Sparring Over Sorafenib: How Will Natco’s Move against Bayer Affect Pharma Licensing?

 A recent move by the Indian government is causing concern among pharmaceutical firms across the globe. The office of the Controller General of Patents, Designs and Trademarks recently issued the country’s first “compulsory license.” The license allows Natco Pharma, a mid-sized Indian firm, to manufacture and sell sorafenib, a generic version of Nexavar, a patent-protected renal and liver cancer drug from Germany’s Bayer. Under the ruling, Natco will pay Bayer 6% of net sales of its drug as a royalty.

As part of the Indian patent law, compulsory licenses can be issued under specific circumstances to any capable third party to manufacture and supply a patent-protected drug without the consent of the patent owner. Natco was awarded the compulsory license on three grounds: Bayer’s drug was not “reasonably affordable,” was accessible to only 2% of India’s patient population, and was not manufactured in the country.

The Natco ruling notes that according to World Health Organization data, in 2008 India had some 20,000 liver cancer patients and 8,900 kidney cancer patients. India’s patent controller maintained that Bayer “neglected India” because it imported only around 200 bottles of Nexavar into the country in 2009 (the latest available data), three years after it launched the drug worldwide. Natco’s version of sorafenib is priced at 97% less than the German brand. While Bayer’s Nexavar costs each patient some Rs. 280,000 (approximately US$5,500) a month, Natco promises to price its drug at Rs. 8,800 (US$171) a month.

At present in India, around 90% of patent-protected drugs of pharmaceutical multinationals are imported and priced very high. The Natco ruling could result in more demands for compulsory licenses. Natco itself has sought a voluntary license from ViiV Healthcare, a joint venture between GlaxoSmithKline of the United Kingdom and Pfizer of the United States, for its HIV drug Maraviroc. Another Indian firm, Cipla, has sought a similar license from U.S- based Merck for its HIV drug Isentress. It is expected that if the foreign firms refuse to give these licenses, Natco and Cipla may seek compulsory licenses from the Indian government. Natco had in fact earlier sought a voluntary license in December 2010 for Nexavar from Bayer, but was turned down by the company. It then applied for the compulsory license.

While the Natco ruling is the first of its kind in India, globally, compulsory licensing has been in existence since the 1830s. In 2001, such an initiative found a place in the Doha Declaration of the World Trade Organization, under its Trade-Related Aspect of Intellectual Property Rights (TRIPS) Agreement. Such licensing aims to make patented drugs available at affordable prices in large volumes in the “public interest.” But pharmaceutical innovators argue that it robs them of their intellectual property (IP) rights and stifles innovation. India’s move has revived fears of a fresh wave of such licensing.

Unhealthy Precedent or the New Reality?

“If this [compulsory license for Natco] precedent were followed widely, not just in India but elsewhere as well, it would simply undermine the purpose and function of patent protection,” says Patricia Danzon, a Wharton professor of health care management. Danzon points out that patent protection enables companies that invest significantly in research and development (R&D) to recoup those costs. “The notion that a government can issue a compulsory license because the product is not affordable to its citizens without insurance is unfortunate,” she notes, adding that forcing a private sector company to sell at a lower price or somehow take away their intellectual property in an attempt to make medical care affordable, “is not a viable precedent in a market economy.”

Philip Nichols, Wharton professor of legal studies and business ethics, says compulsory licenses are forcing pharmaceutical multinationals to do a reality check. “Intellectual property regimes are not a losing battle, but the increasing ease of copying ideas and difficulty in enforcing monopolies over ideas means that intellectual property regimes are going to have to conform to widely-held views of how far those monopolies over ideas can extend.” Nichols adds that business models that factor in these realities “would be far more durable” than those that rely on lobbying to preserve their intellectual property.

Sanjay Nagral, a consultant surgeon in the surgical gastroenterology department at Mumbai’s Jaslok Hospital and Research Centre, welcomes Natco’s sorafenib license because patients can afford it more easily than Bayer’s version. “The costs have come down dramatically,” he notes. “I do understand [pharmaceutical companies’] arguments at a conceptual level, but we also need to see it from the patients’ perspective.” Nagral, however, notes that sorafenib was perhaps not the best example for a compulsory license since it is not a life-saving drug; it only extends the life span of the patient. But at the same time, he adds: “In this case, Bayer has invited the problem by pricing the drug too high. There are so many [other] drugs that are 20% to 30% higher. They don’t attract such attention or government intervention.”

Ravinder S. Singha, managing director of Firmlink Pharma, a New Delhi-based pharmaceutical consultancy firm, says the Natco license “paves the way for the strong Indian generic industry to meet the unmet health needs of the country.” Singha was earlier with pharmaceutical firms Jubilant Organosys, Ranbaxy and Zydus Cadila.

Natco’s Price Advantage

How is Natco Pharma able to price its drug so much lower than Bayer’s Nexavar? Bhaskara Narayana, director and chief financial officer at Natco Pharma, attributes this primarily to the company’s “inherent research strength, [which] has enabled it to make deep inroads into process development.” He notes that Natco has been able to develop different manufacturing processes with lower costs “and therefore has been able to price its products at a competitive rate.”

According to Singha, Indian drug makers are able to sell their reverse-engineered versions of multinational-patented drugs at lower prices for three reasons: One, Indian firms have lower costs of production. Two, they enjoy markets that can support large volumes. And three, their R&D costs are limited to those related to reverse-engineering and the basic formulation development. “One can safely assume that at a treatment cost of Rs. 8,800 per month, Natco is not losing money,” he says. “[Multinationals] overcharge for their discovery research and sell their products at unbelievably high prices to get their [returns on investments] in the fastest and easiest way.”

According to Kewal Handa, managing director of Pfizer India, issues like affordability and reach cannot be left to the interpretation of individuals. Commenting on the Natco ruling, Handa says: “The government needs to bring in specific guidelines and rules. It is very critical to have the right regulatory environment in order to attract FDI.” He goes on to add: “The prime minister [of India] has been talking of building an innovation ecosystem. This will be a big setback to that.”

Ranjit Shahani, vice chairman and managing director of Novartis India, told business daily The Economic Times, that compulsory licensing will be a negative not only for overseas companies, but also for local research-based firms. “Naturally, capital will go to those markets where the business ecosystem is encouraging.” Sujay Shetty, leader of the pharmaceuticals practice at PricewaterhouseCoopers (PwC), agreed that the Natco ruling will send negative signals. “It introduces all kinds of uncertainties into the minds of the innovative pharma multinationals,” he says. “They will be very apprehensive that the indiscriminate use of compulsory licensing can potentially damage their business in India.”

Shetty adds that compulsory licenses must be used judiciously and in extremely rare cases, such as national emergencies or epidemics. He points out that if the objective in the Natco ruling was to improve affordability, the government could have looked at other options — such as making the drug available through the government procurement system or expanding health insurance coverage.

Meenakshi Khurana, partner at Khurana & Khurana, a New Delhi-based law firm specializing in intellectual property protection, expects the Natco ruling to encourage other Indian firms to file for compulsory licenses. “For the multinationals, this will make a dent in their innovation returns,” she notes. Khurana adds that it is not just the restrictions in the India market — which is hugely attractive due to its size — that is cause for concern for the multinationals. There could be other implications, too. “Indian pharma firms are known for their quality. They could well make inroads in other markets where affordability is a key factor and where patent laws are not very strong.”

The Road Ahead

Compulsory licensing may bring big gains for Indian pharma firms, but it is prone to abuse, warns Wharton’s Nichols. The license-granting government body could make “specious arguments” citing public health interests, or it may allow favored companies to benefit unfairly. Danzon, too, warns against taking compulsory licensing too far: “If every government tries to free-ride and get the lowest possible price for its citizens, in the long run there will be no R&D.”

Meanwhile, Bayer is expected to challenge the Indian patent controller’s ruling. A company statement released soon after the ruling said: “We are disappointed by the decision to grant a compulsory license for Nexavar. We will evaluate our options to further defend our intellectual property rights in India.”  If Bayer challenges the ruling, Natco “will deal with it appropriately,” Narayana states. “Natco is also a research-based company and would like to respect the research efforts of other companies. Circumstances in which a compulsory license can be granted are already outlined in the [TRIPS] legislation and we do not believe that they are granted injudiciously anywhere in the world.” [Editor’s note: TRIPS refers to the agreement on trade related aspects of intellectual property rights administered by the World Trade Organization.]

Narayana points to cases where innovator companies sell their patented products in several countries at discounts of up to 80% of their prices in developed markets. He cites examples of Merck Sharp and Dohme’s diabetes drug Januvia and GlaxoSmithKline’s breast cancer drug Tykerb. “The issue is [about] pricing products in a fair manner that addresses a majority of the patients’ needs,” he adds. But Wharton’s Nichols doesn’t see compulsory licensing bringing widespread gains. “First, much of the world still lacks the capacity to reverse engineer and manufacture complex pharmaceuticals.” he says. “Second, if the flexibility built into TRIPS is abused, then wealthy countries might try to renegotiate TRIPS in a way that might make it difficult for members to legally license copycats.”

Need for More Clarity

Danzon expects the current debate to bring more clarity to the TRIPS provisions on compulsory licensing. The original legislation “is ambiguous, and intentionally so,” she points out. That is because in the Doha Declaration, governments failed to reach a consensus on how to define exceptions to the general patent rules.

Nichols, too, recalls how compulsory licensing “was a huge issue” when TRIPS was negotiated. “The handful of countries with companies that develop pharmaceuticals claimed that the developers of medicines have a moral right to control the fruits of their efforts,” he says. “The rest of the world argued that it would be immoral to give a handful of countries monopolies over life and death.” What made it worse was the absence of a universally accepted conception of intellectual property, he adds.

Generally, compulsory licensing has been used in an epidemic situation like HIV/AIDS. In 2007, Brazil issued a compulsory license to locally manufacture a version of Merck’s antiretroviral drug efavirenz to treat AIDS patients. In 2008, Thailand issued compulsory licenses for local manufacture of Novartis’s breast cancer drug letrozole (trade name Femara), Sanofi-Aventis’s breast and lung cancer drug docetaxel (trade name Taxotere) and Roche’s drug erlotinib (trade name Tarceva), which is used to treat lung, pancreatic and ovarian cancer. In 2006 and 2007, Thailand also issued compulsory licenses for two AIDS drugs and one hypertension drug.

Danzon sees a big difference between how Brazil and India have approached compulsory licensing. In Brazil’s case, the government operates a program that buys HIV drugs and distributes them free of charge or heavily subsidized to all HIV patients. Brazil is a high volume purchaser and is investing a significant amount of its own funds to combat HIV/AIDS for all its citizens, she says. The Indian government, on the other hand, is not creating and financing a program to make sorafenib available to all patients. Also, she points out, that Natco’s price of $180 a month is still unaffordable to most Indians.

According to Danzon, the fundamental problem in the current debate is that the drug’s originator company is not able to charge different prices across countries and within countries based on population income or the ability of patients to pay. “If these companies could charge different prices in India than they do in Europe, or different prices within India — say for the affluent, the middle class and the poor — that would make the drugs more affordable for less affluent patients, but still recoup revenue and preserve incentives for R&D,” she notes. “It would be win-win for patients, governments and companies.”

Natco’s Narayana, too, strongly advocates differential pricing. “It would serve well to have a lower pricing mechanism for developing countries like India where patients pay for these medicines from their pocket and where there are no meaningful private or state-run insurance programs,” he says. Danzon notes that in the U.S., it is easy for drug companies to negotiate different prices for drugs with different insurance plans through rebates. Also the Medicaid program, which serves the poorest people, requires that patients be given a discount of 23% below the average price manufacturers charge to the private sector.

Differential pricing would get a big boost if governments provide legal cover, according to Danzon. “All of this would not be an issue if individual governments had a greater willingness to accept that differential pricing roughly related to income is the best way for countries to contribute to the costs of R&D which benefit everyone,” she notes. “There’s no law against differential pricing, but there is nothing protecting it either. On the contrary, many countries require that companies report their prices in other countries, and then set their own prices at the average or the lowest price in the group.”

If differential pricing proves evasive, the search for other options will continue. Mark Duggan, a Wharton professor of business and public policy, says “a delicate balance” is required between the conflicting interests of making available low-cost medicines and ensuring intellectual property protection to encourage drug innovation. Duggan focuses his research on health care, and was formerly a senior economist for health care policy at the White House Council of Economic Advisers. He suggests that one possible solution could be public-private partnerships. Such partnerships, he points out, are in place for HIV drugs in Africa and other lesser developed countries.

Duggan believes there might also be a credible case for “optimizing” patent policies, especially while considering lower-cost drugs as one solution to tackling rising health care costs in the U.S. “The question is not if we can lower health care costs by having companies overseas manufacture medicines,” he says. “The question is: Do we need shorter patent lengths?” He notes that generic competition has made a lot of drugs affordable in the U.S.

Nagral of Jaslok Hospital suggests that for India, the solution lies in becoming self-reliant in producing life-saving drugs, “and not be at the whims and fancies of multinationals.” He says the Indian government has shirked its responsibility in this area. He points out that the public sector firms Indian Drugs and Pharmaceuticals Limited and Hindustan Antibiotics, have both fallen upon troubled times.

In the end, people and polities will win, according to Nichols. “There is a lot of money to be made in controlling ideas, but people and polities will not allow themselves to be excluded from the use of all ideas,” he says. “I can only imagine how the United States’ electorate would act if tens of thousands of people here were suffering and the United States was told by China that [it] had the cure, but it would not be profitable for China to allow the United States to use that cure, and therefore people would just have to suffer. I imagine that politicians in the United States would be climbing over each other to demand reverse engineering.”

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