When would compulsory licenses be effective to negotiate discounts on prices of branded drugs?

uriasBy Eduardo Urias, UNU-MERIT, urias@merit.unu.edu

For Citation: SITE4society Brief No. 4-2018
Related to SDG Goals:  #SDG3 (Ensure healthy lives and promote well-being for all at all ages), #NHM (National Health Mission)
SITE focus: Technology catch-up, Innovation and Governance for Access;  Country Focus: Emerging and Developing countries; Sub-Disciplines:  Economics, Public Health
Based on: Ramani, S. V., & Urias, E. (2015). Access to critical medicines: When are compulsory licenses effective in price negotiations?Social Science and Medicine135, 75-83. DOI: 10.1016/j.socscimed.2015.04.023
Caveat: Please note that our academic works are based on a detailed study of a niche context constrained by the limitations of time and resources. Thus, our policy inferences, which have been extrapolated from such studies should be considered as indicators to be re-confirmed in every new context considered for application.

Context:   Access to essential drugs is particularly challenging when a country has an licensing32important disease burden for which it has to rely on high priced patented drugs from foreign companies. The problem becomes untenable, if the corresponding technology cannot be licensed from the supplier or independently developed by local firms. In such cases, governments of developing countries often attempt to improve access by initiating a price negotiation. Target 3b of Goal 3 of SDG affirms that developing country governments have the right to use, to the full, the provisions in the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) regarding flexibilities to protect public health, and, in particular, provide access to medicines for all in accordance with the Doha Declaration on the TRIPS Agreement and Public Health. This includes the possibility of issuing a compulsory license, whereby governments can permit third parties to produce the patented product without the consent of the patent holder. 

In the new millennium, some developing countries have successfully used the threat of compulsory license or issued a compulsory license to improve access to essential drugs, notably Brazil, Thailand, Malaysia, Ecuador and India.  On the other hand, many developing countries remain silent spectators, without even attempting to negotiate prices with the patent holders of branded drugs. Why?

licensing1If we turn to the literature, it confirms that compulsory licensing is the best TRIPS-compliant safeguard to overcome the negative impact of Intellectual Property Rights or IPR on access to medicines. However, there is no integrative analytical framework to explain the circumstances under which a country can use compulsory licenses in price negotiations, and/or the conditions under which such threats will result in more affordable drugs. This is where the contribution of the present paper lies.

Research Questions:  Under what conditions will a developing country have the confidence to threaten to use the compulsory license option or actually issue one? Under what conditions will such threats be successful in bringing down the price of the vital drug concerned?

Motivation for Research Questions in the Indian context:  India has been widely acknowledged as the “pharmacy of the developing world” due to its capacity to supply cheap generic medicines. As India took full advantage of the transition period allowed under the TRIPS agreement, it has many suppliers of generic versions of drugs developed before 2005. This has had a dramatic influence on the ability of other developing countries to issue compulsory license threats regardless of their own local manufacturing capacity. Whenever there is a generic version available in India, any country can issue a compulsory license to import a high quality and low cost generic version. Brazil, Thailand, Malaysia, Ecuador have all have issued compulsory licenses relying on Indian suppliers. 

On the other hand, it is not clear if India has used to the full the compulsory license provision to its own benefit (a deeper contextual study is required). In 2012, the Indian Controller General of Patents granted the country’s first and only compulsory license for a patented oncology drug (Sorafenib Tosylate). Presently, there is a lack of access to essential patented medicines, and as technology evolves in the creation of new essential drugs (e.g. in the form of bio-similars) the compulsory license threat option might be more useful to negotiate price discounts.

Finally, it is to be noted that issuing a compulsory license is only one pathway to improve access to drugs, and there are access paradoxes that are not addressed in the paper. Forlicensing - aids statistics instance, Indian companies like Cipla, shook the international market for HIV/AIDS drugs by re-engineering the drugs cocktail, slashing the prices and making it far more accessible to all patients, in the pre-TRIPS period. However, even at present HIV/AIDS patients in India have a worse deal than in countries like Brazil, where the government has adopted a Universal Access Policy.

Methodology Used:  Following an inductive research approach, we started with a literature review. Based on its main findings, we formulated and solved a game theoretic model of price negotiation between a pharmaceutical company and a public agency in a developing country. We validated our model by checking it against available data on compulsory license outcomes.

Main findings:  The game features two players: a patent holder, a large pharmaceutical company that sells its patented drug; and a public agency in a developing country that buys this drug and tries to negotiate prices with the patent holder using the issuance of a compulsory license as a threat.  We consider two cases: one where both parties have the same and complete information base, and the other, where the information base of the two parties is asymmetric with the public agency having a better idea of the possible reprisals from the government of the pharmaceutical company than the company itself.


The model demonstrates the following.

In negotiations, the bargaining strength of the public agency is determined is by the country’s local manufacturing capacity and access to imports of cheap generics. On the other hand, the bargaining strength of the patent holder is determined by the degree of reprisal by its government. Indeed, fear of reprisals by the governments of multinationals that will affect trade and industry beyond pharmaceuticals can deter public agencies from using the threat of compulsory licensing in price negotiations.

If local technological capabilities and access to cheap imported generics are strong, and the probability of a high reprisal is low, then the mere threat to issue a compulsory license can be enough to achieve a price discount.

However, a compulsory license will actually be issued only under incomplete licensing2information when the patent holder is over-confident about its government jumping to its rescue. Under complete information, depending upon the bargaining strengths of the two parties, a mutually acceptable settlement will always be reached.

Our model could explain most but not all of the data!

 Policy Recommendations:  

1. To have success in price negotiations with multinationals, in order to have the option of using compulsory license option credibly, developing countries must strengthen their bargaining powers broadly. Further, compulsory licensing should be the last rather than first option to debate about.

2. Ultimately, countries need to make full use of their bargaining strengths to make essential medicines more affordable to their citizens. For instance, in India, the IPR regulation provides that compulsory license can be granted for public interest in case of national emergency, extreme urgency or public non-commercial use. Given that India has one of the most cost-efficient pharmaceutical industry in the world, the competitiveness of local generic manufacturers has to be mobilized and leveraged to ensure that patented medicines are available to its public at an affordable price.

licensing53. Industrial policy must focus on building industrial and technology capabilities in pharmaceuticals for drugs that cannot be imported due to IPR restrictions. Least developed countries can first work towards building technological capabilities in formulation and initiate institutional changes to facilitate the import of cheap generic versions of patented drugs under compulsory-license.

4. Countries should use other flexibilities in TRIPS, such as research exemption and parallel imports.

5. South-South R&D cooperation in pharmaceuticals has to be strengthened by pooling and sharing knowledge, technology and products in order to build bargaining strengths. In particular, Indian generic manufactures can play an important to transfer the required technology if appropriate incentive structures are implemented.

6. That said, there is an urgent need to facilitate the issuance of CL to export vital drugs to the least developed countries. Institutional changes in this direction would not only benefit the least developed countries, but all countries that do not have enough manufacturing capacity for a given drug. India has implemented a special compulsory licence regime for the manufacture and export of patented medicines to countries with insufficient or no manufacturing capacity to address public health needs. However, those countries also need to amend their local IPR regulation in order to take full benefit from the Indian regime.

Source of photos 

  • https://spicyip.com/2016/03/indias-private-assurance-to-usibc-on-compulsory-licensing.html ;
  •  https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRi_s5FTpbSu6VyU0xQo5kRD25blQFDoPM05woqdMFn-QUVVIWxmA;
  • https://www.avert.org/professionals/hiv-around-world/asia-pacific/india;
  • Others are mentioned on photo.

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