In a momentous development for Indian patent law, the Supreme Court recently refused to entertain the appeal of Bayer AG, a German patentee at the receiving end of India’s first compulsory licence. In 2011, the patent office decided that Bayer had priced Nexavar, its anti-cancer drug, at an exorbitant price ( 2.8 lakh a month) and allowed Natco Pharma Ltd, a generic company, to produce the same drug at 1/30th the price ( 8,800).

As the name suggests, in sharp contrast to a voluntary licence, a compulsory licence is mandatorily imposed on the patentee, whether she likes it or not. Indian patent law is quite distinct from most other patent regimes in that such a permit is not merely a matter of government discretion but an entitlement in favour of any interested third party that demonstrates that the patented invention is not working for public benefit on account of it being unaffordable or not available in reasonable quantities to the public, as was the case with Nexavar.

As expected, the patent office’s decision met with brickbats and bouquets. Soon thereafter, Bayer appealed the verdict to the Intellectual Property Appellate Board, a specialized tribunal, which upheld the decision for the most part. Bayer then unsuccessfully approached the Mumbai high court through a writ petition. It finally trudged up all the way to the Supreme Court, only to have the apex court refuse to entertain its petition. The courts’ dismissal effectively ends a legal saga that placed India under tremendous political and trade pressure from the US and the European Union.

What is interesting to note is that Bayer took issue not only with the issuance of the licence, but also with the royalty rate imposed. A compulsory licence is not a free-for-all regime, but mandates that the person using the permit pay a royalty that accounts in some part for the value of the invention. Bayer rightly argued that its research and development (R&D) costs ought to be taken into account to determine the appropriate royalty rate. Surprisingly, however, Bayer refused to submit its R&D costs to the patent office, leaving it free to rely on a broad World Health Organization estimate of 6% as an average royalty rate under the circumstances. This was then increased to 7% by the appellate board on appeal.

Bayer argued this point again at the Supreme Court, noting that this was an unfair rate. However, much to the court’s chagrin, it refused to submit a true account of its costs. This is hardly surprising, given that drug costs have been the best-kept secret of the pharmaceutical industry—with one exception. Big pharma selectively hands out data to one institution that it funds (Tufts Center for the Study of Drug Development), which then comes up with a periodic study every decade or so.

Not too surprisingly, the costs multiply at a fanciful rate with each such study. The latest Tufts figures were released just last month, pegging the price at an astounding $2.56 billion, up from $802 million in 2003. However, the institute has yet to reveal its methodology for arriving at this humongous figure, a methodology that has been vociferously attacked in the past for several reasons, including the fact that the Tufts Center fails to independently audit the figures submitted by a select cabal of big drug makers. In fact, James Love, a health activist, submitted an affidavit before the patent office during the compulsory licensing hearings, demonstrating that Bayer benefited extensively from US tax credits and public funding for its clinical trials of Nexavar, which ought to be deducted from its overall estimate of drug costs.

Price gouging for patented drugs is not confined to India or developing countries. Recently, US senators demanded an investigation into the pricing of Sovaldi, Gilead Sciences Inc.’s anti-hepatitis C virus drug, currently selling at a whopping $84,000 for a full three-month course (approximately $1,000 a day).

Unfortunately, the legal regimes of most countries do not mandate a revelation of true drug costs. Unless we have this data, we will never know whether drug makers are undercompensated, overcompensated, or fairly compensated. Granted, such a methodology may be subject to contest (particularly around the inclusion of the costs of R&D failure), but surely we can begin somewhere, without making the perfect the enemy of the good.

Given their excessive profits year after year, the prevalent perception is that big pharma is being overcompensated. Till such time as these drug companies are transparent about their costs and profits, India should use this perception in its favour, coming down on the side of public health and affordable medication, wherever possible.

In the past, I’ve recommended an investment protection model for incentivizing drug innovation, noting that drug originators must mandatorily submit their costs in order to merit market protection till they recoup these along with a rate of profit commensurate with the health impact of the drug. Will we see a shift to such a model soon? Only time will tell. In the meantime, drug costs will continue to remain an enigma.

Shamnad Basheer is the Founder of SpicyIP, and a recent recipient of the Infosys Foundation Prize for his contributions to Indian patent law.

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