As an elusive covid-19 vaccine draws closer, big pharma is licking its lips at the monetary potential of what could be a virtually limitless ongoing global demand. But governments may use compulsory licensing regulation to tilt the scale towards affordability as the death toll escalates. Never before have intellectual property rights been so starkly weighed against massive human loss. Freny Patel reports

As the covid-19 pandemic threatens lives and the global race to develop a vaccine gathers pace, governments around the world are beefing up legislation to ensure affordable access to appropriate drugs and vaccines to combat the virus. The death toll from the pandemic has already spiralled past the one million mark and public health concerns are likely to supersede the protection of intellectual property (IP) rights. Multinational pharma players are bound to take a hit as governments choose to strengthen laws and interfere in the pricing of any treatment or vaccine in the public interest.

One way for governments to dampen multinational pharmaceutical companies’ ability to mint megabucks is the use of compulsory licensing, one of the flexibilities in the field of patent protection that enables a government to allow a third party to produce a patented product without seeking the consent of the patent holder.

India was among the first few countries to have invoked compulsory licensing, back in March 2012, when it permitted NATCO Pharma, a domestic company, to manufacture and sell the generic version of Bayer’s patented and protected anti-cancer drug, Sorafenib Tosyalte. This landmark judgment saw multinational pharma companies raise a hue and cry as they feared the loss of their exclusivity rights in India. But what it really did was ensure that drugs sold by international pharma companies in India were affordable, and, more importantly, that “supply met demand”.

Compulsory licensing is a powerful bargaining tool for price negotiation. Gordon Gao, a partner at Fangda Partners advising on intellectual property, says whether governments choose to use this tool will depend on the availability of any vaccine, as well as rights holders’ ability to meet states’ needs at an affordable cost.

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It is “more of a bargaining chip for governments in negotiations with pharmaceutical companies, for achieving lower drug prices and balancing public interest and interests of rights holders,” says Gao.

While Bayer’s example paves the likelihood of India forcing down the price of a covid-19 vaccine, mainland China has never triggered article 49 of its Patent Law, which provides a patent compulsory licensing system for pharmaceuticals.

“There are no signs of China taking any action to use or enhance the powers related to compulsory licensing to deal with covid-19,” says Alan Chiu, the managing partner of Ellalan, a Hong Kong-based IP-focused firm.

“There were some discussions within IP circles about the idea of compulsory licensing in early 2020, when Remdesivir was widely reported as a wonder drug and possible treatment,” he says. “But such talk quickly faded away as it soon became clear that China was on the leading edge in development of covid-19 vaccines, and the pandemic seems now to be under control in the country.”

Shanghai-based IP lawyer Helen Cheng, a partner at Zhong Lun Law Firm, agrees the central government is unlikely to use compulsory licensing for covid-19 vaccine-related patents, based on the legislation and practice of the compulsory licensing system in China. Instead the government is more willing “to negotiate with pharma companies and place large-volume orders to ensure the vaccine is accessible and affordable to the public,” she says.

However, Cheng does not rule out the possibility of Chinese pharma companies encountering compulsory licensing in overseas markets, as regulations and practices vary across countries.

Richard Blewett, a Brussels-based partner at Clifford Chance, a member of the firm’s antitrust group and head of practice in Greater China, says it would be rash to make any predictions about what requirements on licensing or pricing might apply in the scramble for governments to protect their citizens from covid-19.

It may be rash to make any assumptions, given the current pandemic situation and that quite a few governments across the globe have initiated legislation to issue compulsory licensing in the eventuality that patentees fail to make vaccines accessible.

Governments in Chile and Ecuador have done so already, while other developed nations like Canada, France and Germany are preparing the necessary groundwork to facilitate the issuance of compulsory licensing, if warranted.

Back in Asia, the Indonesian government has the power to exercise compulsory licensing under its existing patent laws, and a new regulation came into force on 8 July expanding its ability to use patents for the public interest.

However, Chiu points out that it appears that the export price of Chinese covid-19 vaccines is even lower for developing countries. Therefore, the chance of other countries implementing compulsory licensing to drive the cost of Chinese covid-19 vaccines down is likely to be low as well. “Bio Farma, a state-owned firm in Indonesia that has reached a deal for at least 40 million doses from Sinovac, said this week the vaccine will cost around IDR200,000 (US$14.15) per dose when it becomes available in the Southeast Asian country,” he says.

Compulsory licences enable governments with the right to intervene in cases of national emergency and extreme urgency, even after granting of a patent. “However, to exercise the said powers, circumstances such as national emergency or extreme urgency are required to be established,” says Ajay Bhargava, a senior partner at Khaitan & Co based in New Delhi. Bhargava is a senior member of the dispute resolution team with expertise in IP and pharma.

This could have a negative bearing for pharmaceutical companies, which usually profit from their R&D spend thanks to the 15-20-year exclusivity period under most patent regimes. With the threat of compulsory licensing hanging over their heads, they will need to think twice before deciding on their pricing strategy for a covid-19 vaccine.

“Considering the deterrent effect of compulsory license, the urgent demand of the public and the cost of vaccine, the pharma companies will probably offer a price relatively acceptable to both parties,” says Cheng.

Affordability and availability

US-based Gilead Sciences, for instance, signed non-exclusive voluntary licensing agreements with generic pharmaceutical manufacturers in Egypt, India and Pakistan to expand the supply of Remdesivir, an antiviral drug.

In a statement, Gilead said that voluntary agreements allowed pharma companies – like Cipla, Dr Reddy’s Laboratories, Eva Pharma, Ferozsons Laboratories, Hetero Labs, Jubilant Lifesciences, Mylan, Syngene, and Zydus Cadila Healthcare – to manufacture Remdesivir for distribution across 127 countries. These countries include the majority of low-income ones facing significant obstacles to healthcare access.

“While the idea behind Gilead’s licensing agreements is for technology transfer to quickly scale up the production of Remdesivir, this strategy may safeguard the US pharma major from any advent of compulsory licensing,” says a London-based IP lawyer who wished to remain anonymous. Companies that enter into voluntary licences have an upper hand in deciding the royalty, “if at all they want to charge it”, says the IP lawyer. “This needs to be minimal, which would ensure the affordability and availability of the drug.”

Gilead, for instance, has allowed licensees to set their own prices for the generic product produced. The licences are royalty-free until the WHO declares the end of the public health emergency, or until another drug or vaccine is approved to treat or prevent covid-19.

Lawyers interviewed cautioned that pharma companies currently focused on developing a vaccine to combat the coronavirus will have to pay heed to the strong possibility of government intervention. Even if governments choose to enter into a voluntary agreement with generic companies, this does not stop them from imposing compulsory licensing.

If pharma companies like AbbVie and Moderna take a more socially conscious approach, there may not be a need for government intervention to issue compulsory licensing to settle patent disputes, says Gao. AbbVie and Moderna have promised not to enforce any patent rights related to covid-19.

Gao does not rule out the possibility of some patent holders invoking a protectionist stance and seemingly attempting to profit from the global pandemic through the patent system, citing the case of Labrador Diagnostics.

SoftBank owned Labrador Diagnostics, which acquired patents from a failed blood-testing start-up called Theranos, recently filed a patent infringement lawsuit against BioFire Diagnostics, a health startup that launched three covid-19 tests. Labrador requested an injunction demanding BioFire to stop using the technology covered by the Theranos patents. However, after filing the lawsuit and the ensuing public backlash, Labrador was forced to throw in the towel and allow third parties to use its Theranos patents to develop covid-19 tests with a royalty-free licence.

Gao points out that while compulsory licensing would be seen as a desperate measure by governments to address the urgent need for vaccine accessibility, the main challenge is the absence of any approved vaccines or cures.

Chiu, of Ellalan, says: “In the short term, companies that have or develop products (be they devices, kits, drugs or vaccines) protected by patents will likely choose to make those products available at an affordable price (cost-plus) if not for free. Any potential disputes over patent rights or patent protected products are therefore more than likely to be resolved in the short term through decisions to sell or license for free or at most, cost-plus.”

ALAN-CHIU,-Managing-Partner,-Ellalan,-Hong-Kong

There are reportedly 47 vaccine candidates between phase one and phase three clinical trials worldwide, with three having been approved for limited use, but it will be a long arduous road before any real cure is found. For instance, on 8 September, AstraZeneca was forced to halt clinical trials of a candidate vaccine on account of “an unexplained illness” among participants enrolled in the clinical trial in the UK. According to media reports, its vaccine had commenced phase three clinical trials in early September, with the delivery schedule of the first doses expected in October.

AstraZeneca, one of nine global pharma companies in the late stages of phase 3 human trials, has since resumed clinical trials. There is an expectation that in the next 12 months, more than 300 million doses would be made available for the majority of the US population. Yale Institute for Global Health’s director, Saad B Omer, who is based in New Haven, Connecticut, and is working with the WHO on the rollout of a vaccine, says that even in an equitable distribution scenario there is not a realistic expectation of the availability of vaccines for the entire world.

Viability of dual pricing

Understandably, while many governments are in a panic mode, some are preparing the groundwork to invoke compulsory licensing. What countries need to bear in mind is that this could have a serious chilling effect on the future of R&D. With sizeable investments running into tens of billions of dollars, Omer suggests “a Robin Hood kind of model”, where high-income countries pay a higher price than low-income countries, which would help subsidise the latter’s vaccine access.

Gao agrees, advising that dual pricing/regional pricing should be an industry practice. “After all, drug pricing is a matter of public health, insurance, patient affordability, pharma company R&D incentives, and even involves epidemiological surveys and pharma-economics,” he points out.

Pharma companies may decide the price based on the cost, product positioning, competitor pricing and consumer acceptance, says Gao. “The current forms of drug price control, and principles of drug pricing, leave drug managers a fairly large profit margin,” he says, adding that governments in developing countries can also be involved in the pricing for covid-19 vaccines.

GORDON-GAO,-Partner,-Fangda-Partners,-Beijing

More pharma companies and governments have opted for “value-based pricing of drugs”, says Gao, where pharma companies may provide discounts for patients with less effective outcomes after administering their drugs. “Such a pricing policy is appealing to patients, and prompts the pharma companies to develop more effective drugs.”

While, from an economic standpoint, dual pricing could be helpful for pharma companies, it could also be likened to price discrimination, and attract legal challenges from other regulators. “While government intervention in the private sector could give rise to litigation, courts are likely to side with the larger public interest,” says Kanika Nayar, a partner at L&L Partners in New Delhi. Pharma companies would be better off looking at equitable distribution of the vaccine and keeping economic considerations secondary, she cautions. “Governmental intervention, which may prejudice future innovations, should be seriously considered and legally challenged if the need arises,” she says.

KANIKA-NAYAR,-Partner,-L&L-Partners,-New-Delhi

Rewarding endeavour

While the immediate future may look grim for pharma companies developing the vaccine, Blewett seems confident that the rush to find a vaccine suggests that the pharma companies investing all this time and effort “clearly believe that there will be plenty of rewards to be had, financial or otherwise”.

“Considering that the entire world population is expected to purchase a cure, multinationals will play it as a volume game, and not necessarily look at the unit pricing,” says Bhargava.

AJAY-BHARGAVA,-Senior-Partner,-Khaitan-&-Co,-New-Delhi

Further, a compulsory licence is usually granted for a fixed period of six months to a year. Since covid-19 is not expected to go away in six months, and many countries have witnessed the recurrence of the virus in terms of a second and even third wave, patent holders stand to benefit once the compulsory licence ends, he says, “especially if their drug has been a tried and tested product”.

Cheng, at Zhong Lun, points out that compulsory licensing cannot guarantee the smooth development and manufacture of a biosimilar vaccine by generic companies. The reason is that as a kind of biological product, the vaccine’s technical threshold is higher than that of chemical drugs, and the quality of vaccine is more vulnerable to the production environment and process. “Even if a compulsory licence is issued, there are still many obstacles for generic pharma companies to overcome,” she says.

HELEN-CHENG,-Partner,-Zhong-Lun-Law-Firm,-Shanghai

This would not be the first time that governments have chosen to intervene and ensure affordable access to medicines. Almost two decades ago, during the height of the AIDS crisis, the World Trade Organization stepped in as scores of citizens across numerous countries were not able to afford life-saving treatment. The Doha Declaration, adopted in November 2001, reaffirmed that the Agreement on Trade-Related Aspects of Intellectual Property Rights “should not prevent members from taking measures to protect public health”.

Time will tell on to what extent governments around the world will be forced to act to safeguard accessibility and affordability for a vaccine. Ultimately it will be a matter of striking a balance between protecting public health and IP rights.

China May not adopt compulsory licensing

China is unlikely to impose compulsory licensing even in the midst of the covid-19 pandemic. China is armed with the necessary provisions under its patent law, and the new Measures for Compulsory Licensing of Patent Implementation came into effect on 1 May 2012, which enables the State Intellectual Property Office (SIPO) to grant compulsory licences for the production of generic versions of patented drugs.

“Although no compulsory licence has ever been granted in China, the rules of compulsory licensing have been in existence since the patent system was established in 1985,” says Alan Chiu, of Hong Kong-based IP-focused firm Ellalan.

“At present, the following grounds are available to grant a compulsory licence: Insufficient exploitation of the patent by the patentee within three years of the patent grant date; use as a remedy for Anti-Monopoly Law violations by the patentee; the patentee of a dependent patent cannot obtain a licence from the earlier granted patent; state emergency or public interest; and supply to the least developed countries, according to the Doha Declaration on the Agreement on Trade-Related Aspects of Intellectual Property Rights.”

Gordon Gao, a Beijing-based partner at Fangda Partners, says there is “no doubt that imprudent enforcement of compulsory licensing would definitely harm innovation”. Gao says many other policy challenges face governments managing the pandemic that are not directly related to intellectual property rights and innovation.

He says governments should first identify and address obstacles to the effective management of the pandemic, including insufficient capacity to manufacture medicines, medical devices, cross-border transport, importation of drugs, lack of health workers, and mismatched health systems and infrastructure.

“The management of epidemics is not a problem of a single country, but requires concerted efforts from the all over the world,” he says, adding the goal of bringing the pandemic under control via equitable access to covid-19 vaccines needs urgent, broad-scale commitment and investment from countries, not simply with the application of compulsory licensing.

According to media reports, China has stated it would make its covid-19 vaccine “a global public good” when available, and thereby contribute to accessibility and affordability of the vaccine to developing countries.

Chinese officials have shared that the price of the approved and listed covid-19 vaccine would be cost-based, rather than decided by supply and demand. “Thus, it will be affordable to the public,” says Helen Cheng, a Shanghai-based partner with Zhong Lun Law Firm.

The price of vaccines may vary in different markets, based on the pricing policy of pharma companies, not to mention that pricing regulations are typically different. Cheng says that, according to some pharma companies, it is a common practice to utilise sales profits to subsidise the expensive re- search and development.

“However, considering the global outbreak of the covid-19, the urgent demand for vaccines in developing countries, as well as the advocation of more and more governments and international organisations, as far as I know, quite [a few] companies would consider selling vaccines at a reduced price, or even provide free vaccines out of humanitarianism in an urgent situation,” Cheng tells China Business Law Journal.

Cheng and Gao warn that Chinese pharma companies could, however, face licensing regulations when they sell in overseas markets. While China is unlikely to impose compulsory licensing, the same does not necessarily hold true of other countries, as some governments have started to either relook at compulsory licensing regulations or introduce the same in order to ensure that the vaccine is available and made affordable to their citizens.

With a number of covid-19 vaccines now becoming available around the world, the issue of availability versus profit and intellectual property is becoming increasingly relevant.

The European Parliament and many other countries are openly talking of using compulsory licensing in response to the pandemic crisis, and more may follow suit. The World Health Organization (WHO) reaffirming the TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement flexibilities, enabling the waiving of patent rights, adds further fuel to the fire.

Since there are many candidate vaccines for covid-19, competition in the market should result in a favourable price, says Gao. “I personally do not see Chinese pharma companies being forced to consider the pricing of covid-19 vaccines due to government intervention for compulsory licensing,” he says.

Chiu, from Ellalan, says: “The [central] government has even announced that, after successful development, covid-19 vaccines will be provided to other coun- tries as global public goods. The National Medical Products Administration has also announced measures to accelerate the launch of new drugs through a conditional approval mechanism, which may directly benefit those vaccines in Phase 3 clinical trials. All these indicate that China has neither the need, nor the motivation, to impose any sort of compulsory licensing to fight covid-19.”

In late October, addressing the three-day online World Health Summit in Berlin, Tedros Adhanom Ghebreyesus, director-general of the WHO, said that vaccine nationalism would prolong the pandemic, not shorten it. He advocated the need to ensure that poorer countries had fair access to a vaccine, and to vaccinate “some people in all countries rather than all people in some countries”.

Another major concern China would face is that not all countries would welcome Chinese vaccines with open arms. Sinovac, one of the Chinese pharma companies developing CoronaVac, for instance, has faced a political backlash in Brazil as the nation’s president, Jair Bolsanaro, has disputed its use, given its country of origin is China. Geopolitics, not science, could be a decisive factor when it comes to immunisation, once covid-19 vaccines are approved.

Gao and Cheng are at odds when it comes to the distribution of the covid-19 vaccine in Hong Kong. As ties between Hong Kong and mainland China become closer, “we believe the central government would pay close attention to the demand of the vaccine/cure in Hong Kong” and thereby prioritise the supply to the island city, says Cheng.

Gao, on the other hand, is not as confident, since mainland China and Hong Kong do not share the same health and drug regulation system.

“There might be some difference in terms of the distribution of the vaccine,” he says, not to mention the existence of different patent law regimes.

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