A fair return approach to pharmaceutical compulsory licensing.

• Author: Nuno, Maura

This article argues that universal access to drugs requires not only collaboration between nations and patent holders, but also the creation of a neutral International Panel. Under the supervision of a Neutral International Panel, the disequilibrium created by the current system of global intellectual property protection can be equalized to improve access to drugs without undermining pharmaceutical companies and intellectual property rights.

CONTENTS I. INTRODUCTION II. INNOVATION COSTS VS. ABILITY TO PAY III. THE CURRENT SYSTEM IV. DISEQUILIBRIUM IN THE CURRENT SYSTEM A. Insufficient Royalty Payments under Compulsory Licensing B. Public Relations Battles are a Waste of Resources C. Orphan Diseases D. Rise in the Counterfeit Drug Market V. PROPOSAL: AN INTERNATIONAL PANEL OF NEUTRAL INDIVIDUALS A. Special Board B. Board Composition C. Review Process D. Authority VI. CONCLUSION I. INTRODUCTION

Innovation is the solution to global health problems, but as long as innovators are not inherently altruistic, the developing world will be deprived of access to life saving drugs. Under the current framework for the protection of intellectual property, pharmaceutical companies receive property protection and set market prices. The framework allows pharmaceutical companies to justify their supra-competitive prices based on the need to recuperate innovation expenses. Because drug development is timely and expensive, with a high risk of failure, governments are inclined to provide pharmaceutical companies with strong intellectual property protection and greater profit margins than would exist in a competitive system to induce them to assume the risks. (1) The genius of the patent system is that it harnesses the market system to determine the reward for patent holders. However, this means that access is determined by the ability to pay, and some people may be deprived of access.

The World Trade Organization (WTO) established the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement to strike a balance between protecting patent holders and giving the public access to inventions. The agreement included a provision for compulsory licensing that would permit a government to allow someone else, usually a generic manufacturer, to produce a drug without the explicit consent of the patent owner. Although TRIPS defined certain qualifications for issuing compulsory licenses, countries retained broad discretion over when to grant compulsory licenses and how to establish adequate remuneration. The Doha Declaration, (2) enacted in 2001, was intended to clarify some of the confusion about compulsory licenses but instead left the adequate remuneration language untouched and did little to coordinate the international system. (3)

Even if consumers from countries housing the top-ten largest pharmaceutical companies can feasibly pay the market price for drugs, these same prices shut out consumers in the developing world. The existing framework of TRIPS creates a reciprocal arrangement between countries where all member countries must recognize and protect each others' domestic intellectual property rights. (4) The arrangement is challenged when developing nations are forced to choose between upholding intellectual property rights and granting their citizens access to medicines. In those instances, developing nations resort to compulsory licensing. As a result, both patent holders and countries are subject to criticism, litigation, and monetary loss for their respective actions concerning the compulsory license.

This Note proposes the establishment of a neutral International Panel to review pharmaceutical compulsory licenses and provide patent holders with an impartial review of adequate remuneration. Part I introduces the paradigm created by the need for innovation matched against society's ability to pay market prices. Part II outlines the global system of intellectual property protection under TRIPS and Part III deconstructs the consequences of imposing a global patent system with no global coordination. Part IV proposes the creation of an International Panel specifically designed to exclusively entertain disputes over pharmaceutical compulsory licenses. Establishing a neutral International Panel for compulsory license disputes should ameliorate the struggle between pharmaceutical companies and developing countries while increasing global access to life saving drugs.

2. INNOVATION COSTS VS. ABILITY TO PAY

   The patent system is premised on compensating innovators for the costs and risks associated with developing new ideas through temporary market control. (5) Patent rights assume a system at equilibrium where innovators will recover the costs of innovation without surplus or supra-competitive gains. On a national scale, this system is thought to assure that innovators will have the incentive to invest in research and that the public will enjoy the benefits of their innovation. The system harnesses the market by requiring those who benefit from the drug to pay the cost of investing in the drug. But, once domestic patent protection rights are engrafted on other countries who make individual and disconnected decisions about access to medicines, the equilibrium of the system is disturbed.

   In developed countries, access to drugs is regulated by national governments and insurance systems, which can determine "how to spread the financial burden of the system among potential beneficiaries." (6) Governments can also choose to subsidize the cost of innovation through government-funded research or the healthcare system. (7) In contrast, the developing world lacks the infrastructure or system to spread the financial burden across beneficiaries. Furthermore, there is no coordination between countries concerning the reward for innovation and the ability of each country to pay. This uncoordinated system of international patent rights leads countries to take unilateral action to the detriment of patent holders and the TRIPS agreement as a whole. For example, in 1997, Brazil passed legislation authorizing a local company to produce a specific medicine without the consent of the patent holder. (8) In this example, Brazil took unilateral action to remedy insufficient access to that medication in its country without negotiating with the patent holder's country of origin.

   Without an International Panel, it is impossible to fairly determine whether pharmaceutical companies are being over or undercompensated for their innovations. Further, there is no way to resolve the distributive issue--"the determination of which ... countries should bear the burden of providing the incentive"--without a coordination system. (9) In fact, even with a presiding International Panel, the distributive issue would be difficult to resolve given the concentration of pharmaceutical companies in only a handful of countries.

3. THE CURRENT SYSTEM

   TRIPS was enacted to promote the transfer and dissemination of technology through the protection and enforcement of intellectual property rights (10) by establishing "minimum levels of protection that each government has to give to the intellectual property of fellow WTO members." (11) When a member government determines its citizens cannot pay the market price for a drug, they are first encouraged to seek voluntary licenses from the patent holder. Under a voluntary license, the petitioning country is authorized to use patented material by the patent holder under "reasonable commercial terms." (12) Additionally, Article 31 of TRIPS creates an exception to the exclusive right of the patent holder to determine the drug supplier and manufacturer. Under Article 31, a member government may allow "someone else to produce the patented product or process without the consent of the patent owner," therefore issuing a compulsory license. (13) Before a government may issue a compulsory license, the proposed user must show proof of unsuccessful attempts to obtain a voluntary license over a "reasonable period of time." (14) Further, the agreement provides an additional exception in cases of "national emergency or other circumstances of extreme urgency or in cases of public noncommercial use," where the issuing government need not demonstrate an initial attempt to obtain the patent holder's authorization before issuing a compulsory license. (15)

   Despite the exception to strong intellectual property protection, the compulsory license issuer must pay "adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization." (16) The language of TRIPS fails to delineate a process for determining adequate remuneration and therefore gives the issuing government wide discretion in determining appropriate royalty rates. As such, the issuing country may unilaterally decide to issue a compulsory license once favorable negotiations cannot be met and set the royalty rate according to their own measures of adequacy. Access to drugs is an important consideration for TRIPS and by demanding royalty rates, no matter how minimal, it ensures pharmaceutical companies will at least obtain some profit from developing nations, which they would not otherwise receive because citizens of developing countries could never purchase the drugs at market value.

   Further complicating the paradox created by the ambiguity of "adequate remuneration," the agreement provides that the judiciary branch or some higher authority from the issuing country shall review determinations about remuneration for compulsory licenses. (17) A pharmaceutical company dissatisfied with the compulsory license or the issuing country's determination of what constitutes adequate remuneration must seek relief through that nation's judicial system. In order for that clause to be carried out successfully, the countries issuing compulsory licenses would need to provide a mechanism for impartial review.

   Pharmaceutical companies that have attempted...