Latha Jishnu: It's not just about royalty rates

PATENTLY ABSURD

So far the case has not attracted much attention here. A small generics company from Hyderabad applies for a compulsory licence (CL) to export two life-saving drugs to neighbouring Nepal. The quantities are small, not enough to make any ripples in the market or to dent the earnings of the patent-holders who, of course, are big guns. Yet, the application filed by Natco Pharma for Roche's erlotinib (brand name Tarceva) and Pfizer's Sunitinib (sold as Sutent) has a significance that goes beyond these two drugs, both of which are used to treat cancer, and that's why international interest in this seemingly innocuous application is unusually high.

If Natco is successful with its application, then other generic companies are likely to follow suit and manufacture the latest patented drugs at much lower cost for export to a wide swathe of poorer developing countries. In which case, the drug majors would seriously have to rethink the way their products are priced in different markets. For example, Natco is offering its version of erlotinib at just Rs 1,000 per tablet in Nepal against Rs 4,800 a tablet that Roche charges for Tarceva in India. It's not so difficult to calculate the implications of this across the spectrum.

Natco's is the first CL application in India and only the second in the world to be made under the Doha Declaration on public health that was incorporated in the TRIPS agreement. This allows developing countries to use CLs to make cheaper versions of patented drugs in special circumstances, each country being free to use the flexibilities within the TRIPS agreement to formulate its own rules. The first time the CL was invoked, and granted, under the Doha Declaration was in Canada on GSK's AIDS drug, TriAvir, for export to Rwanda. A CL allows a drug company to manufacture a patented drug without the consent of the patent owner by paying what is deemed a reasonable royalty.

But the CL is not so easy to obtain as the Nacto experience reveals. Although the application was made in September, 2007, the Controller General of Patents has yet to take a decision on this. Instead, it had convened a meeting of Natco with the two drug majors last month to which the Hyderabad company had objected, saying that the law (Section 92 A of the Indian Patent Act, 2005) did not warrant that the patentee should be given a hearing. Natco has offered a 5 per cent royalty to the two drug majors in its CL application, a rate that is in keeping with the guidelines suggested by the WHO and other international organisations like UNDP.

The interlocutory application filed by Natco has triggered off a major debate in international pharma circles with some activists insisting that the Indian Patents Office is wrong to have called the patentees to discuss the CL. It's true that Section 92A says nothing about seeking the views of patentees and gives the Controller full powers to set the terms and conditions, but others maintain that calling the patentees is in keeping with the spirit of the law.

What the law does state is that the CL can be made available for manufacture and export "to any country having insufficient or no manufacturing capacity for the concerned product to address public health problems". For this, Natco needs to have either a licence or a notification from the Nepal government for the contracted amount. So far, there has been no confirmation on this score from either Natco or the authorities in Kathmandu.

For health activists, however, the issue is fairly straightforward. They claim that the payment of a "reasonable royalty to the patentee" should settle the issue. The problem, they say, would not have arisen if the government had notified specific rules on royalty to be paid for CLs. In fact, there is speculation that the Controller of Patents had called a meeting with the patent-holders because the question of royalty is missing altogether in the Indian law.

In Canada, royalty is capped at 4 per cent of the price of the generic product, the rate being adjusted downwards depending on the importing country's rank on the UNDP Human Development Index. In the tiered royalty system proposed by UNDP, the base royalty is set at 4 per cent of the price of a product in high-income markets.  This rate is adjusted taking into account the relative capacity of a country to pay, based either on the relative per capita income or the national income.

But royalty is not really the issue here. It is a fight for markets. While drug multinationals have usually sought to reap the rewards of their expenditure on R&D primarily from lucrative markets where drug prices can be tagged much higher, generic companies are now seeking to open up the LDC markets for newer drugs. The outcome of the CL application could easily change the way both do business.