory license, the innovator could take various steps to protect its patent and reduce the value for the generic company. Thus investors should be aware about such actions. Ultimately, the opportunity from compulsory license would depend upon the nature and size of the drug and the patents surrounding the same and should be evaluated accordingly.

      Bhavita Nagrani (Research Analyst) is a Chartered Financial Analyst (ICFAI) with nearly six years of experience in the field of equity research. She has a deep understanding of the global as well as the domestic Healthcare industry and keenly tracks the developments therein. When it comes to stock investing, she is a strong advocate of the bottom-up approach to stock picking and has a remarkable ability to discern nuances in the business models of companies belonging to the same industry. Bhavita is the contributor to our large cap franchise, StockSelect.



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