BAYER VS. NATCO: NEED FOR RADICALLY NEW IP-LED STRATEGIES 

-Swapna Sundar, IP Dome

On the 4^th of March, 2013, the IPAB passed orders on the Bayer V. Natco Compulsory Licensing application.[1] The present order confirmed the order of Compulsory License passed by the Controller of Patents, Mumbai on 12^th March, 2012, and modified it only in the rate of royalty to be paid to the Patentee, Bayer by the Compulsory Licensee, Natco. The case has made it apparent that companies entering India with patents must follow radically new strategies to benefit from their patents. And after studying the case in quite some detail, I am of the opinion that the best strategy is responsible use of the patent and surrounding IP.

From the case, we have identified certain lessons for companies aspiring to get and use Indian patents commercially.

1.            Indian patents are granted to inventive technologies to encourage socio-economic development, technological advancement, transmission of technology to the public domain and the dissemination of technology to the mutual advantage of manufacturers and users.

In India, by way of patent disclosure, the new technology should enter the public domain to benefit both the manufacturers and the users of the technology. Patent owners should ensure that the patent is used to encourage socio-economic development, say by setting up a factory to produce the product or train workers to gain a new skill. Bayer failed in its duty as the owner of an Indian patent as it made no effort to encourage socio-economic development.

Strategically, the owner of an Indian Pharma Patent should take advantage of governmental initiatives including 100% FDI in greenfield projects and up to 49% in brownfield projects to enter the manufacturing segment. Perhaps some lessons can be learnt from the foreign car companies with Indian manufacturing units who are competitive against CBU importers simply given the difference between taxes on Indian-manufacture units v. imported units. Moreover, as the companies are invested in India for between 20 and 50 years, they are able to sell each unit more cheaply leveraging the long-term investment.

2.            Patents are granted in India to make the benefit of the patented invention available at reasonably affordable prices to the public without undue delay. Further, the grant is not absolute but conditional upon the use of the technology for the benefit of the public at commercial scale without undue delay and at reasonable prices.

Patents are not granted as a reward for exceptional inventiveness or to enable the inventor to recover his R&D expenses. Patents are granted to ensure the inventor works with a sense of security surrounding his invention, confident that should there be infringement he can always have remedies in law; and that he works with this confidence to bring the benefit of the invention to the general public at reasonable cost. The reasonable price at which the drug is to be made available to the public does not depend on the cost of developing the drug, but on the economic position of the consumer of the drug.

Strategically, in marketing the patented drug product, the manufacturer must delink R&D costs from the pricing plan. This is easier said than done. One way of delinking R&D costs from the price of the drug suggested by the Knowledge Ecology International (KEI), which was also heard in the case, is a ‘National Innovation Prize’ or a Governmental grant from a dedicated fund that could compensate the costs of developing a marketable invention, thereby enabling the inventor to sell the drug at an affordable cost.

It has been made clear in the IPAB decision that the general cost of development of new drugs in the industry cannot guide pricing for a particular drug. Drug price has to be decided on a case to case basis. As manufacturing costs are lower in India, drug companies should consider manufacturing the drug in India rather than importing and transferring the applicable taxes to the consumer.

Companies choose to enter special therapeutic areas with a clear business agenda. Strategically, in the case of orphan drugs, companies with a large range of product lines, like Bayer, should create internal mechanisms by which profit from drugs with high market potential can be leveraged against those with lower profit margins over a longer period of exclusivity.

3.            The working of a patent is essential for its survival for 20 years. Working implies substantial ‘working’ which could be adequate importation at a commercial scale, processing, manufacturing, packaging or substantial assembly of the patented product in India. The applicant for compulsory license must demonstrate that he is willing and able to ‘work’ the invention and make the benefits of the invention available to the public at a reasonable price without undue delay.

While the Controller of Patents, Mumbai had decreed that the ‘Working’ requirement meant ‘Local Manufacture’ or ‘local working’, the IPAB judgement disagrees with this and suggests a more flexible meaning. The IPAB states that even if ‘import’ would suffice for fulfilment of ‘working’ requirement, it has to be on a commercial scale to an adequate extent and should be affordable to the public at a reasonable price. Further, the ability of the patentee to provide capital for working, and sincere efforts to increase the market and access to the market shall be considered towards making a decision on whether the patentee is ‘working’ the invention. It is interesting to note that charitable activities and subsidised sales would not be termed ‘working’; neither will infringing use by a non-licensed party.

Strategically, the holder of an Indian Patent should be aware that the ‘working’ requirement means that he has to attempt to reach the widest possible consumer base at the earliest possible time. This he should do through a good long-term pricing strategy, or licensing to ‘authorised generics’ in India to leverage the existing supply chains of the authorised generics until their own supply chain can take over, tying up with hospitals and government health care systems and by creating a strong and reliable brand.

5.            Licensing conditions cannot be onerous. They cannot amount to restraint on trade, prevention of international transfer of technology, exclusive grant back of IP, prevention of challenges of validity of the patent, or stifling the Indian manufacturing industry through importation.

Holders of Indian patents should be aware that anti-competitive practices such as unreasonable restraint on trade, or exclusive grant back of IP or agreements preventing challenges of patent validity can result in the patent being unenforceable. This resonates positively with other regimes globally.

Strategically, the holder of an Indian patent should work closely with the licensee to improve the patented technology or process, making it more effective or cheaper, and thereby increasing the consumer base. Given India’s strengths in research and manufacture in the pharmaceutical sector, the patent holder can leverage the lower cost of research and development in India, creating a strong local brand and better products for a global market. Strong and positive collaboration with the generic industry in India is bound to show positive outcomes for both the generic industry as well as the patent holder as the generic player becomes a partner in the industry rather than a competitor.

6.            In considering an application for compulsory license, the Controller takes into account as to whether the applicant has made efforts to obtain a voluntary license from the patentee on reasonable terms and conditions and the refusal to grant a voluntary license within a reasonable period.

A compulsory license would be granted to another participant in the market if his legitimate demand to work an ‘unworked’ patent is refused by a patent holder on unreasonable grounds or through the device of unreasonable delay.

Within a few months of the grant of the compulsory license by the Controller Bristol-Myers-Squibb is fighting a Compulsory License application against its cancer drug, Sprycel (dasatanib).  As compulsory licensing becomes more common, strategically, a patent holder would do better to design his course of action. The patent holder should sincerely attempt to capture a large part of the market, or be willing to license to authorised generics. Attempts to capture the market should be documented fully including market surveys, studies on brand acceptability, studies for deciding on pricing strategy, supply chain and royalty payments should be documented to prove that the patent holder is sincere in his attempts to ‘work’ the invention. A close watch on the generic competition becomes imperative.

7.            In considering an application for compulsory license, the Controller will also consider whether the reasonable requirements of the public with respect to the patented invention have been met by the Patentee.

Reasonable requirements of the public are deemed not to have been met if by reason of the refusal of the patentee to grant the license on reasonable terms, manufacturing industry is prejudiced, the demand for the product is not met on reasonable terms, the market for export of the patented article manufactured in India is not being supplied, or the establishment of commercial activities in India is prejudiced.

Strategically, an inventor should undertake a study of the Indian market prior to entering the market, or filing a patent in India and file a patent only if a reasonable expectation of commercial success is reported. In the NEXAVAR case, it seems obvious that the market would not support the product at the price at which it was necessary for Bayer to sell the drug to make a profit. The failure of market studies would leave the product open to market and compulsory licensing challenges.

8.            Anti-competitive practices and preservation of monopoly by trivial improvements in technology are not encouraged by the IP system in India.

Having considered the real possibility of facing a compulsory license application, and decided on a more liberal licensing course, it is essential for the patent holder to ensure that his licenses are not deemed to be restrictive or anti-competitive Restrictive technology licensing contracts including conditions such as exclusive grant backs, and contracts preventing challenges to validity are sought by patent holders to expand the scope of and extend the monopoly of the original granted patent. Other tactics include seeking patent rights over trivial improvements and minor modifications. All of these are prohibited specifically by the Indian Patent Act. Coercive package licensing contracts which force the licensee to license patents that are not required by him are also anti-competitive and restrictive contracts. Patent laws in certain jurisdictions prohibit experimentation on the product to improve it, without a specific license authorising such use of the patented product.

Strategically, a patent holder should be careful in crafting voluntary licenses. Exclusive grant back licenses can be considered acceptable means of protecting a technology licensor’s interests while promoting the licensing of the underlying technology. If the improvement is closely related to the patented technology, the license is non-exclusive and if the term of the grant-back license is less than or equal to the term of the patent protection on the underlying technology it would be acceptable in law while ensuring that the patentee meets the strict criteria of the Indian patent regime.

Some modifications and improvements would not be patentable in India, in which case a carefully crafted license agreement would protect the interests of both the improver of the technology as well as the holder of the original patent.

© Swapna Sundar 2013

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[1] Order No.45 of 2013 in OA/35/2012/PT/MUM passed by Hon’ble Smt. Prabha Sridevan, Chairman with D.P.S.Parmar, Technical Member

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