Compulsory pharma licensing, the Indian case of Natco vs Bayer, and the South African context

With the crisis of HIV/AIDS and the great debate on access to healthcare, some ask why, if a third-world economy like India can grant relief to generic manufacturers, South Africa continues to lag behind as South African Courts have not yet granted a compulsory licence for a pharmaceutical-based patent. At first glance, the legislative provisions enabling compulsory licensing in India (section 84(1) of the Patents Act of 1970, as amended) and South Africa (section 56(2) of the Patents Act No. 57 of 1978, as amended) seem similar. Both find their basis in Article 31 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which allows members of the WTO to provide for compulsory licensing. Thus, the question of why some states have judicially allowed compulsory licensing, stemming from patent legislation , whilst others have not, arises.

The Case

In the Natco vs Bayer case, the Patentee, Bayer, held the rights to a patent for a cancer drug, sorafenib tosylate, otherwise marketed as Nexavar. Natco, a generic drug manufacturer, approached Bayer for a voluntary licence, which was denied, before bringing an application before the Controller of Patents Court, for a compulsory licence. The Controller had three substantive issues to consider.

a) Reasonable Requirements of the Public

Section 84(1)(a) of the Indian Patents Act required that the "reasonable requirements of the public with respect to the patented invention" must not have been satisfied, in order for a compulsory licence to be granted. Natco supplied statistical data showing that Bayer did not make the drug readily available to the public, and that excessive pricing of the drug partially contributed to lack of demand by the public. Bayer denied this, and interestingly, used sales figures of an alleged infringer in its argument. Bayer had prior to this case, brought infringement proceedings against Cipla, another generic manufacturer, for infringement of the same patent. These proceedings were still pending. However, Bayer argued that sales by Cipla contributed to the reasonable requirements of the public being met. The Controller however, did not accept this argument, stating that Bayer's conduct and that of any licensee was of importance. He found basis for this reasoning in Section 86(6)(i) of the Act, which stated that the measures taken by the patentee and licensee must be taken into account. On the facts, the Controller found that Bayer did not discharge its obligation in satisfying the reasonable requirements of the public as an insignificant quantum of the drug had been made available to the public in the three years since grant of the patent.

Section 84(1)(a) finds similarity in section 56(2)(c) of the South African Patents Act, which requires that "the demand for the patented article in the Republic is not being met to an adequate extent and on reasonable terms". Whilst the phrase "demand" seems less vague than the Indian terminology, "adequate extent" was interpreted by the South African Commissioner of Patents to mean "sufficient or commensurate with the needs of the Republic". It was further held that the question of what terms are reasonable will depend on the circumstances of each case. South African precedent therefore leaves interpretation of the section open to the Commissioner, based on the facts of the case, allowing flexibility. Thus, if a similar case were to come before a South African court, where statistical evidence proves that demand is not reasonably being met, the court may rule in favour of the grant of a compulsory licence.

b) Reasonably Affordable Price

Section 84(1)(b) of the Indian Patents Act requires that in order for a compulsory licence to be granted, the patented invention must not have been made available to the public at a "reasonably affordable price". Natco contended that the drug was excessively priced and unaffordable to the ordinary public. It also contended that Bayer was eligible for a drug tax credit which would have lowered the net cost of investment on research to Bayer, however, Bayer did not take this opportunity to lower the price of the drug, which proved abuse of its monopolistic rights. Bayer argued that innovation based products cost more, and that the Controller had to take into account the total cost of R&D and sustainability of future research. Bayer argued that a "reasonably affordable price" should be reasonable to both the public and the patentee. The Controller did not agree with this proposition, stating that the reasonable price had to be construed with reference to the public, without explaining his reasoning. On the facts of the case, the Controller again found in favour of Natco.

The issue of excessive pricing is dealt with in the South African legislation in section 56(2)(e), which requires that in order for grant of a compulsory licence, the price charged in South Africa must be excessive "in relation to the price charged therefor in countries where the patented article is manufactured by or under licence from the patentee". It would seem that such a comparison, based on factual evidence, results in a simpler method of determination of excessive pricing, rather than the subjective determination of "reasonably affordable" as in the Indian case.

c) Patented Invention not worked in India

Section 84(1)(c) of the Indian Patents Act allows for a compulsory licence if the patented invention is not worked in the territory of India. Natco argued that "worked in the territory" meant "manufactured in India". They argued that since Bayer already had manufacturing facilities in India, there was no hurdle preventing them from manufacturing in the country, and as it did not manufacture the drug in India, it did not discharge its obligation. Bayer stated that it did not manufacture the drug in India due to economic reasons, and argued that "worked in the territory" could not mean "manufactured in India", based on interpretation of other sections of the Indian Act. However, after analysis and interpretation of the Act, the Controller found that importation could not amount to working of a patent, thus finding in favour of Natco's interpretation of manufacture.

Section 56(2)(a) of the South African Patents Act requires that "the invention is not being worked in the Republic on a commercial scale or to an adequate extent...and there is in the opinion of the Commissioner no satisfactory reason for such non-working". By contrast, working in the South African context has been held to mean "exploitation", which includes importation. Whilst the precedent gives clarity, it defines a narrow definition where exploitation could be carried out by the patentee, his licensee or even alleged infringers. Therefore, Bayer's argument of exploitation by the alleged infringer, Cipla, might have been upheld in a South African court. It must also be recognised that a second leg to the determination exists in section 56(2)(a) in that the Commissioner must be of the opinion that no satisfactory reason for non-working exists. Whilst this subjective leg could be said to give the patentee more room to escape the grant of a compulsory licence, it could also be argued that it allows the applicant flexibility to make arguments based on the circumstances of the case.

It must also be stated that whilst the Controller in the Indian case did not delve into detailed preliminary issues of the refusal of Bayer to grant a voluntary licence, section 56(2)(d) of the South African Patents Act states that abuse of monopoly rights will be proven if by the patentee's refusal to grant a voluntary licence upon reasonable terms the establishment of any new trade or industry is being prejudiced, and that it is in the public interest that a licence be granted. Again, vague phrases such as "reasonable terms" and "prejudiced" which must be decided on the facts of each case , coupled with a lack of definitive case law, prove that the section has yet to be shaped.

Conclusion

It must also be stated that section 56(2) gives rise to four circumstances which give rise to an abuse of rights and the onus is on the applicant to establish one or more of these circumstances, which are not mutually exclusive. This allows flexibility to an applicant, who will merely have to establish one of the circumstances, in order to succeed.

In the final analysis, whilst there has been public outcry over the lack of compulsory licences granted for pharmaceutical patents in South Africa, and suggestions of amending the Patents Act, the provisions enabling compulsory licensing do exist in South African legislation. The lack of case law granting a pharmaceutical compulsory licence and vague phrases of section 56(2) show that there is room to shape the legislation. An applicant will have to prove abuse of patent rights based on the facts and circumstances, as did Natco in the Indian case. Whilst many argue that the legislation favours the patentee, and this has contributed to the lack of case law in favour of compulsory licences, it must be appreciated that external factors such as the costs and time spent on litigation also play a role. It must also be remembered that the patent system was structured to reward an inventor for his contribution to society. Admonishing big pharma for spending time and resources on research will merely lead to a situation where research and development becomes a rarity. A balance of rights must therefore be achieved if South Africa is to move forward in access to healthcare and compulsory licensing.