What China has done is
perfectly legal, but deeply unsettling. In May,
China's State Intellectual Property Office
announced, "the revised version of Measures for
the Compulsory Licensing for Patent Implementation
came into effect". For multinational
pharmaceutical companies, China's embrace of what
are known as compulsory licenses (CL) add to fears
that the central government in Beijing is looking
to take a more aggressive stance towards an
industry that has enjoyed much protection over the
past 30 years.
On its own, this change to
China's patent law and its advocacy for compulsory
licenses would be manageable. But, multinational
pharmaceutical companies feel very vulnerable in
China at the moment. Most have deep concerns over
the implications on their pricing strategies
because of the "Anhui Model", whose blind bid
and tender process has
resulted in destructive price wars. [1]
In
addition, Beijing is moving to change the prices
the government pays on about 100 drugs that had
differential (or what the industry calls
"preferential") pricing, which were all
manufactured by Western and European
multinationals. The drugs covered under this
preferential pricing scheme were protected by the
Chinese government almost 20 years ago in an
attempt to address concerns pharmaceutical
companies had about intellectual property (IP)
theft. In many cases, the patents on these drugs
have run out, but the Chinese government has stood
by its commitment to protect these products from
domestic competition. Cumulatively, all of
these changes have pharma worried that China's
healthcare reform process is going to leave them
in the cold through a combination of brittle
pricing and the sort of forced technology transfer
they have seen take place in other high-tech
industries eager to access the Chinese market.
In many ways, the grinding pressure
Beijing is under to expand healthcare services and
improve outcomes runs at cross-purposes with those
policies industry would most like to see pursued.
Compulsory licenses, while in practice thus far
limited in scope, in theory have the ability to be
much more widely used. If so, they could prove to
be very detrimental to the growth opportunities
pharmaceutical companies will find in China.
Geoffrey Lin, an attorney in Shanghai with
Ropes Gray, believes pharmaceuticals should not
interpret these changes to China's patent law as
anything more than the country bringing its legal
framework up to previously established standards.
Lin admits, "These changes do suggest that China
is getting read to issue compulsory licenses.
There really is no reason to get the process going
other than this; however, China is being very
sensitive to international expectations in this
area, and they will be pretty careful."
Compulsory licenses address what should be
rare situations where a national government must
intentionally break patent laws specific to
pharmaceuticals. This is allowed only in cases of
state emergencies, what are called "unusual
circumstances", or where the interests of the
public are at risk.
The World Trade
Organization (WTO) acknowledges the need for
compulsory licenses in these situations, and the
2001 Doha Declaration on the Trade Related aspects
of Intellectual Property Rights (TRIPS) spelled
out these conditions where compulsory licenses
could be used. Industry has always been
uncomfortable with compulsory licenses, in large
part because how the conditions under which they
can be used remain open to abuse.
Researchers Reed Beall and Randall Kuhn at
the Josef Korbel School of International Studies
at the University of Denver have conduced a survey
of how nations have used compulsory licenses. They
found "24 verified CLs in 17 nations". One of
these was in the United States when, in the
aftermath of 9/11 over fears of a potential
anthrax attack, the American government suggested
it would pursue a compulsory license in order to
address the potential shortage of Cipro. As Beall
and Kuhn note, the US government "subsequently
secured a significant discount, giving the
appearance of a US double standard".
Of
the 24 compulsory licenses they found, 16 involved
HIV/AIDS drugs. Four were related to treatments
for communicable diseases, and the other four were
for non-communicable diseases, the majority of
which were related to cancer therapies. Given the
prevalence of HIV/AIDS and other communicable
diseases in developing nations such as India, as
well as the prices of these drugs, it is no
surprise that the vast majority of compulsory
licenses to date have been specific to these
conditions.
The timing of China's recent
announcement came on the heels of a compulsory
license issued by the Indian government for Bayer.
Earlier this year, India successfully pursued its
first compulsory license. Once the compulsory
license on Bayer's Nexavar was issued, the price
of the drug dropped over 90%, to only $175 per
month from $5,500 per month. India justified its
forced license by pointing to 8,800 patients
across the country that could not afford the drug
where another treatment option did not exist.
Under the terms of the agreement, the
Indian generic pharmaceutical company Natco, which
will be manufacturing the product, must pay a
royalty of 6% back to Bayer.
Multinationals believe that, at their
worst, compulsory licenses amount to a sort of
extortion. The mere threat that a government may
pursue a compulsory license can bring a
pharmaceutical company to the table with
compelling price reductions. From the point of
view of governments - and the people in emerging
and third-world economies who benefit from this
process - doing so is a necessary step if they are
to address health problems endemic in their
country.
The pharmaceutical industry has
continued to warn that compulsory licenses run the
risk of dis-incentivizing future research and
development. After all, from their point of view,
if their researchers stumble onto a new drug
regimen that cures cancer, but only after billions
of dollars have been spent on discovery and
clinical trials, they have the right to profit off
of their work.
Thus far, compulsory
licenses have not been over-used. Beall and Kuhn
note "given the opportunities and incentives for
[these countries] to employ CLs, we may ask why
[they] have not rushed to issue CLs on a far wider
range of medicines."
Answering their own
question they add that these countries "face
considerable pressure from internal industrial
lobbies and foreign governments to honor
intellectual property rights. Patent recognition
may also be seen as an opportunity to attract
foreign investment and technology transfer."
Thus far, countries have carefully weighed
the benefits and risks of compulsory licenses and
erred on the side of maintaining protections for
multinational pharmaceutical companies.
The question now is two-fold: what did
China have in mind when it changed its patent law
to accommodate compulsory licenses, and what will
American industry and the politicians who watch
China's policies make of this change? China did
not make these changes to its IP regimen
carelessly. This was a deliberate adjustment that
more than likely had a specific portfolio of drugs
in mind. In the short term, Beijing is likely to
find it has gained the upper hand in negotiations
with its pharmaceutical suppliers because of this
move; but, in the long term, if multinationals see
China over-use compulsory licenses it will be very
bad for US-Sino relations.
On the back of
China's "Indigenous Innovation" policies and
forced technology transfers related to key deals
in the aviation sector - among others, compulsory
licenses have the potential to add to a powerful
narrative being developed in Washington DC. This
line of thinking would likely over-interpret
China's compulsory licensing strategy, choosing to
instead put forward the interpretation that trade
with China comes with too many strings attached,
that Beijing forces its trading partners to
exchange too much technology for limited market
access.
Admittedly, from China's point of
view, this swap is nothing new: it is how almost
every key industry in China has been brought up to
speed since the country started to open in the
1980s. What is new is America's attitude towards
this trade.
As China's manufacturing
prowess has grown, both the sectors of the
American economy and the skill level of the
workers impacted by this exchange have
transitioned from heavy manufacturing to high
technology. This part of America's economy was
supposed to be safe from China's omnipresent
economic juggernaut. But, high technology
industries and the workers employed in them are
not much more safe than their blue-collar friends
and family members.
As the US wrestles
with the implications to this realization, it
seems policymakers have two choices: either throw
up new trade provisions, duties and tariffs that
try to punish China for its trade practices or
single mindedly pursue a national economic
strategy that emphasizes worker training,
education reform and investment into nascent
industries.
On their own, compulsory
pharmaceutical licenses are an acknowledged
mechanism for countries to address public health
crises. Against the backdrop of deep mistrusts
about how China plays the rules of the game,
compulsory licenses become something much more
symbolically powerful. They add to a growing sense
in the US that trade with China now has more
downside risks than upside potential, a
realization that could well make progress towards
mutual trust and coordinated policies to address
global problems that much more difficult and
unlikely.
Notes: 1. Under
China's healthcare reforms, the Anhui model is
fixated on getting the lowest cost possible
without - at least as critics suggest - adequate
consideration of the relationship between price,
benefit and quality. At least 18 of China's 23
provinces have adopted all or part of the Anhui
model. It broadly consists of two elements: a
requirement that prescribing institutions have a
0% mark-up on drugs called out on the Essential
Drug List (EDL) and a formalized and centrally
controlled bid and purchase process for drugs on
the EDL.
Benjamin A Shobert is
the Managing Director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis
for companies looking to enter emerging economies.
He is the author of the upcoming book Blame
China and can be followed at www.CrossTheRubiconBlog.com.
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