Electronic copy available at: http://ssrn.com/abstract=2146821

1

Compulsory Licensing: A study with reference to India’s first Pharmaceutical Compulsory License Case of NATCO V/S BAYER1

Introduction and Objective

The Intellectual Property Rights in the new world order are governed by an agreement called Trade

Related Aspects of Intellectual Property or TRIPS which is a part of WTO agreement. The WTO

agreement allows all the s overeignties to have their own laws and procedures but they should align

with the TRIPs agreement for IPR Issues. This agreement has lot of flexibilities and is not a rigid

agreement. India, which ascends to WTO on 1st January, 1995, has used these flexibilities well. The

case in point is monumental judgment on Compulsory Licensing in the pharmaceutical products by the

Controller of Patents, Mumbai. This case, titled Natco Pharma Ltd. v. Bayer Corporation,2 involves

Bayer’s patented drug Nexaver which is used in treatment of liver and kidney cancer. This judgment

has laid down the foundation for development of jurisprudence of compulsory licensing for

pharmaceutical products under the provisions of Indian Patent Act while compiling with the provisions

of the WTO Agreement. The objective of this paper is to study the compliance of compulsory license

granted by the Indian authorities vis-à-vis with the TRIPS requirements in the case of Nexaver.

Scheme of Paper

Part-1 of this paper explores concept of Compulsory License. This part presents survey of Compulsory

License granted in pharmaceutical sector in last decade. Part-2 of this paper examines provisions of

TRIPS and Indian Patent Act, 1970(as amended) relating to compulsory license. Part-3 deals with facts

of the Bayer v/ s Natco case. Part-4 deals with arguments advanced by both the parties and decision

arrived at. In the last part author concludes the paper with recommendations.

Part-1 Concept of Compulsory License

Compulsory Licence: The Concept

A “compulsory license” is “non-voluntary license”. It is termed as “Other use without the authorization of the right holder” (Article 31) under the TRIPS agreement. CL is an authorization given by the national government or its agency to a person without or against the consent of the title-holder, for

1 Dr Charu Mathur, Advocate-on-Record Supreme Court of India. Adjunct Faculty IMT (Centre for Distance Learning), Ghaziabad. She did her Ph.D on “ A Comparative Study of various Legislations for synerzing Patent protection in Pharmaceutical sector”. Author can be contacted at charumilind@gmail.com

2 Compulsory License Application No. 1 of 2011, Application for Compulsory License under Section 84(1) of the Patents Act, 1970 in respect of Patent No.215758 at http://ipindia.nic.in/ipoNew/compulsory_License_12032012.pdf accessed on 24-07-2012

Electronic copy available at: http://ssrn.com/abstract=2146821

2

the exploitation of a subject matter protected by a patent or other intellectual property rights. In this section we shall limit ourselves to CL in Patents, particularly for pharmaceutical patents.

The origin of the concept of compulsory licenses lies in the UK Statute of Monopolies Act, 16233, It was granted to make patented invention work locally. The 19th century French law imposed the forfeiture of a patent in the case of non-working. S.22 of the UK under the Patent Act of 1883 provided for grant of CL in cases in which the patent was not being worked in the UK, the reasonable requirements of the public were not satisfied, or any person was prevented from working or using an invention. This is the key provision that has influenced the development and growth of CL in other countries as well as for making inroads in Paris Convention. Despite stiff opposition from the US Paris convention accepted the “working obligation”. At The Hague in 1925 compulsory licensing was adopted as the main means to ensure the exploitation of a patent. Art 5A of the Paris convention provides that the forfeiture of the patent would only apply where a compulsory license proved to be ineffective as a means of addressing the non-working of a patent.

Paradoxically, the United States patent law does not provide for compulsory licenses but it has granted 100s of CL under its Anti-Trust law. Some of them are even royalty free CL4, some required to make the results of its research readily available to other industry members, or to transfer the know-how actually used in production5.

Post WTO regime CL has become route for medical reach. Governments of various countries (as shown under the table) have granted CL and on various occasions have declined to grant CL and in some have taken alternative route to CL. For example, Cipla was refused CL on nevirapine, lamivudine, zidovudine, stavudine, didanosine, efavirenz, indinavir, abacavir, and combinations of these drugs by South Africa. Similalry, South Korea denied the request for compulsory license on imatinib mesylate, also known as ‘Gleevec’. In yet another alternative route, the Colombian government rejected a request for compulsory licensing the HIV drug Lopinavir/Ritonavir in 2009 but set out maximum prices for the drug. This cap has cut down the price down by 54-68%. The table below gives bird’s eye view of various CL granted in last decade or so.

Compulsory Licenses Option Exercised by various Countries

Year Country National Income

Pharmaceutical Company

Drug(s) involved

Disease Outcome

2005-2006

Argentina Upper Middle

Roche Oseltamivir (Tamiflu)

Avian flu/Pandemic Flu

VL

2007 Brazil Upper Middle

Bristol Myers Squibb

Atazanavir sulfate

HIV/AIDS Discount

3 Correa, C., (1999a) "Intellectual Property Rights and the Use of Compulsory Licences: Options for Developing countries", T. R. A. D. E Working Papers 5, South Centre, Geneva. 4 FTC v. Xerox Corporation (Goldstein, 1077, p. 124 Goldstein, Sol (1977) A study of compulsory licensing. Licensing Executive Society (LES), 122-125. In one single case (U.S Manufacturers Aircraft Association Inc.), about 1,500 patents were compulsorily licensed (Goldstein, 1977, p. 123)

5 FTC v. Xerox Corporation (Goldstein, 1977, p. 124).

3

(Reyataz)

2001, 2007

Brazil Upper Middle

Merck Efavirenz (Stocrin or Sustiva) and Indinavir (Crixivan)

HIV/AIDS Discount in 2001 brought $1.59/ pill to $1.10. In 2007 from discount moved to CL to provide pill @ $ 0.45 from Indian generic Pharma company.

2001 Brazil Upper Middle

Roche Nelfinar (Viracept)

HIV/AIDS Discount (30% of US price)

2005 Brazil Upper Middle

Abbott Lopinavir+ritonavir (Kaletra)

HIV/AIDS Discoumt ($4137 to $1000 pp per year

2005-2009

Brazil Upper Middle

Gilead Tenofovir (Viread)

HIV/AIDS Discount, generic production by 2009

2001 Canada High Bayer Ciproflaxin (Cipro)

Anthrax Discount $2.50 to $ 0.95 per pill

2010 Ecuador Lower Abbott Lopinavir + ritonavir(Kaletra)

HIV/AIDS CL (price slashed by 27%)

2002 Egypt Lower Middle

Pfizer Sildenafil (Viagra)

NCD CL to ALL Egyptian pharmaceutical companies who wish to manufacture.

2005 Indonesia Lower Middle

Boehringer Ingelheim

Lamivudine (Epivir) and Nevirapine (Viramune)

HIV/AIDS CL royalty at 0.5% net sales

2003-2004

Malaysia Upper Middle

Bristol-Myers Squibb and GlaxoSmithKline

Didanosine (Videx), Zidovudine (Retrovir), and Lamivudine+Zidovudine (Combivir)

HIV/AIDS CL price slashed from $315 to $ 58

2004 Mozambiqe LDC GlaxoSmithKline, Bristol-Myers Squibb,

Lamivudine (Epivir), Stavudine

HIV/AIDS CL. 1st license by African

4

Boehringer Ingelheim

(Zerit), and Nevirapine (Viramune)

country as these companies failed to produce the drug. Royalty at 20% of net revenue.

2007 Rawanda LDC Apotex (Canadian generic supplier)

Lamivudine+Nevirapine+Zidovudine (FDC)

HIV/AIDS CL for 2 years

2005 Taiwan High Roche

Osetamivir (Tamiflu)

Avian Flu VL

2006, 2010

Thailand Lower middle

Merck Efavirenz (Stocrin or Sustiva)

HIV/AIDS CL again CL renewed in 2010. Payment 0.5% of net sales

2007 Thailand Lower Middle

Abbott, Sanofi-Aventis

Lopinavir+ritonavir (Kaletra) andClopidogrel (Plavix)

HIV/AIDS Cardiovascula disease

CL. As policy Abbott brought cost of Kaletra at $1000 per patient per year for low and middle ncome countries.

2007-2008

Thailand Lower middle

Novartis Imatinib Mesylate (Glivec or Gleevec)

Cancer Discount 75%

2007-2008

Thailand Lower Middle

Novartis, Sanofi-Aventis, Roche

Letrozole(Femara), Docetaxel(Taxotere), and Erlotinib (Tarceva)

Cancer CL

2001 US High Bayer Ciproflaxin (Cipro)

Anthrax Discount

2004 Zambia LDC Boehringer-Ingelheim and Bristol-Myers Squibb

Lamivudine (Epivir), Stavudine (Zerit), and Nevirapine (Viramune)

HIV/AIDS CL Royalty not to exceed 2.5% of turnover of product

5

On analyzing above table the following facts emerges:

1. Majority of CL is for anti-retroviral drugs (HIV/AIDS products), followed by Avian Flu, Anthrax and cancer drugs.

2. Very few companies go for VL. Abbott is one of few companies to follow differential pricing. 3. Discounts works great. Novartis seems to always offer discounts to escape CL. 4. In many cases (for example Kaletra), higher standards of patentability will eliminate the

need for CL. Thus countries need to raise the bar for patentability. 5. Cases like that of Viagra in Egypt dilute the CL concept.

Thus CL is an important tool which has to be applied diligently.

Part-2 Provisions for Compulsory License

The WTO states that compulsory licensing is when a government allows someone else to produce the

patented product or process without the consent of the patent owner6. Thus, under the Patent system

Compulsory License is an involuntary contract between a willing buyer and an unwilling seller imposed

and enforced by the State. In simple terms we can say that CL means allowing a third party to make,

use or sell a patented invention without the patentee’s consent. CL is one of the flexibility of TRIPs

agreement. The provisions relating to CL under TRIPS and Indian Patent Act are as under:

A. TRIPS PROVISIONS RELATING TO CL

Article 27.17 of the TRIPS agreement provides that patent protection is available to all inventions in all

fields of technology if they satisfy the basic requirements. This means patent protection is available to

pharmaceutical sector. However, Art. 30 and 31 puts reasonable restraints on the rights of Patentee.

Under Article 308 provides that member nation have a right to provide limited exceptions to the

temporary monopolistic right conferred by the patent. However this has to be rational decision. It is

the Art 31 of the TRIPS which deals with Compulsory License. It is dealt under the heading “other use

without Authorization of the Right holder”. There are some 12 instances where patented product or

process can be used without authorization of the right holder. Let us analyze each subsection of Art 31

of TRIPS with reference to Pharmaceutical sector. The sentences in italics are content of Art 31 and

underneath in the normal text are its analysis.

Article 31 Other Use without Authorization of the Right Holder

6 http://www.wto.org/english/tratop_e/trips_e/public_health_faq_e.htm accessed on 24-7-2012 7 Art27.1 “… patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application.”

8 Art. 30 Exceptions to Rights Conferred: “Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties.”

6

Where the law of a Member allows for other use of the subject matter of a patent without the

authorization of the right holder, including use by the government or third parties authorized by the

government, the following provisions shall be respected:

Thus, the first requirement is that the law of member nation must allow the other use of patented

product or process. Use without authorization can be done either by the Government itself or by 3rd

party if it is authorized by the government of the member state to do so. Thus, if a company has been

given license to manufacture, import, distribute drugs then it would mean that it is been authorized by

the government to do so.

(a) authorization of such use shall be considered on its individual merits;

This simply means that the member state cannot just keep on exemption patented products

or process. It has to examine each and every case individually.

(b) such use may only be permitted if, prior to such use, the proposed user has made efforts to

obtain authorization from the right holder on reasonable commercial terms and conditions

and that such efforts have not been successful within a reasonable period of time. This

requirement may be waived by a Member in the case of a national emergency or other

circumstances of extreme urgency or in cases of public non-commercial use. In situations of

national emergency or other circumstances of extreme urgency, the right holder shall,

nevertheless, be notified as soon as reasonably practicable. In the case of public non-

commercial use, where the government or contractor, without making a patent search, knows

or has demonstrable grounds to know that a valid patent is or will be used by or for the

government, the right holder shall be informed promptly;

Art 31(b) mandates that before CL can be issued the proposed user must (mandatory

requirement) make an effort to obtain authorization from the right holder. Further the offer

should be made at reasonable commercial terms and conditions. Thus, an entity first of all

should make an effort and this effort should fail within a reasonable period of time, only then

Member nation can mandate for CL. Art 31(b) further mandates three possibilities where this

mandatory requirement may be waived of i.e. in case of (i) a national emergency, or (ii)

other circumstances of extreme urgency or (iii) in cases of public non-commercial use. Even

in these cases patentee must be notified as soon as possible. The crux of this sub-article is

that before CL can be granted proposed user must make an effort to obtain authorization

from rightful owner at reasonable commercial t&c.

(c) the scope and duration of such use shall be limited to the purpose for which it was

authorized, and in the case of semi-conductor technology shall only be for public non-

commercial use or to remedy a practice determined after judicial or administrative process to

be anti-competitive;

7

Art 31(c) (limiting ourselves to pharmaceutical drugs) provides that the CL is to be provided

for limited purpose for which it is authorized. CL is not blanket licensing, it is for limited time

period for limited purpose to a particular entity or to various entities as desired by the

member nation.

(d) such use shall be non-exclusive;

The most important and pertinent point to note is that CL is a non-exclusive license. It can be

given to other persons also and it does not limit the patentee to use himself. Thus, by granting

CL the patentee does have exclusive right to use vis-à-vis others except the one to whom the

CL is given.

(e) such use shall be non-assignable, except with that part of the enterprise or goodwill which

enjoys such use;

The entity to whom CL is issued it cannot further assign to anyone else. This CL is given for a

limited purpose only.

(f) any such use shall be authorized predominantly for the supply of the domestic market of the

Member authorizing such use;

The other important safeguard provided to patent holder is that member nation can grant CL

only for its own domestic market and nor for export.

(g) authorization for such use shall be liable, subject to adequate protection of the legitimate

interests of the persons so authorized, to be terminated if and when the circumstances which

led to it cease to exist and are unlikely to recur. The competent authority shall have the

authority to review, upon motivated request, the continued existence of these circumstances;

The CL is issued only to meet certain exigencies if those circumstances are removed or are

not likely to re-occur then the CL over the patented product will be undone. In such

circumstances the patent holder shall again have exclusive right to deal in that product. This

is however open for request by the patent holder and to the entity who is granted CL of the

patented product.

(h) the right holder shall be paid adequate remuneration in the circumstances of each case,

taking into account the economic value of the authorization;

It is very important to note that even if a patented product is given CL then also the patent

holder will be compensated adequately. This is generally based on the sale of product or

process for which CL is granted.

8

(i) the legal validity of any decision relating to the authorization of such use shall be subject to

judicial review or other independent review by a distinct higher authority in that Member;

Further the decision of grant or refusal to grant of CL is always open for judicial review by the

higher judicial authorities of the member nation.

(j) any decision relating to the remuneration provided in respect of such use shall be subject to

judicial review or other independent review by a distinct higher authority in that Member;

Even any decision regarding remuneration to be paid to patent holder is always open for

judicial review by the higher judicial authorities of the member nation. This can be challenged

by both the parties i.e. patent holder as well as to the entity to whom CL is granted.

(k) Members are not obliged to apply the conditions set forth in subparagraphs (b) and (f) where

such use is permitted to remedy a practice determined after judicial or administrative process

to be anti-competitive. The need to correct anti-competitive practices may be taken into

account in determining the amount of remuneration in such cases. Competent authorities

shall have the authority to refuse termination of authorization if and when the conditions

which led to such authorization are likely to recur;

If the patented use is found to be anti-competitive after applying administrative or judicial

process then member nations are obliged to waive off conditions prescribed in sub-article b

and f i.e. mandatory requirement of to make an effort to obtain authorization from the right

holder at reasonable commercial terms (Art 31(b)) and conditions and to provide CL only for

domestic market and not for export (Art 31(f)).

Thus, Art 31 of TRIPS provides adequate checks and balances for grant of CL. It further takes

care that the patent holder is not unjustly treated, he is adequately compensated. The CL is

open for scrutiny and it can be de-licensed if the circumstances forcing member nation to

asking patent holder to compulsorily issue CL changes. Further if patent-holder is creating

anti-competitive market then after applying administrative or judicial process it can be granted

without applying any safeguards.

The Grounds for grant of CL are not specifically mentioned under the TRIPS Agreement. It

merely lay down the conditions and procedural safeguards that are to be followed while

granting CL. As seen above the grounds covered under Article 31 would be emergency and

extreme urgency, public non-commercial use by government or third parties, dependent

9

patents and anti-competitive practices. Apart from Art 31, Article 8.29 of TRIPS allows

members to take measures necessary to protect, inter alia, public health and nutrition or to

prevent abuses, provided that such measures are consistent with the Agreement10. These are

not exclusive grounds on which CL can be granted but are inclusive ones. They do not limit the

member’s possibility to grant compulsory licenses on other grounds. Further The Doha

Declaration on TRIPS and Public Health11, confirms, that countries are free to determine the

grounds for granting compulsory licenses.

Now, let us examine provisions relating to CL under Indian Laws.

B. INDIAN PROVISONS RELATING TO CL

Chapter XVI(s. 82-98) of the amended Indian Patent Act,1970 is devoted to CL. S. 84 of the

Act provides for grant of CL. The grounds on which a compulsory licence can be granted under

the Act, can be sub‐divided into the following categories:

(i) Abuse of patent rights (dealt with broadly under s 84);

(ii) ‘Public Interest’ (dealt with broadly under s 92).

Let Examine s. 84 and s.92 of the Act. The sentences in italics are content of relevant sections

and underneath in the normal text are its analysis.

“84. Compulsory licences

(1) At any time after the expiration of three years from the date of the [grant] of a patent,

any person interested may make an application to the Controller for grant of compulsory

licence on patent on any of the following grounds, namely:—

(a) that the reasonable requirements of the public with respect to the patented

invention have not been satisfied, or

(b) that the patented invention is not available to the public at a reasonably

affordable price, or

(c) that the patented invention is not worked in the territory of India.

U/s 84(1) a person has to make an application to the Controller of Patents for grant of

CL. This application for CL can be made only after 3 years of grant of patents. Thus, even in

9 Art 8.2 Appropriate measures, provided that they are consistent with the provisions of this Agreement, may be needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology. As given at http://www.wto.org/english/tratop_e/trips_e/t_agm2_e.htm accessed on 08-09-2012 10 An EU Contribution, Legal Issues Related to Compulsory Licensing under the TRIPS Agreement in Compulsory Licensing and Data Protection at http://trade.ec.europa.eu/doclib/docs/2006/may/tradoc_122031.pdf

11 World Trade Organization, The Separate Doha Declaration explained at http://www.wto.org/english/tratop_e/trips_e/healthdeclexpln_e.htm

10

case of CL a rightful patent holder has clear three years period to exploit the invention. S.

84(1) (a) further provides three grounds on which CL can be issued. The first ground is that

the patented invention has failed to satisfy reasonable requirements of public. This means that

if patented invention is unable to meet the needs of public for which it is invented then the

Controller of patents may grant CL for the patented invention. This is in sync with the very

philosophy for grant of patent. As patents are rewards for disclosing the invention for benefit

of mankind. If that patented invention is not available to public i.e. to say for example the

production is low then CL may be granted to meet the reasonable requirements of the public.

The Second ground for grant of CL is that the patented invention is not available to

public at a reasonably affordable price. The idea behind grant of patent is to create limited

monopoly as a reward for disclosing invention. This reward is given because the invention has

helped in the progress of mankind. It is a reward for well-being of society. However if the

patented invention is put at exorbitant prices that public fails to be benefited out of that

because of unduly high prices then CL can be granted. Here the affordability of each nation is

to be undertaken. This sub-section s.84 (1) (b) is at the crux of grant of patent for Nexavar in

Bayer v/s Natco case. Net socio-economic benefit for grant of patent is to be seen.

(2) An application under this section may be made by any person notwithstanding that he is

already the holder of a licence under the patent and no person shall be estopped from alleging

that the reasonable requirements of the public with respect to the patented invention are not

satisfied or that the patented invention is not worked in the territory of India or that the

patented invention is not available to the public at a reasonably affordable price by reason of

any admission made by him, whether in such a licence or otherwise or by reason of his having

accepted such a licence.

S.84(2) provides that a person even if he already having license from the rightful patent

holder still s/he/it can make an application u/s 84(1) to the controller for grant of CL if the

three exigencies mentioned in s.84(1) arises. Further s.84(2) provides that while opposing CL

the patent holder has right to plea that the three mentioned exigencies and that the patent is

not working in India. This is irrespective of the fact that while granting normal license any of

these pleas where considered by the patent holder and on the basis of these pleas he

considered to grant licence. In strict legal terms it means that there is no estoppel12 against

the rightful patent holders to plead (in opposing CL Application) what it has considered for

grant of normal license.

12 A legal principle that bars a party from denying or alleging a certain fact owing to that party's previous conduct, allegation, or denial. http://legal-dictionary.thefreedictionary.com/estoppel accessed on 08-09-2012

11

(3) Every application under sub-section (1) shall contain a statement setting out the nature of

the applicant's interest together with such particulars as may be prescribed and the facts

upon which the application is based.

S.84(3) is the mandatory requirement which requires that whenever application u/s 84(1) is

made to the Controller it needs to have a statement made by the applicant(person seeking CL)

to set out its interest for seeking CL and to give the facts upon which he is building up his case

for grant of CL. This means that for grant of CL it is pertinent to give complete fcats and

circumstances which will convince the controller for grant of such CL.

(4) The Controller, if satisfied that the reasonable requirements of the public with respect to

the patented invention have not been satisfied or that the patented invention is not worked in

the territory of India or that the patented invention is not available to the public at a

reasonably price, may grant a licence upon such terms as he may deem fit.

s.84(4) gives huge discretionary powers to the controller to grant CL if he is satisfied that any

of the three exigencies mention in s.84(1) are met i.e. interests of public is not satisfied vis-à-

vis patented invention or that the patented invention is not working in India and it is not

available at affordable price.

(5) Where the Controller directs the patentee to grant a licence he may, as incidental thereto,

exercise the powers set out in section 88.

The wide powers granted to controller are subject to restrictions imposed u/s 88 of the Act.

(6) In considering the application filed under this section, the Controller shall take into

account,—

(i) the nature of the invention, the time which has elapsed since the sealing of the

patent and the measures already taken by the patentee or any licensee to make full

use of the invention;

(jj) the ability of the applicant to work the invention to the public advantage;

(iii) the capacity of the applicant to undertake the risk in providing capital and

working the invention, if the application were granted;

(iv) as to whether the applicant has made efforts to obtain a licence from the

patentee on reasonable terms and conditions and such efforts have not been

successful within a reasonable period as the Controller may deem fit: PROVIDED that

this clause shall not be applicable in case of national emergency or other

circumstances of extreme urgency or in case of public non-commercial use or on

establishment of a ground of anti-competitive practices adopted by the patentee, but

12

shall not be required to take into account matters subsequent to the making

of the application.

[Explanation : For the purposes of clause (iv), "reasonable period" shall be construed

as a period not ordinarily exceeding a period of six months.]

s.84(6) puts an onus on the controller to consider following facts before granting of

CL. He needs to be satisfied with the nature of the invention, time that has elapsed

since the grant of Patent to the patent holder. The law requires atleast 3 years must

be elapsed before the grant of CL. He also needs to look into the fact that if rightful

patent holder is doing enough in the public interest vis-à-vis patented product then is

there the real need for grant of CL? As for the applicant he has to see the financial

capabilities, as well as manufacturing capabilities of Compulsory License seeker. He

also has to see whether the applicant can work in public interest. The controller is

categorically required to be satisfied that the applicant has made commercial offer to

the rightful owner for the grant of license at reasonable terms and conditions and it

was rejected. He needs to submit documentary proof of the same.

(7) For the purposes of this Chapter, the reasonable requirements of the public shall be

deemed not to have been satisfied—

(a) if, by reason of the refusal of the patentee to grant a licence or licences on

reasonable terms,—

(i) an existing trade or industry or the development thereof or the establishment of

any new trade or industry in India or the trade or industry in India or the trade or

industry of any person or class of persons trading or manufacturing in India is

prejudiced; or

(ii) the demand for the patented article has not been met to an adequate extent or on

reasonable terms; or

(iii) a market for export of the patented article manufactured in India is not being

supplied or developed; or

(iv) the establishment or development of commercial activities in India is prejudiced;

or

(b) if, by reason of conditions imposed by the patentee upon the grant of licences

under the patent or upon the purchase, hire or use of the patented article or process,

the manufacture, use or sale of materials not protected by the patent, or the

establishment or development of any trade or industry in India, is prejudiced; or

(c) if the patentee imposes a condition upon the grant of licences under the patent to

provide exclusive grant back, prevention to challenges to the validity of patent or

coercive package licensing; or

13

(d) if the patented invention is not being worked in the territory of India on a

commercial scale to an adequate extent or is not being so worked to the fullest extent

that is reasonably practicable; or

(e) if the working of the patented invention in the territory of India on a commercial

scale is being prevented or hindered by the importation from abroad of the patented

article by—

(i) the patentee or persons claiming under him; or

(ii) persons directly or indirectly purchasing from him; or

(iii) other persons against whom the patentee is not taking or has not taken proceedings

for infringement”

S. 84(7) provides various circumstances under which it shall be deemed that the ‘reasonable

requirements of the public’ are not met. It provides that if the rightful patent holder has

refused to grant license and such refusal is detrimental to trading or manufacturing in India

then the reasonable requirements of the public are not met. Hence it opens up case for CL.

Secondly, it provides that if patent holder is unable to provide with adequate demand of

patented product at reasonable price then again it opens up the case for CL. If the article that

is manufactured in India and it has an export market and the demands for export market is

not be supplied or developed then also it opens up the case for CL. If the refusal to grant

license is detrimental to establishment or development of commercial activites then also

requirements of reasonable requirements of public are not met. Further the terms of grant of

license should not be such that it prejudices the development or establishment of any trade or

industry in India. Further this sub-section provides that rightful patent holder should not

hinder the working of patented invention or commercial sales by importing the patent article

from abroad by patentee himself or persons working for him. Reasonable public interest

requirement is not met if the patentee fails to take action the person who is infringing the

patented article. Thus, a duty is cast upon the rightful patent holder to protect his patented

products.

The other category for grant of compulsory license is Public Interest as envisaged u/s 92.

Unlike s.84 u/s 92 CL can be granted even before the expiry of 3 years of patents and the

exigencies for CL u/s 92 are:

(a) national emergency; (b) extreme urgency; or (c) public non‐commercial use.

Revocation of Patents after Grant of Compulsory License s. 85 of the Patents Act

provides that after the expiry of two years from the date of order granting the first compulsory

license, the Central Government or ‘any person interested’ may apply to the Controller for an

order revoking the patent. Only grounds available u/s 85 are:

14

(1) the invention has not been worked in the territory of India;

(2) the reasonable requirements of the public have not been satisfied; or

(3) the patented invention is not available to the public at a reasonably affordable price.

Part-3 Facts of Natco V/s Bayer

The various players of the Natco v/s Bayer case are:

The Patentee: BAYER Corp

M/S Bayer Corporation, USA is a Multi National Corporation and a giant in innovative drug

manufacture. It invented a drug called SORAFENIB' (Carboxy Substituted Diphenyl Ureas) a

life extending drug used in the treatment of liver and kidney cancer. It is sold under the Brand

name 'NEXAVAR' The Patentee 1st applied for a patent in the USPTO13 in 1999 and

subsequently in 2000 filed PCT international Application. In India the patent application was

filed as IN/PCT/2001/799/MUM14 and was granted Sorafenib product patent as Patent No.

21575815. The grant of this patent was opposed at post grant level by the Indian generic

Pharmaceutical Company CIPLA. Cipla started selling its generic version in India. A case for

infringement is pending between Bayer and Cipla in Delhi High Court16. This patented product

is not manufactured in India nor have any steps been taken to manufacture this product in

India. That is to say that this patent is not working in India.

The Applicant: NATCO

Natco Pharmaceutical ltd is an Indian generic pharmaceutical company. Natco filed an

application with the patentee Bayer Corporation for the Voluntary license of the drug Nexavar

(Sorafenib) with reasonable commercial terms and conditions. However the same was rejected

by Bayer on 6.12.2010. Natco developed the process of manufacturing Sorafenib and received

a license from the Drug Controller General of India for manufacturing the drug in bulk and

marketing in form of tablets in April 2011. Consequently Natco on 29-07-2011 filled historic

application before the office of Controller of Patents u/s 84(1) of the Patent Act,1970 for grant

of Compulsory license in respect of Patent No 215758 i.e. Sorafenib.

The Drug: NEXAVAR

13 United States Patent and Trademark Office 14 Entered National Phase under PCT in India on 5th July,2001 15 This patent was granted on 03.03.2008 by the Patent controller of India, Mumbai. This grant is available at http://124.124.193.235/patentgrantedsearch/(S(hous1hyhvdl5su45iftjbr45))/displayApplication.aspx?application_number=IN/PCT/2001/00799/MUM accessed on 25-08-2012 16 Bayer Corporation Anr. v. Cipla Ltd C.S. (O.S) No. 523 of 2010 pending before Delhi High Court

15

The drug Nexavar is the patented product of M/s Bayer Corporation. It is a life extending drug

in case of liver and kidney cancer patients. It extends life by 4-5 years. To develop this

product in February, 1994 Bayer established a research and development collaboration

agreement with Onyx Pharmaceuticals to discover, develop and market compounds that inhibit

the function, or modulate the activity, of the Ras signaling pathway or that appropriately

modulates the activity of this pathway to treat cancer and other diseases. Based on this

collaborative research under this agreement in 1999, a development candidate, BAY 43-9006,

was identified. BAY 43-9006 was later given the generic name sorafenib, and the brand name

Nexavar.

The Nexavar R&D Cost

While studying compulsory licensing it is vital to understand R&D cost involved in the

development of that product. This is critical as the usual stand taken by the patentee is that

the R&D cost is exorbitant and hence there should be no CL.

In the case for CL before the Patents Controller of India, the Bayer did not disclose the cost of

R&D involved in the invention of this drug. However, as per the affidavit filed by the Director

of a US based NGO called Knowledge Ecology International (KEI)17 came up with interesting

facts. To come at these numbers KEI dig into various fillings done before the Securities

Exchange Commission (SEC) of the USA. As Bayer has time and again tried to conceal the

R&D Expenditure for development of Nexavar, the relevant data is mined from Annual reports

of Onyx Pharmaceuticals. As per Onyx SEC fillings from 1994-1999 Bayer provided Onyx with

$26.1 million. In 2000 Onyx and Bayer started clinical testing of sorafenib. On October 8,

2004, Bayer received an orphan drug designation for sorafenib/Nexavar for the treatment of

renal cell carcinoma. This orphan drugs designation makes the drug eligible for eligible for a

50 percent orphan drug tax credit thus, lowering the net cost of the investments to both Bayer

and Onyx. Nexavar was approved for marketing by the US FDA on December 20, 2005, for the

orphan indication.

As per SEC 10-K reports, Onyx Pharmaceuticals spent $125 million, which was 50 percent of

Bayer's outlays on the development of the drug. Combined with the $26 million Onyx received

from Bayer from 1994 to 1999, the SEC filings report a combined Bayer/Onyx outlay of $275

million, which was spent to develop sorafenib as a treatment for several types of cancer,

including but not limited to the approved indication for cancer of the kidney, and also for

research on related products. Thus, the Total R&D for development of Nexavar was

$275million. Deduct Orphan Tax credit from the same this will further lower the R&D cost.

The Sales

17http://keionline.org/node/1359 accessed on 25-08-2012

16

Sorafenib was launched in the market as Nexavar in 2006 and in the first year itself its sale

was staggering $165 million in sales, an amount nearly equal to all joint outlays on R&D from

1994 to 2004. In 2007, Bayer reported Nexavar sales of $371.7 million. By 2008, sales of

Nexavar were reported at $678 million, for a total of $1.2 billion within three years of approval

as an “orphan” drug.

The sales of Nexavar from 2006-2011 as extracted from Annual Reports of Onyx

Pharmaceuticals filed with SEC are presented as under.

Year Sales worldwide in $ Million

2006 166

2007 371

2008 678

2009 843

2010 934

2011 1008

Source: Extracted from Annual Reports of Onyx Pharmaceuticals

Sales of Nexavar in India and world18

Now if we focus our attention to Nexavar in India then the sales of the drug in India and

worldwide is depicted in the following graph. Thus when the world sales are $934 million in

2010 the Indian Sales is almost negligible in few decimal million dollars. It is important to

remember that India is one of the most populous countries.

Source:www.informaticsoutsourcing.com

COST IN INDIA

18 http://informaticsoutsourcing.com/global-outsourcing-services/?cat=36 accessed on 26-8-2012

17

India has population of 1.2 billion and hence it is a huge patient base for pharmaceutical

companies. But India’s per capita income is considerably lower compared to developed and

emerging markets. countries. India’s spending on healthcare (as % of GDP) is considerably

low coupled with the fact that most of the people in the country pay directly from their pockets

as opposed to insurance proceeds in the developed markets. In an effort to provide healthcare

to all the government does subsidize some medical costs for the poor but that is not sufficient.

It is a fact that even upper middle class family cannot afford drugs like Nexavar which costs

almost Rs 3 lakhs per month.

Nexavar is an expensive drug. The cost of cancer drug Sorafenib in 200mg tablet varies vastly

in branded and generic category. At the time of dispute the rate cost of Sorafenib from

Patentee Bayer in India was Rs 280,428 per patient per month. This comes out to19 $69,000

per patient per year. If we take today’s exchange rate it will be way above 3, 35,000/-. The

generic drug sorafinib was available from Cipla for Rs 27,960 and Natco is providing the same

at Rs 8,880/- After the judgment for grant of compulsory license Cipla has slashed its price

further and now it is available for Rs 6,600/- per patient per month.

To get the bigger picture consider the following facts:

Per Capita Income of India (PCY) in 2011 is $1575/-

Cost of Bayer’s Nexaver PP/Year in 2011 is $69,000/-

Cost of Natco’s Sorafenib PP/Year in 2011 is $2,120/-

19 http://donttradeourlivesaway.wordpress.com/2012/01/17/update-on-first-compulsory-license-application-in-india-for-cancer-drug-sorafenib/

18

Thus Bayer is charging almost 45 times the PCY of India. If Bayer adopts same pricing

in USA and starts charging 40 times PCY of US then the US patients would be paying

staggering $1.6 Million20 for the Nexavar supply for one year.

PART- 4 Arguments advanced and Decision

During the course of arguments the Applicant Natco claimed CL u/s 84(1) of the Act. It contended

that

1. Bayer has failed to work the invention in India. Bayer was granted Patent in 2008 and it has

not taken any step to manufacture the patented product in India.

2. Bayer’s Nexavar is not available to the public at a reasonable price. It is exorbitantly priced at

Rs 2, 80,428/- per month which simply is not affordable.

3. Natco argued that the reasonable requirements of public have not been met. To substantiate

this it was shown that even though patent was granted patent in 2008 Bayer has imported

only around 200 bottles of Nexavar where the demand is 23,000/- bottles per month. It has

not bothered to find a local manufacturer or made an effort to bridge this gap. It is too be

noted that Bayer has well oiled network of distributors and manufacturers in India.

4. Natco made its intentions clear that the CL for sorafenib/Nexavar will be used only in the

territory of India. The generic version will not be exported.

5. It further undertook that it will be able to provide generic drug at around Rs. 8,880/-per

patient per month.

Against this Patentee Bayer argued that as it is supplying the drug in Indian market the

reasonable requirements of the public are being fulfilled by the company. Further it opposed that

the generic version of the drug is already in the Indian market produced by Cipla Ltd so there is

no need to give a license for the product. However this argument was rejected as Bayer filed an

infringement case against Cipla and the case is pending before courts.

DECISION

The Controller of Patents vide his judgment dated 9th March,2012 issued first pharmaceutical

based compulsory license under new WTO regime. The Bayer failed on the grounds of delay in

working the patent in India and on being exorbitantly priced. The CL for license for

Sorafenib/Nexavar is granted by the Controller on the following terms:

1. The applicant Natco has limited right to make and sell sorafenib. It cannot sublicense it. It is

non-assignable and non-exclusive license with no right to import the drug.

20 Forbes Article http://www.forbes.com/sites/matthewherper/2012/03/19/how-to-charge-1-6-million-for-a-new-drug-and-get-away-with-it/ accessed on 28-08-2012

19

2. The use for which the compulsorily licensed drug can be sold is only for treatment of liver and

renal cancer. This means that Natco cannot use this CL for second or subsequent use of

sorafenib.

3. Natco has to pay the royalty at a rate of 6% of net sales to Bayer. This is in consonance with

Article 31(h) of TRIPS Agreement read with s.90(1) of the Act. Further, Controller awarded

highest royalty rate of the royalty practices/ guidelines adopted reflected by the United

Nations Development Program (UNDP) which specifically recommends a range of 2% to 6%

for royalty rates depending upon the therapeutic value of the product.

4. The Controller has set the price at Rs. 8,800/- for one month treatment.

5. The applicant Natco as per its commitment has to provide the drug for free to at least 600

"needy and deserving" patients per year.

6. Natco has no right to "represent publicly or privately" that its product is the same as Bayer's

Nexavar.

7. Bayer has no liability for Natco's drug product, which must be physically distinct from Bayer's

dosage form.

PART 5-Conclusions and Recommendations

Natco v Bayer is a pioneer case. It establishes that the Indian laws are in consonance with the

TRIPS agreement. This case showcases that India is using TRIPS flexibility like CL effectively

to provide health care to its public. By applying the provisions of TRIPS effectively it has

succeeded in keeping its Constitutional Obligations. Article 2121 of the constitution of India

mandates “Right to Life”. This right to life would become meaningless if the medicines are

around and they cannot be administered because they are either too expensive or the

patentee is not producing them. Here the State (India) has done the right thing by granting

non-voluntary license to a firm who took the initiative to come forward and manufacture that

drug at very reasonable price for people residing in India.

The judgment given by the Controller of patents is very balanced and he has even awarded

the highest royalty of 6% on net sales. This should make a win-win situation for Bayer also. As

Bayer needs to appreciate that even before the CL was granted it had imported just 200bottles

of Nexavar in 3 years. The money it will earn by the royalty from Natco will be much more

than the business it was not doing in India.

21 Art. 21 Constitution of India “No person shall be deprived of his life or personal liberty except according to procedure established by law.”

20

However, the CL is not an option available for each and every patented drug. Hence the

sincere recommendation of the author will be to link health care system with insurance. It is

not feasible for anybody (including US Citizens) to spend $6,000 medicines every month from

their own pockets. The only sensible thing is to make it linked with insurance.

It is to be remembered that country like US who vehemently opposes CL forced Bayer to bring

down the prices of Ciproflaxin when the threat of Anthrax was looming high on its land and air.

After 9/11 faced with threat of bio-terrorism the US government made Bayer to ship 100

million tablets of Ciproflaxin by the end of the year for 95 cents each, and to donate another 2

million tablets beginning next week. The government also obtained options to buy an

additional 100 million tablets after this year at 85 cents each, and a further 100 million tablets

for 75 cents apiece. Thus being an assertive government the country which has always

opposed the CL forced the drug company to provide it with the stock at dirt cheap price. Thus

the important lesson for any government is to remain assertive if they believe that it is

essential for their public.

Finally, the author recommends that the pricing of Nexavar by Bayer has horribly went wrong

in India. It was charging 32 times more than the generic product! The big corporations must

be sensitive towards the developing and least developed markets. They should use differential

price mechanism intelligently for different markets.