When administrative measures related to the strengthening of China’s compulsory licence framework came into effect from May 1, popular media misconstrued the regulation tweak. Various articles declared that compulsory licences could now be issued in China, and that Big Pharma companies were in trouble.
Starting June 8, media around the globe announced with great gusto that China had overhauled parts of its intellectual property law to “allow its drugmakers to make cheap copies of medicines still under patent protection”. “China to license copies of patented medicines” boomed Aljazeera; “China’s drug law-revamp rattles Big Pharma” proclaimed Reuters; “China breaks patent barriers on drugs” extolled the Times of India; even industry website PharmaTimes warbled “China amends patent laws to enable compulsory licensing”. However, none of these headlines or the ensuing reports got it quite right.
The core misconceptions disseminated by the general media were that: 1) Compulsory licensing was now added into China’s patent law; 2) The timing of the “regulation change” was somehow related to the fact that India had, in March, issued its first compulsory licence for the generic manufacturing of anti-cancer Bayer drug Nexavar; and that 3) Large foreign pharmaceutical companies (Big Pharma) were especially unnerved by “China’s latest move”.
But do not always believe everything you read. As numerous lawyers ALB spoke to asserted, in actuality there is nothing alarming about the newest amendments to China’s compulsory licensing regulation under China’s current patent law. Compulsory licences have “always” been allowed and inked into the country’s patent law for over a decade. The new administrative measures related to compulsory licensing - The revised version of the Measures for the Compulsory Licensing for Patent Implementation, which came into effect on May 1 - were issued by the State Intellectual Property Office (SIPO). They simply strengthened the compulsory licensing framework, and implemented detailed procedures regarding application and defence against applications. “The new regulation does not set out a new law, but merely provides detailed rules for implementing the compulsory licensing provisions already in the law,” says Chiang Ling Li, a Hong Kong-based partner at Jones Day. August Zhang, a Beijing-based partner at Rouse, echoes: “From the legal point of view, there is very little that is new. Of course, the media articles will try to spin the update. But these are not big steps legally.” Benjamin Bai, the Asia IP head of Allen & Overy also comments that though the “whole world got really excited, the measures were actually quite a non-event”.
Key changes
Even prior to the new measures, a compulsory licence (CL) could be granted under the Patent Law if a company or entity is unable to obtain a licence within a reasonable timeframe on reasonable terms and conditions. The main changes in the latest provisions are that clarity is given to the application process and timing, anti-monopoly exploitations are specified as potential grounds for a CL grant, and the scope for compulsory licensing is expanded to include “any matters of public health”. Lawyers have highlighted the antitrust element as one of interest. Zhang of Rouse believes that of the grounds for a CL grant, the antitrust angle would be the toughest since proving a company’s monopoly – as the applicant would have to do – is very difficult. However, it is still possible, and is now included in the much clearer guidance from SIPO. “Anti-monopoly litigation is an area of law that is rapidly developing, and it is likely that future compulsory licences may come on the heels of a finding of an anti-monopoly violation by the court or competent administrative authority,” says Beijing-based Fangda Partners lawyer, Fang Qi.
Timing
In March, India granted its first ever CL, allowing a domestic drugmaker to manufacture a copy cat version of Nexavar, a cancer drug developed by Germany's Bayer. This enabled India's Natco Pharma to sell its generic version of Nexavar at a fraction of the cost of Bayer's version. Bayer is now challenging India’s CL ruling.
When China issued its CL framework-strengthening measures in May, many in the media drew a link between China’s actions and India’s move, to insinuate that China was following in India’s footsteps. However, the timing of when the new regulation went into effect was purely coincidental because the draft rules had been under preparation since the beginning of 2011, and were promulgated only at the end of last year. “I spoke to SIPO officials last November when the draft measures were published for comments. They said, ‘We promulgated a number of rules last year in response to the 3rd Amendment to the Patent Law, so because the law got changed, we are doing the administrative job of cleaning up the rules and regulations in response to the amendment to the law’,” recounts Bai, who emphasises that the CL measures had been planned well in advance, and were a necessary refinement to accompany the most updated Patent Law. “SIPO’s revised measures for compulsory licences were necessary after the 2009 revisions to the Patent Law,” confirms Fang. “So unless proven otherwise, I do not think the revised measures signal a change to SIPO’s cautious approach to compulsory licences.”
Big Pharma effect
Despite the fact that CLs have been in the law books for a long time, China has never granted one. By all accounts of pharmaceutical intellectual property (IP) specialists, this is unlikely to change in the near future. “I am willing to bet that there will be no compulsory licence issued in the next five years, absent the occurrence of a pandemic or national emergency,” says Bai. “I told my clients not to overreact; it’s much ado about nothing.” Li of Jones Day agrees: “China has never granted a compulsory licence, even during SARS. Due to various considerations, China is unlikely going to issue compulsory licences on a routine basis.” Several lawyers noted that in a high-profile example from 2003, a Chinese company applied for a CL for the Roche-owned drug Tamiflu, but the government denied the request.
This ought to be reassuring to Big Pharma. Although there is clearer guidance for the framework of CLs now, China’s track record reflects that it is not really interested in granting them freely. “There is no need to panic as we have not seen aggressive enforcement of compulsory licences from SIPO, other than the issuance of the administrative measures,” says Fang. The lawyers underscore China’s desire to protect its international IP reputation, and its continued efforts to attract foreign investment. “The new regulation gives China a clearer regulatory basis and flexibility for issuing compulsory licences. But China is likely to continue to be prudent and measured,” says Li. Zhang concurs: “It’s not something it would do very easily or quickly.”
However, this does not mean that Big Pharma should turn a blind eye to China’s CL rules. Alison Wong, a Hong Kong-based partner at Bird & Bird, does feel that Big Pharma should be wary. “Understandably, the CL provision dealing specifically with patented drugs will be of great concern to pharmaceutical companies, and time will tell as to whether the authorities will exercise their discretion in exceptional cases only,” she says. Just because China has never issued a CL, that does not mean it may never happen. Drug companies need to be aware of the potential effects of the new measures. “Even though nobody has been successful so far in applying for a compulsory licence, the developments do bring some possible concern for foreign drug companies,” says Zhang.
The new regulation provides the Chinese government with the upper hand when negotiating with foreign companies on drug prices and access, or in regular licensing negotiations. “The new regulation is a reminder to patent rightholders that China has the option to issue CLs if disputes are not resolved, or compromises are not reached,” says Li. “Even if it (Chinese government) continues not to issue compulsory licences, it will probably use the new rules as a bargaining chip.” Bai of Allen & Overy deems this a “real risk” for Big Pharma. “I think the real threat is the possibility of the government dangling a compulsory licence to force companies to provide access to certain drugs,” he says.
One example of the new CL effect is, as Reuters reported on June 8, related to Gildead’s HIV drug, Tenofovir. The drug, known by its brand Viread, had worldwide sales of $737.9 million last year. China's government, initially slow to acknowledge its growing problem of HIV/AIDS in the 1990s, now admits to having a ballooning number of HIV/AIDS cases. Although Gilead moved to share its IP rights on its medicines in a patent pool with generic drugmakers from many countries last July in return for a small royalty, China was excluded. This meant it had to continue paying high prices for Tenofovir.
Since the change in China's Patent Law, Gilead has offered certain concessions including giving China a substantial donation of Tenofovir if it continues to buy the same amount, said Paul Cawthorne, coordinator for Medecins Sans Frontieres' Access Campaign in Asia. "This is all a negotiation game; this offer from Gilead came about once the news that the Chinese were considering issuing a CL came out. The end game is okay; you get a better deal or you use the CL. It's a strategy that many countries use," he told Reuters.
Big Pharma response
Lawyers say the new CL regulation simply adds another layer of risk and challenge to what Big Pharma already deal with on a daily basis around the globe. “The risk won’t be any greater for them than in the U.S.,” says Bai. But he does counsel that “the MNCs (multinationals) should have a strategy in dealing with the Chinese government when it waves a CL over their heads.” Li concurs and says that MNCs “do not need to be overly worried. But they need to consider management strategies”. Zhang feels that at the moment, what all his clients need to do is to “keep an eye on this development”, and find out whether there are real applicants in the process of applying for a CL on their products. “Keep in close contact with SIPO,” he says. Constant communication with the authorities is always recommended. “Big Pharmas need to keep open communication and regular contact with authorities so that they are up to speed as to the government’s policy on how to implement the new CL provisions under the patents law,” says Wong. Other suggestions from IP specialists include brand owners reviewing pricing issues in China, and considering whether there are any new licensing strategies to utilise.
One core aspect for Big Pharma success in China is to ensure they are meeting the market’s demands for their products. If there is enough supply, it is likely the Chinese government will not focus much attention on the drug company. However, as Bai points out, “if the fear of an undersupply develops, the government may consider issuing a CL for generics to produce the drug to meet demand”. “The real solution is to be more engaged with the Chinese consumers, and to work with the government to make sure if you have a patent; that you meet domestic demand. This would be a win-win situation for the government and the drug companies, and a CL can be avoided,” he says. Bai is a proponent of the “holistic approach” to China – one that “balances profits with consideration for the real human aspect and the social responsibilities”, and encourages Big Pharma to implement this type of strategy.
Innovation-bound
Rather than homing in on the potential issuance of a CL, outsiders should instead be watching China’s gradually-shifting pharmaceuticals landscape.
Unlike India, which has developed a formidable generics industry, China’s ambition is to become the next great drug innovator country. “Thus, I do not see the widespread use of the CL for pharmaceutical products,” says Fang. Bai says that “from its latest Five-Year Plan, it’s clear that China wants to develop an innovative biotech and pharmaceuticals industry. This is a planned economy”. There has been financial support and incentives from the government to bolster research and development (R&D) efforts, and the authorities have consistently been encouraging domestic pharmaceuticals to acquire patents.
“Domestic companies are continuing work on generics, but they are also developing the R&D side for innovation,” says Li. According to various statistics, 88 percent to 95 percent of Chinese pharmaceutical companies manufacture generic drugs. However, there are a handful that are working on morphing into innovative players. Zhejiang-based Simcere Pharmaceuticals, a New York Stock Exchange-listed company, is one such example. “Innovation is the key driver of our progress towards excellence. In recent years, we have refined our strategy to focus on the development of first-to-market generic and innovative pharmaceuticals,” says the firm’s website. Last year, it received approval from the State Food and Drug Administration for a new disease modifying anti-rheumatic drug named Iremod. It was independently developed by the company, and will be the first Iguratimod drug on the global market. Jiangsu Hengrui Medicine is another domestic player investing in R&D. Shanghai-based Hutchison MediPharma states on its website that it is “a novel drug R&D company focusing on discovering, developing and commercialising innovative therapeutics in oncology and autoimmune diseases”. The company has compounds in pre-clinical, phase I, phase II, and phase III development stages.
With the developmental timelines being so long, an innovative drug will not go to market anytime soon from China. However, numerous domestic companies are working hard to make it a reality. “They are in the process of developing the next generation blockbuster drugs that will be sold all across the world,” says Bai.
So when will China emerge as the newest drug innovator country? It is too soon to tell for sure, but industry watchers estimate that within a decade, China will likely reach its goal. “When has China not met its goals?” asks one domestic lawyer. “Look at China’s track record; it achieves whatever it states in its Five-Year Plan.” Since domestic Chinese drug companies are seemingly on the right track toward novelty and innovation, what Big Pharma really need to watch out for is the impending competition it will face from China in this generation – and not wring their hands over a nebulous potential CL grant.
Although the term “court-sanctioned compulsory licence” (CSCL) is not officially recognised, numerous academics and a growing number of lawyers are viewing this approach as amounting to a de facto compulsory licence (CL). In essence, it is where a court denies a permanent injunction but awards damages and so infringers continue infringing. “This is tantamount to the same thing as a CL,” says Allen & Overy IP head, Benjamin Bai.
The hallmark case demonstrating this judiciary route to obtain a de facto CL is found in the U.S., in a 2006 Supreme Court decision on eBay Inc v MercExchange LLC. According to a Fordham Law Review article by H. Tomcis Gómez-Arostegui:
“The Supreme Court held that traditional equitable factors apply to injunctions in patent and copyright cases, and therefore, the mere fact that a defendant has infringed a patent or a copyright does not necessarily mean a final injunction must issue. In the three years since, lower courts have denied final injunctions more frequently than before and are now struggling with what relief, if any, to give prevailing plaintiffs in lieu of an injunction. Some courts permit plaintiffs to sue again later. But most award prospective relief to plaintiffs-sometimes a lump-sum damages award or more commonly a continuing royalty-to compensate plaintiffs for the defendant's anticipated post-judgment infringements. Plaintiffs often object to prospective-compensation awards as constituting compulsory licences.”
In China, although the prospect of a CSCL is still quite rare, it has happened in a handful of cases. In one famous instance, Wuhan-based China Environmental Project Tech (CEPT) sued Fujikashui Engineering (FKK) and Wuhan Huayang Electricity (WHE) in a Fujian Higher Court for patent infringement. After an eight-year long battle that went all the way up to the Supreme People’s Court, FKK and WHE were found guilty of infringement and held jointly liable for damages in December 2009. Even though an injunction was granted against FKK, an injunction was denied against WHE for public interest reasons - thus resulting in a de facto CL, a CSCL. Upon paying a licence fee, WHE was able to continue using CEPT’s technology. August Zhang, a partner at Rouse, says that because the Supreme People’s Court made an interpretation that the court does not need to grant an injunction, CSCLs are possible in practice. “Particularly if you have a good reason for public interest, the Supreme People’s Court has made it clear that courts may not be able to stop the infringement of a patent and the infringer can continue use,” he says. Alison Wong of Bird & Bird agrees that a CSCL is rare: “Only in a case of public interest would a Chinese court refuse a permanent injunction.” She points out that if the courts too easily granted CSCLs in patent infringement cases, “the value of a 20-year patent right should be seriously undermined”.
Despite the fact the CSCLs may lead to the same result as a CL, another school of thought from legal practitioners is that they are not CLs. By definition, a CL must be issued by the government and allows an individual or company to use a patent without seeking the owner’s consent, though it does need to pay the patent holder a set licence fee. Jones Day partner Chiang Ling Li says that CSCLs may not always end up with the same result as a CL, so including “CL” in the term is not accurate. Fangda Partners’ Fang Qi also does not view the CSCL as the same as a CL. He notes that a court’s refusal to grant an injunction would mostly originate from public interest concerns, which differs from the grounds for a CL as outlined in the Patent Law. “First, even though the court may not grant an injunction in a case, the infringing party is still identified as an infringer and not a licencee. Second, because of the characteristics of civil litigation, the court is only dealing with one particular dispute instance. Thus, the fact the infringer may continue infringement in a particular dispute instance does not mean it can freely exploit the invention,” he says. Thirdly, he says the CLCS is an ex post remedy, and that the damages awarded in these particular cases are based on the infringer’s gains or patentee’s losses. “The royalty rate for a compulsory licence is decided ex ante, likely based on prevailing rates for comparable patented technologies between parties in similar situations,” Fang elaborates.
“If one were to take a strict definition of CLs as government-agency granted rights, then court-sanctioned CLs are not CLs,” says Bai. “However, most people don’t take that narrow a view. There are definitional differences, but it does not change the fact that a de facto CL accomplishes the same goal as a regulatory CL.”
Regardless of the varying viewpoints on the definition of CSCLs, the lawyers are in agreement that it is part of a host of IP litigation strategies. The judiciary route to acquire a CSCL is “easier and quicker” than applying and waiting for the government to issue a CL (especially given the fact that it has never acceded to a request). “CL is a useful tool, like a bargaining chip; it works in a multifaceted way. The threat of a CL – both a court-sanctioned one and one from the government – should always be in anyone’s war chest,” says Bai. “When I defend patent infringement claims, I consider the option of going to a court to get a CSCL. In the meantime, I also weigh the option of getting a CL from the Chinese Patent Office. It’s a multipronged approach.”
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